Investor: If Banks Are Smart, They Will Become the Platform for New Generation Fintech Startups
Alex Zhigarev is a partner at the Austrian investment fund Speedinvest and is responsible for scouting the best deep tech startups in Eastern Europe. Before that Zhigarev co-founded Vest Financial – a B2B fintech company backed by Y Combinator and First Round Capital, which was later acquired by Chicago Board Options Exchange.
During this year’s Annual Fintech Summit, Zhigarev will be talking about the latest technology innovations in the financial market. We decided to ask him about the process for those innovations to enter the market and the relationship between established financial institutions, venture capital, and startups.
Trending Topics: The companies that have direct contact with the consumers are the most visible, yet you have successfully sold your B2B venture some years ago. Where are the major breakthroughs and disruption in fintech actually?
Alex Zhigarev: Honestly, I think the most important thing that is happening now in Europe is the PSD2 and the Open Banking regulation. The user data is supposed to belong to the user and this should lead to a major wave of unbundling of financial services. You, as a user, can now decide which financial service you are going to procure from where. So you can use Revolut or Transferwise for foreign exchange, at the same time N26 or Raisin.de for your account management, and Freetrade to manage investments on the stock market, integrating it all in an app, providing you with an overview of your financial health (PersonalCapital or even exotic Njorda). This is a huge shift, which we see now.
Another huge trend is, of course, the rise of big data and AI. This is the first time ever in the history of fintech (outside of trading) when we can monetize data rather than direct access to money (Sbdagroup.com is a good example of monetization of expenditure patterns). Data about patterns of money consumption could now be more valuable than the financial service itself. Current accounts, for example, are already a commodity with extremely low margins for the service provider. How you spend the money is a more interesting thing with the potential of upselling and referrals that the likes of Google/Facebook are only dreaming of. The openness of the data can help in creating new business models in financial services.
What is the first example that comes to your mind?
We are now in the gig economy and people move around, and when you move to a new country, your credit score is non-existent. But at the same time you sign up for the mobile phone services, and the operator has a lot of data about you – what do you spend on, how often do you travel, how much you spend per month etc. So we see startups monetizing data which is coming from other services e.g. telco, to provide better financial services like the Estonian Bailsmann, for instance. They enable telcos and other owners of data to start offering financial products like loan guarantees to the customers. You can go and rent an apartment and instead of putting cash into a deposit account, get a guarantee from your phone provider which is going to cost you a couple of euros a month.
Where is Europe on the global fintech map?
If you look at retail banking, Europe is ahead of the US – just take online banking as an example. It is far less developed in the US than in Europe. We have a lot of innovation happening in the neobanks like Revolut and N26. They are pretty much ahead. Luckily, we finally are seeing the situation, when more funds are available to fintechs in Europe, so it is easier for European startups with the global vision to raise money. The entry, as well as exit valuations, are still smaller in Europe, the good news, however, is that fintechs are still overperforming on the VC market in both geographies.
I’d actually ask another question – how are we doing in comparison to Chinese fintech? The short answer is Europe is way behind on many KPIs. Different sources argue about the size of the fintech sector, but an anecdotal example is that in China, you can pay with WeChat since years and we are still to see the first payment with WhatsApp. According to multiple sources (The pulse of Fintech 2018, KPMG), We still are ahead of the overall amount invested, but the growth rates are much higher in China.
And what does this mean for Europe?
The abundance of capital in China is leading to more and more money coming into the European tech sector which is in general good for the ecosystem. It used to be hard for the later stage companies to fundraise using solely European money, so now both US and Asian funds are becoming more active in Europe to get to get access to the companies here, just look at the recent activity of Softbank.
Should established financial institutions, companies, and fintechs see startups as competitors or suppliers?
They used to look at startups as competitors but not anymore. We are in the age of corporate venturing. If ten years ago there were one or two banks that were doing it, today literally every single large incumbent has a CVC to work with the startups. Of course, there is a certain competition. Startups are trying to redefine the status quo and are biting into the large institutions’ pie, however, startups grow the pie at the same time.
We are far away from the saturation of the market, so the question for fintechs is not how to take over someone’s customer base, it’s more about addressing the needs that were not addressed properly. In this sense, I don’t think there is much of a competition between incumbents and startups. In the future, I think we will have multiple players, serving the financial needs of consumers the same way we have it now. Some of the players hopefully will be neobanks, others will be traditional banks that have properly adapted to the changes. They will co-exist having way less power over the end consumer than they used to have 10 years ago, which in the end is better for the consumer.
Where is that leading?
I think if incumbents are smart, they will be able to become the platforms for the new generation of fintechs. Instead of N26 becoming the hub where you can buy investment services, insurance services, and banking services – all from one app, Raiffeisen or Erste bank could as well be that hub. Having the brand and the trust of the consumers gets you a long way in financial services.
How does financial CVC work? Are they trying to control and acquire companies?
There’s a long history behind this topic. From the first generation of CVCs when corporates were trying to invest and get as much control as possible to make sure the startup is not going to work with the competitors, to the current situation where the investors became much more sophisticated and drive a completely different agenda. The CVCs now play in different stages of the startup’s lifecycle – from acceleration through seed stage to much later stages. The most successful model now is where CVC is trying to play according to the same rules as the normal VCs. As soon as you become greedy and limit your portfolio, you lose your best teams. If the best teams are avoiding you, your customers are not getting the best services and you are falling behind in innovation. As simple as that. We now often see that successful CVCs are diversifying away from their original single LP model and are fundraising from independent sources, hence becoming an independent VC with some connection to the incumbent. So the incumbent still benefits from the connection to the startups but at the same time, startups don’t see CVC’s investment as a threat.