It is all go for investment bankers covering fintech companies.
In late June, JPMorgan acquired UK robo-adviser Nutmeg and announced it will also buy OpenInvest, a San Francisco-based platform that builds ESG-based portfolios for wealth managers and their clients.
Visa, whose attempt to buy Plaid was blocked on competition grounds in January, will now pay €1.8 billion for Swedish open-banking platform Tink. Founded in 2012, Tink today claims to connect through one application programming interface (API) to more than 3,400 banks with 250 million customers across Europe.
The financial industry giants, ever fearful of big tech companies encroaching onto their turf, have identified the more promising fintechs now emerging from the mass of start-ups in the past decade and are buying them to capture their scale-up potential.
We want to really penetrate this market and create a utility-like infrastructure for moving savings
Tim Sievers, Deposit Solutions
However, not all fintechs are selling out. Wise, the company formerly known as TransferWise – a pioneer of cheap and fast ways to send money across borders that now also offers a multi-currency account and debit card to its 10 million customers – is set to list directly on the London Stock Exchange.
And Deposit Solutions and Raisin, two German fintechs each aiming to build a marketplace for European savers easily to shift their money to banks offering better rates on guaranteed deposits, have chosen to merge rather than sell.
Tim Sievers, founder and chief executive of Deposit Solutions, explains to Euromoney the rationale for doing so.
“We are in the marketplace business; Raisin with more of a B2C approach and Deposit Solutions more B2B,” he says. “There is certainly room for standalone development. Each company has grown 40% year over year. But we believe that by doubling in size, together we can accelerate that growth.
“For the deposit-taking banks, the bigger the company, the larger its distribution reach. And for savers, it’s also better to have a wider range of product providers.”
The business logic for both companies is sturdy. Certain banks have found themselves over-loaded with a surplus of deposits that they cannot redeploy into loans and that they must pay to park at the central banks. Negative rates have hit their margins. The banks are nervous, however, about hitting retail customers with negative rates in turn, even though many are now charging corporate and high-net-worth clients to hold their cash.
Deutsche Bank, for example, is a shareholder in Deposit Solutions and a user of its service. It reasons that it can provide customers with third-party savings products and still own the customer relationship, while dodging the cost of retaining those deposits itself.
Ultimately, banks do not want to protect their margins by driving away their customers. One day, they may need them.
Open banking
And there are still banks looking for deposits, for example to grow lending operations outside their home countries. Through open banking, the technology now exists for customers to see these new deposit-seeking banks’ products from within the accounts they hold with their own primary banks and to place money with them without going through all the hassle of onboarding.
Tamaz Georgadze, chief executive of Raisin, tells Euromoney: “Our service is well-suited to different types of lenders that want to adjust rapidly and reprice on both the liability and assets sides, for example leasing providers and consumer finance providers. It is not all traditional high-street banks with 30-year mortgage books.”
Deposit Solutions can be proud that 200 banks use its platform and it has transmitted €35 billion of deposits, with Raisin having done a similar amount.
Both firms, however, see much more potential and there may be some frustration behind the merger announcement.
Our biggest competitor has been the current account, which has become the fastest-growing asset class in Germany
Tamaz Georgadze, Raisin (Photo: Lukas Schramm)
The companies size the European deposit market at around €20 trillion ($24 trillion). In addition, both have recently entered the $17 trillion (€14 trillion) US market, where Continental Bank was an early partner for Deposit Solutions. In June, MapleMark Bank in Dallas became the first US partner bank for Raisin, which rather smartly calls its business savings-as-a-service.
So, while $35 billion is a big number, $24 trillion puts it in context.
“We are still small compared to the huge size of the deposit market,” says Deposit Solutions’ Sievers. “We want to really penetrate this market and create a utility-like infrastructure for moving savings, but so far we have only scratched the surface.”
Low rates, which have obliterated the traditional benefit of locking up money in savings accounts, have not helped these pioneers.
Raisin’s Georgadze says: “Our biggest competitor has been the current account, which has become the fastest-growing asset class in Germany. While there is growing take up for third-party savings products, there is a psychological barrier for customers when the difference between 0.0% and 0.2% looks so small that it hardly seems worth the effort. People naturally think in one-year returns rather than compounding over multiple years.”
Georgadze argues that the business model has been validated in an abnormally low-rate environment and could take off when rates start to rise again and consumers hunt more eagerly for better rates.
Following the merger, Raisin DS, as the combined company will be called, plans to invest in its platforms – where integration will require a lot of work – extend the product range and expand into further markets.
It is not obvious how its technology might work for the brokered market in wholesale corporate and institutional bank deposits, which are outside the scope of state-supported guarantee schemes. Scalable technology works better for large numbers of small-ticket size transactions. However, it could expand beyond retail savings.
“We also have a business for small businesses, for example, independent shops, and we might provide our service to more start-ups,” says Georgadze.
Raisin has also stepped beyond savings into lower-risk investments, such as ETFs, that might go into people’s pensions.
