N26, Trade Republic and Co.: The hopeful fintechs wanted to revolutionize the market for financial products. Democracy was the order of the day: Everyone should be able to trade with everything as free as possible. But now, in the crisis on the markets, the wheat is being separated from the chaff. One of the most influential stock market experts and short sellers warns.
Neo-banks from N26 to Nubank, neo-brokers from Robinhood to Trade-Republic, plus many other hopeful fintechs – many of them are currently experiencing what it means to be subject to gravity: things go downhill faster than uphill. In the case of listed companies, this can be seen in the prices. In the case of those startups that are either not planning to go public or are hesitating, postponing it or have already canceled it, the most recent financing rounds by capital investors provide insightful information. Accordingly, things are not looking good for the young bank competitors, who started with full-bodied promises and experienced a real hype.
One person who is looking closely is short seller legend and Wirecard hunter Fraser Perring. At a conference in mid-May in Hamburg, he predicted difficulties that fintechs would face: “A lot of money has flowed into the industry, but half of the companies are already in trouble.” customer identification.
These days, when the index of the American technology stock exchange Nasdaq, which is meaningful for these companies, has started its way down with violent fluctuations, the bear market hits many of the young “unicorns” unprepared. The term refers to those meanwhile more than 1200 start-up companies worldwide that are valued at more than one billion dollars. But also with good reason? This is often hardly recognizable at first glance.
Example Robinhood: The neo-broker shows a horrible price development – the provider, named after the noble outlaw and fighter against established powers in England in the 13th century, managed to turn more than 75 percent of the investor’s money into thin air in less than a year. The users of the platform trade securities and cryptocurrencies for free. Actual customers are large exchange service providers who receive commissions. Selling addresses also plays a role in business. Robinhood made inglorious headlines several times – for example through unannounced sales stops for so-called “meme” stocks such as Gamestop or Blackberry. With these papers, users had agreed via relevant social media to bring large hedge funds to their knees with targeted mass orders. Some big ones have indeed had to liquidate their positions at heavy losses. The action showed the new power of the neobrokers and their investors, but only brought in something for a few, not even Robinhood itself.
Example Coinbase: The first stock price a little over a year ago: 381 dollars. The crypto platform is trading at $60 today, 13 months later. The acclaimed startup, which became the first cryptocurrency exchange to become a “unicorn,” recently shocked investors by frankly admitting that it can access its users’ accounts in the event of financial difficulties. Then they would suddenly be gone, the bitcoins and everything else that was hyped as a safe, anonymous and state-unassailable currency. The collapse of the so-called “TerraUSD” stablecoin, whose value was supposed to be similar to the dollar, certainly didn’t help either, which hasn’t worked recently. 30 US cents was one of the last listings. Showpiece Bitcoin has lost half of its value in half a year, which partly drove new investors to ruin, who are now understandably not active customers of a crypto exchange.
Example Nubank: The largest fintech institution in South America has been 60 percent underwater on the stock exchange since the IPO in December 2021. With 38 million customers, good figures and high esteem by the legendary investor Warren Buffett, this was certainly not preordained when the company went public. And indeed, under its charismatic founder Christina Junqueira, the company from Sao Paulo didn’t do much wrong. In South America, not even every second person has a regular bank account, but often a smartphone. Nubank offers access to almost all digital services, recently including cryptocurrency trading. Debit cards and bank transfers anyway. Bad luck for the neobank: The global macroeconomic outlook has deteriorated significantly, which will particularly affect countries in South America, where the customer base is primarily located. While dubious business practices and strange deals sift through trust in other fintechs, the Brazilian digital bank has solid economic arguments that put customers under pressure.
The best-known German fintechs include the neobroker Trade Republic and the online bank N26, neither of which are – yet – listed. The high-tech company Trade Republic sees itself as a democratizer of stock trading – private investors can also trade paper for smaller investment amounts here without significant costs, and thus diversify their portfolio for small amounts, which initially seems positive in terms of German stock culture. It is up to the individual to decide whether the inhibition threshold for risky commitments falls sharply and encourages speculation. After several rounds of financing, Trade Republic is valued at around 4.5 billion euros. Further investments are necessary; their success is also likely to depend on sustained customer base growth. In times of a veritable crash in financial stocks, this is not a sure-fire success. According to reports, potential investors in fintechs, i.e. private equity companies and investment companies, are now making tougher conditions.
N26 has an eventful history behind it. Currently valued at nine billion euros, the Berlin fintech bank has already suffered a number of setbacks. Several fines were due due to insufficient security measures – and after the imposition of a 4.25 million euro fine at the end of 2021, the BaFin supervisory authority sent a special representative to the company to provide support. If you write losses, millions in penalties are suddenly painful. Again and again there were headlines about a lack of “compliance”, i.e. too lax observance of rules in business operations. Precautions against money laundering seemed too casual, there were allegations about the protection of customer data, then suddenly a huge number of accounts were terminated. N26 withdrew from the USA and Great Britain, corporate communication was rather tight-lipped. Customer service repeatedly made the headlines, and in 2020 attempts were initially made to prevent the establishment of a works council.
What to do if you are looking for lower banking costs on the one hand, but don’t want to end up in digital nirvana on the other? The selection of smartphone banks is huge, there are numerous platforms that allow you to stay with your own house bank and still use the services of different fintechs. According to the current EU directive, all banks must allow access from such platforms as long as the customer authorizes it. Otherwise, “trust is the beginning of everything”, as it was said in the legendary advertisement of a major bank, almost 30 years ago, before the practice gave the lie to this, and before the turbulence of the new market, the financial crisis and other events severely damaged the remaining trust of the customers undermined.
As you can see, investors in fintech shares who are not already involved will find plenty of illustrative material in the stock price history of the courageous new brokers alone. However, fintechs are also represented in funds, can be traded as ETFs and are listed in sub-indices of the technology exchanges, and can therefore also be acquired as index funds. Everyone has to assess the current turbulence on the stock exchanges for themselves. An investment in individual stocks in the young industry requires, in addition to unconditional diversification, a certain “handyness” – even Warren Buffett currently needs courage and, above all, patience when investing in Nubank. And short seller Fraser Perring would probably have advised him against it.
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The article “Stock exchange legend raises the alarm: “Half of the neo-banks are already on fire”” comes from WirtschaftsKurier.