In 2013, a founder of Cowboy Ventures, Aileen Lee, invented a new term for startups with capitalization larger than $1 billion before IPO. She called those “Unicorns” in her article in TechCrunch magazine. Unicorns are mythical creatures you can hardly meet out there. There were only 39 unicorns (large and successful startups) back then. But as time goes on, unicorns keep multiplying: about 700 unicorns with a total capitalization of $2.46 trillion are available today, according to CB Insight

Fintech startups take every fifth dollar invested in tech industries. The second world’s largest decacorn (a startup with a capitalization bigger than $10 billion) is an American fintech giant Stripe ($95 billion). CB Insight recognizes 136 fintech unicorns, including 11 decacorns for today. Along with Stripe, the most famous ones are Swedish Klarna, British Revolut, Brazilian Nubank, Indian One97, and American Ripple. 

The so-called neobanks and fintech startups have carved a specific niche in the world financial system. They are nipping at the heels of traditional banks and financial institutions. What properties allow them to do so? How do fintech unicorns meet the expectations of modern customers? And which trends constitute the contemporary fintech landscape? Let’s investigate the issues with relevant examples. 

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The fintech industry includes several sectors inter alia neobanking, payments, insurance, investments, and wealthtech. The latter covers various tools for retirement planning, trading, crypto, analytics, and investech. The post-COVID interest in trading along with booming crypto assets adds fuel to wealthtech around the world. The following trends are fertilizing the soil on which the future fintech unicorns seem to find rich grazing grounds.  

Crypto 

The IPO (April 2021) of one of the largest crypto exchanges, Coinbase, became a significant event in the world’s finance far beyond the community of cryptocurrency geeks. Crypto is rapidly evolving to penetrate all available niches of regular finance despite negative reactions of government officials from the USA and China. Bitcoin overcame a certain psychological barrier when the President of El Salvador announced the most popular cryptocurrency as a national legal currency alongside the US dollar.  

Canadian financial regulators have authorized the creation and circulation of crypto ETFs (exchange-traded funds). Many investors have recognized crypto assets as a substitute for gold in their search for a safe haven amid the galloping inflation of national fiat currencies. Oddly enough, leaders of the American banking industry such as JP Morgan Chase, Fidelity, and Goldman Sachs offer various instruments to handle crypto similar to what has been adopted by transnational payment systems such as PayPal.  

Blockchain solutions

It seems crypto is becoming the asset that makes even the most conservative banking structures follow the “adopt or die” approach. Many world-famous celebrities propagate crypto: Elon Musk regularly hints at brighter prospects of Bitcoin and Dogecoin in his tweets while SpaceX and Tesla officially invest in crypto. Jack Dorsey, a founder of Twitter, launches his new fintech startup, Square, to use Bitcoin inter alia. Moreover, crypto is fully adopted by many popular fintech organizations such as eToro, Trade Republic, and Wealthfront. 

Another area where crypto is impacting the traditional banking system is CBDC (Central Bank Digital Currency). To put it simply, CBDC is a digital dollar running on the blockchain. In contrast to decentralized Bitcoin, CBDC is designed to be under the full control of national governments. Despite quite a questionable experience of Venezuela that launched the first national CBDC Petro in 2018, many countries keep intensively developing their national crypto. China is leading the movement with its digital RMB that has already been launched in several Chinese cities on a trial basis. The US Federal Reserve Bank is experimenting with a crypto dollar in cooperation with MIT. 

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Micro investment 

The recent global pandemic has highlighted the long-term dream of many people to participate in retail trading and micro-investments. Those fintech startups that offer such opportunities have captured a strong tailwind. They provide the extent of democratization that has been hardly imaginable in the traditional investment and trading sector ever before.  

Example 1 – Robinhood app

A milestone event happened in February 2021 when thousands of micro investors gathered together via a Reddit channel to achieve their specific revolutionary goal in the Robinhood app. They start pumping up the stock price of the GameStop company, whose financial destiny seemed to be sealed by large Wall Street players. That was the first case when the so-called hamsters (small singular traders) made the so-called whales (rich institutional investors) retreat under the pressure of the public will. 

The hamsters’ victory is never possible without innovative fintech tools such as Robinhood, which is worth being Example №1 in our review. 

The app was launched in 2015. Today, this is a fintech decacorn with a capitalization of about $20 billion. Robinhood is widely recognized as a game-changer: commission-free trading of stock, options, and crypto for all wishing is what the traditional stock market has never seen. Robinhood is a gamified trading platform through which ordinary people can participate in IPOs by buying small fractions of stock. Besides, every user can get the so-called leverage to dispose of hundreds of thousands (if not millions) of dollars for trading. 

Robinhood is not the only platform with such capabilities. Some other similar services that provide micro-investment management for ordinary mobile users nowadays: Webull (China), Ajaib (Indonesia), Freetrade (Great Britain). But the day-trading revolution is synonymous with just Robinhood due to the GameStop case that has shown how painful the highly democratized fintech approaches can be for the traditional overlords of Wall Street. 

Robo-advisors 

Such fintech tools as Robinhood have appeared in the form of mobile apps in the pockets of millions of people. It is easy to set up a brokerage account online in a few minutes; 24/7 trading opportunities are widely available. At the same time, not every micro investor is ready to play on the market offhand. There are various ways to get professional advice about the assets to invest: trustees, investment advisors, online communities, etc. But the easiest approach is provided by bots. That is why robo-advisors got a second wind.  

A typical robo-advisor is an automated platform that provides various services to create and manage personal investments. Robo-advisors tend to be maximally user-friendly, working under the principle “install and forget”. Their commission fees are lower than “human” financial consultants. Hence, robo-advisors fit well with every novice having a small seed capital. 

What’s the key benefit of robo-advisors?

The main advantage of robo-advisors is their ability to help investors follow the core principle of trading: never worry about fluctuations on the market. When asset prices go down, people tend to sell assets for a lower price in panic. And on the contrary, when the market grows, they buy assets more expensive due to euphoria. In contrast, bots are free from emotions to achieve the desired financial results with no attention to price volatility. 

The average annual growth rate of robo-advising is 13.5%, according to stats. The global robo-advisor market promises to reach $6.2 trillion by 2027. Statista expects the number of US users of robo-advisors to reach 479 million by 2025. This year, the average amount of assets under robo-advisors’ management is expected to be $1,139.  

There are dozens of popular robo-advisors, among which the most innovative platforms are Bibit from China, the first crypto robo-advisor Macara, and truly folk all-in-one apps Stash and M1 Finance. 

Example 2 — SoFi

The world-leading robo-advising platform is Vanguard Personal Advisor Services, with $212 billion under management. That is a fully automated bot that runs without any human intervention. The system takes a 0.3% annual commission and requires at least a $3000 balance on the account. The minimum balance is what makes the bot hardly attractive for novice micro investors. There is a more interesting solution of robo-advisors to be considered as Example №2 in our review. 

SoFi is a commission-free robo-advising system that requires almost zero balance (symbolic $1) to start. The bot is in the Top 20 of robo-advisors. It can collect inexpensive exchange-traded funds (ETFs) to create an investment portfolio for newcomers.  Besides, the platform provides free access to human consultants. Moreover, free training courses are available for every user who invests at least $20 (!) a month. Personal financial planning (PFP) is also available for SoFi clients. Automatic rebalancing of the portfolio is carried out every quarter. The system doesn’t provide a tax optimization feature since the issue is hardly critical for amateur micro investors with relatively small portfolios.  

ESG scoring 

Another booming trend in the contemporary world’s finance is ESG. The acronym has two slightly different interpretations: Environment Society Governance and Environment Sustainability Governance. Both are pretty clear at first glance, which is more than can be said about the stats of the trend. Various rating agencies evaluate ESG companies with different metrics and properties. Hence, ESG as a socially responsible investment (or ethics-driven investment) remains open for interpretation. 

Climate change seems to be the major catalyst of the trend when companies try to achieve a high ESG score to help their businesses feel well in the foreseeable green future. 

Tesla Motor can be an illustrative case of a mess in ESG ratings. On the one hand, electric cars are environmentally-friendly enough to make TSLA (Tesla’s stock) attractive for ESG investment. On the other hand, the available ESG risk rating of the company tells otherwise. It seems Lisa Simpson is somehow right saying about Elon Musk that “for a guy who likes electric cars he sure burns a lot of rocket fuel.”   

ESG funds: How it works

The easiest way to invest in ESG projects is provided by ESG funds such as VESGX (one of Vanguard Group’s mutual funds). However, eco-startups such as Beyond Meat are not their main focus as might be expected. ESG funds invest in almost the same stock as other funds do while taking ESG risk ratings into account to some extent. As many analysts note, quite weird logic is that Microsoft and Starbucks appear among ESG companies while Amazon, Apple, and Facebook don’t. 

Big Pharma is among popular ESG stocks for a couple of reasons. Modern high-tech pharmaceutical production requires very few human employees to easily correspond to socially responsible businesses. Biotechnologies constitute one of the main pillars upon which the new post-COVID world is to be built. That is a clear sign of the upcoming sixth techno-economic paradigm when hitherto unprecedented demand in vaccines creates new transnational markets where pharmaceutical companies will get high ESG scores almost by default. 

ESG rating is definitely becoming one of the major metrics to evaluate assets in future investment. Even though the ESG-related manipulative technique “greenwashing” is gaining momentum as well, neither investors nor startups will ignore ESG scoring in the future.  

Neobanking 

That is probably the very symbol of digitization in finance. Neobank is a financial organization that operates in a digital space only. Customers visit neobanks via the internet: no physical facilities are available. All neobanks consist of two groups: 

  • Licensed financial entities capable of handling all banking functionalities 
  • Intermediaries that collaborate with offline banks and provide their clients with remote online services 

Neobanking allows people to manage various financial issues without leaving their homes. Both digital developments and COVID pandemics add popularity to neobanks. There are 256 working neobanks (also known as Challengers) in the world today, while even more neobanking projects are under development, according to stats. The United Kingdom is a champion in the segment with 37 neobanks available. The largest neobank by customer audience is Brazilian Nubank, with more than 30 million account holders. The richest neobank is a US Chime, with a $14.85 billion capitalization.  

Neobanks and traditional banks

Neobanks have raised huge investments since day one on the fintech market. Venture funds have pumped neobanks with money. Expansion and displacement of traditional banks seemed to be the main objectives while profitability has been considered just a pleasant add-on until recently.  

Both users and investors expected neobanks as triggers of a true revolution in finance just a couple of years ago. But the opposite happens: traditional banks keep strengthening their position, while neobanks have to invent new business models to turn a profit. Neobanks offer many services for free and set up minimum fees for transactions that have been considered the decisive competitive advantage.  

Example 3 — Starling Bank

The sad truth is that many neobank clients prefer holding their savings in old traditional banks while using neobanks for quick transactions and online shopping. In October 2020, Starling Bank appeared in the headlines of the world’s media as the first neobank that made a profit. Starling Bank deserves to be Example №3 in our review, therefore.  

A positive cash flow of only 800,000 GBP/month was enough for Starling to become the first profitable neobank. Notably, neither super-popular Monzo with 5.5 million clients nor transnational Revolut with 13 million accounts, but Starling with only 2 million users has reached the achievement. What helped the neobank do so? 

Starling’s loan department offers private loans, business loans, and overdrafts. The neobank has caught 4.4% of the small-business market of Great Britain. That is a wise strategy since an average business client keeps an order of magnitude larger account balance than a private client does.  Besides, Starling has obtained accreditation for making loans to small businesses under the governmental CBILS program (Coronavirus Business Interruption Loan Scheme). The other loan products bring more money than transaction fees as well. As we see, neobanks need evolution rather than revolution to be profitable. 

Anyhow, the neobanks changed the banking industry even though in a different way from what analysts expected. They have not replaced banking monopolists, but new standards have been introduced instead. Mobile banking, innovative digital services, and much more user-friendly interfaces of banking apps have appeared. Just compare your user experience in online banking five years ago and today. Besides, neobanks require fewer efforts from users than traditional banks. You need only 24 clicks to open an account in Revolut, in contrast to HSBC that requires 99 clicks. 

Conclusion 

The future is not in neobanks and fintech startups as such. The future is in the new financial models they introduce. Their competition with other IT giants is becoming severer that will lead to blurring the borders in the fintech sector. Techno giants will offer financial services, while banks will have to offer digital services. Many analysts expect that some conditional Apple or Google will become the largest fintech company sooner or later to make traditional banks redundant. 

Fintech unicorns will keep appearing to benefit from various technological developments such as open banking. The interfaces of the latter represent more opportunities for a free exchange of financial data. They will build innovative fintech superstructures to cover more B2B niches with small and middle-sized businesses, freelancers, and self-employed entrepreneurs. With customers growth, fintech startups and neobanks will create their own ecosystems to strengthen their positions on the market. This will result in such a sort of competition that financial institutions and techno vendors seem to appear indistinguishable. 

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