The Banks Strike Back Against Fintechs

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Shares in Afterpay Touch Group Ltd [ASX:APT] plunged in the last hour of trading on Friday.

The reason being was a news release from Visa, saying they were going to enter the ‘buy now, pay later’ business. They hope to be fully up and running by early 2020.

At first glance, this seems like very bad news for Afterpay. Which could be why some investors have panicked.

After all, a behemoth like Visa muscling into your territory certainly isn’t what you want to hear about over Friday arvo drinks.

But I think some people have perhaps overreacted a bit here. When it comes to Afterpay’s prospects, at least.

(Shareholders of another small fintech stock might have more cause to panic. I’ll get to that one shortly.)

You see, Afterpay has a key advantage, which I think protects them to a large degree.

Let me explain…

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Time to split on this stock (Hint: It’s not Afterpay)

As founder Nick Molnar explains it, the key to Afterpay’s success was understanding a key behavioural difference between Millennials and their parents:

Millennials have a total aversion to credit [cards]’ he told Forbes in 2018.

If Visa thinks they can entice these credit-averse youngsters to the dark side of extortionate credit card interest rates, they’re mistaken.

And here’s the important point.

The nuance of Afterpay wasn’t in simply giving younger customers another source of credit.

It was in giving them a credit-free option of buying in instalments. Instant gratification at no extra cost.

And certainly, no temptation to ring up a huge credit card debt.

That’s why I think Afterpay has less to fear from Visa than you might initially think. Their target customers don’t want or have credit cards.

But time will tell on that front, I suppose…

The real stock you should probably worry about is Splitit Ltd [ASX:SPT] — an Afterpay clone with one crucial difference.

You see, their ‘buy now, pay later’ model relies on users having a credit card, which they then use to debit instalment repayments from.

But if you’ll be able to soon do that with Visa, why use Splitit?

In a bit of bad timing for investors, the company just raised over $30 million from institutional investors at 80 cents.

Interestingly, the retail offer to ordinary punters (of up to $10 million) hardly raised a cent. A rare role reversal in fortunate timing for investors.

Shares closed on Friday at 64 cents, and by the time this gets out on Monday, who knows where it’ll be…

This Visa announcement does bring up a broader point worth discussing, though.

The empire will strike back…

Am I delusional?

In the fintech wars, you can’t expect the big banks and finance companies to be passive spectators.

They will react when they can.

Some investors already think the big banks will prove to be too strong for the challengers.

As reported in the Australian Financial Review last week:

A bold rejection of the business model of emerging digital-only banks was made by seasoned fintech investor Rajeev Gupta, partner at Alium Capital, at the Credit Suisse Australian Fintech Forum on Thursday.

“[The valuations on Australian neobanks] are delusional because the response to any serious competition from the big four is going to be fierce,” Mr Gupta told a session where venture capitalists discussed where Australian fintech’s next $1 billion-plus “unicorn” company would come from.

“The neobanks don’t stack up in our view. The only reason anyone will switch to them is if they can offer a better deposit rate or a lower lending rate. I deal personally with two of the big four and they have improved immeasurably on that in the last 24 months.”

I find that to be a surprising lack of imagination for someone at the coalface of venture capital.

But his point remains valid.

If you try to take on the Big Four at their own game, then they will react and break you.

To beat them, the challenger banks and fintech disruptors will have to offer something different.

Something the banks can’t easily replicate…

Second-hand fashion website shows fintech the way

Funnily enough, the founder of a second-hand fashion retailer recently explained the strategic considerations for fintech investors perfectly.

The RealReal just IPO’d on the New York Stock Exchange at a US$1.6 billon valuation.

And what a stunning rise it’s been for The RealReal.

The luxury second-hand fashion website started off in 2011 with just a $100,000 investment.

But from day one, founder Julie Wainwright had one eye on the big competitors. As reported in The Guardian:

Wainwright said last year she had set out to found an e-commerce business that “Amazon couldn’t replicate”.

The idea came to her after she saw one of her wealthy friends buy consignment stock — second-hand items sold on behalf of the original owner — hidden away at the back of a designer boutique.

“That’s when the lightbulb went off,” she said. “I went home and looked at my closet, and I had 60 designer pieces that I had never worn or had stopped wearing. I thought, ‘How big is this market? Can eBay do this?’ The truth is, if you’re selling luxury goods, you need trust, and eBay’s not set up for that trust.”

Trust’, you say?

That’s certainly something the big banks could be ripe for the picking over…

A lose-lose for bloated banks

Tomorrow, I’m going to explain to you why it’s a lose-lose situation for the big banks. No matter what they do.

If you have shares in the Big Four, you’ll want to read it.

Because a tale playing out in Germany is a red alert for bank shareholders around the world.

Speak soon…

Good investing,

Ryan Dinse,
Editor, Money Morning

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About Ryan Dinse

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately…

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