Fintech, family offices…and the demise of big finance

Twenty years ago, few thought the big banks could be vulnerable to disruption. By 2010, following a credit crisis which suggested otherwise, investors were backing challenger banks, lending circles, ETFs and payment processing.

And now, in the Covid-19 era, all fintech bets are off, as digital banking transactions continue to boom.

All this activity, and more, puts fintech in a position to continue heaping pressure on the banks, in the same way cheap ETFs have been robbing clients from active asset managers

Research by The Economist has found that the traditional bank valuations have fallen to 72% of the global total, against 96% in 2010.

Unlike fintech promoters, banks remain firmly on the back foot. As value investments, they are spurned by investors preferring to case growth. 

Even now, they are failing to set up online platforms, like other sectors, to host rival products. Precise price comparisons are hard to calculate.  Banks are also protected by regulators wary of fintech showbiz. Growth for digital solutions has been fastest in emerging markets, where regulation is less fierce.

Banks have also failed to reinvent themselves through bids and deals because bidders do not want to risk buying assets of questionable value.

Instead, finance is being disrupted from underneath by fintech venture capitalists like Ribbit Capital. Its mission statement speaks of its “single, relentless mission, to change the world of finance.”

Research by Family Capital has discovered that a growing number of family offices are joining the revolution. 

THE TOP 75 FAMILY OFFICE INVESTORS IN FINTECH

Billionaire Michael Spencer’s IPGL is a UK leader, following a series of deals, culminating in a venture seeking to digitise the bond market, outlined in Family Capital earlier this month. 

Even today, you need confidence to embark on this kind of strategy. But Spencer knows who he can trust, after a career running Icap, the UK-based money broker, and successor companies.

Capital markets are particularly ripe for disruption now that software can match their complexity. Offerings relating to compliance, investment planning and broking made Q2, 2020 a record quarter for capital market raisings. 

Horizons Ventures, run by Hong Kong’s Li Ka-shing has a taste for innovation, and finance is in the mix. It recently invested in Mitech, an AI provider of data and analytics, now involved in ESG.

Omidyar Network has earned renown as a backer of microfinance opportunities. In 2019, it spun off a sustainable fintech  business called Flourish. More recently it invested in an Indian consumer credit business called Zest Money.

In September, Skip Capital of Australia invested in Airwallex whose processing of overseas payments saw supercharged growth before, and during, the pandemic. 

Valar Ventures, led by Peter Thiel, a pioneer of payment processes with PayPal, is seeking out European fintech deals. 

Ferst Capital Partners of Canada, owned by Jay Ferst, is actively backing fintech ventures. Holdun Family Office of Montreal which inherited its money from industrialist Sir Herbert Hunt, has been running a fintech accelerator fund since 2018 with Stradigi AI, a machine learning business. 

The fintech fundraising of the year is likely to be the IPO of Ant Group, recently spun out of Jack Ma’s Alibaba.

The Chinese authorities have just given the deal its blessing. Ant is expected to raise a record $35 billion due to the success of Alipay, its mobile wallet, money market funds and consumer loans, priced by algorithm. 

Ant’s $250 billion float is also likely to benefit YF Capital and Blue Pool Capital family offices, set up to look after billions for Jack Ma and his associate Joe Tsai.

Fintech fundraisings finalised in the second quarter were headed up by payment processor Stripe and broking firm Robinhood. They each raised $600 million to achieve theoretical values of $36 billion and $8.6 billion, respectively.

Former UK Chancellor George Osborne and his brother Theo, inheritors of a family wallpaper business, are getting involved in fintech through 9 Yard Capital. They are among the investors backing Robinhood, which is renowned, and sometimes criticised, for its zero-commission client share dealing system.  

9 Yard has made a range of investments: Coinbase is another. George Osborne was behind a UK regulatory programme known as the “sandbox” which provided safe harbour to 700 fintech businesses. 

Gian Brazilian challenger bank Nubank raised $300 million to take its valuation to $10 billion following a digital surge in business as a result of the pandemic. Varo, also determined to make bank transactions easy, raised $241 million from a variety of investors like The Rise Fund, run by Bono, Jeff Skoll and William McGlashan, ex-managing partner of TPG. 

Elsewhere, Chime’s market value has exploded to $14.5 billion in the last 18 months due to its success in offering cheap fintech services through a smartphone app. It does not charge clients for overdrafts of up to $100. 

All this activity, and more, puts fintech in a position to continue heaping pressure on the banks, in the same way cheap ETFs have been robbing clients from active asset managers. 

That said, quite a few challenger banks have come under pressure due to bad loans, inadequate capital or poor judgment. Lending circles can lack experienced loan officers and have not been entirely successful. 

Robo-advice for wealthy investors has not achieved universal acceptance.

All of which means finance will be a sector which remains heavily regulated. Banks will still play a big role in deciding how fintech should be applied. 

Goldman Sachs and JP Morgan have been particularly active in forging partnerships. Fintech has also struggled to raise seed finance in the second quarter, which only saw 71 deals, against 171 in the final quarter of 2019, according to CB Insights. 

Family offices should not ignore the sector – far from it. But there are good reasons for them to tread carefully.