The FinTech bubble: Euphoria surrounds $1 billion Swiss ‘unicorn’ but there is no profit

The million dollar, or perhaps in this particular context, billion dollar question is, how can the new FinTech challengers become highly capitalized entities that are able to gain huge venture capital investment when there is no track record and no sign of profit?

In the financial technology sector, today’s massively high profile new startups which are paving the way ahead for the method by which retail and commercial customers will access financial markets are gaining vast sums of investment via various rounds of funding from large scale venture capital investors.

The internet, bill posters, and advertising material in subway stations are omnipresent, demonstrating a new, bank-free future of self-empowerment via smartphone apps that do everything from manage mortgages to execute trades on derivatives exchanges.

Today, another massive milestone has been reached, this time by Swiss FinTech newcomer Numbrs Personal Finance (yes the spelling error is intentional) which has, according to those wishing to fan its flames, become a $1 billion ‘unicorn’.

The company, based in Zurich, is led by CEO Martin Saidler, with significant investment, among others, from Josef Ackermann who had been CEO of Deutsche Bank for a number of years, and Chairman of the Board from 2002 to 2012. He also had the dubious accolade of being Chairman of the Bank of Cyprus elected in 2014.

In 2011, EconomyWatch dubbed Mr Ackermann as “the most dangerous banker in the world” following his appearance in a court in Munich to testify in a lawsuit against the bank by fallen German media mogul Leo Kirch.

Mr Kirch wanted 2 billion Euros from the bank he alleges triggered the Kirch Group’s collapse by questioning the creditworthiness of his media empire in a 2002 Bloomberg Television interview.

According to the suit, Mr Ackermann is the main witness. And 84 year old, virtually blind Leo Kirch has had little luck claiming damages and during the same year, Mr Ackermann found himself at the forefront of the European sovereign debt crisis as European Union policy makers clashed over how to prevent the currency region’s default after 256 billion Euros in bailouts to Greece, Ireland and Portugal failed to stop the debt crisis.

Numbrs Personal Finance raised $40 million in its most recent round, to bring the total capital invested to almost $200 million, Chief Executive Officer Martin Saidler said in an interview with Bloomberg. Numbrs offers an app that enables users to manage their existing bank accounts in one place and to buy financial products.

The company has become a so-called unicorn by focusing mostly on private investors. “Venture capital and private equity funds tend to have less patience. They get nervous when it takes longer for a startup to earn money,” Saidler said in an interview. Investment Corporation of Dubai, which invested in 2017, is an exception, he said.

In total, more then 50 individuals and families are invested in the company. Existing and new investors took part in the latest funding, Saidler said, while declining to name any. The company previously identified Mr Ackermann and private banker Pierre Mirabaud as stakeholders yet according to a spokesperson who contacted FinanceFeeds on behalf of Numbrs, none of the participating investors have been disclosed during its most recent funding round.

The alarming aspect here is that Numbrs is not profitable yet, though it aims to break even in two years, according to Mr Saidler. The fintech firm launched its app in 2014 in Germany and, starting next year, Numbrs aims to establish Britain as its second main market.

How can such a huge amount of funding be given to a firm with no track record and no profitability? Surely the new age of fintech-driven challengers are cost-efficient and have low overheads, and many clients willing to use their services?

The over-zealous eagerness to fund these entities is interesting, however, as challenger banks and new age trading platforms are not yet tried and tested as actual businesses that can sustain themselves without investor funding.

Currently, almost all of them have very little capital of their own, and are still running on the resources provided from various rounds of VC investment, and whilst most certainly some of the new entrants to the market are paving the way forward for the electronic trading industry in that a move toward ownership of client bases, mobile-first integration with other financial services solutions on one platform and an alternative to banks for cross border trading or settlement are all very important ways for firms to scale their businesses and attract premium client bases in good jurisdictions, especially in the current regulatory environment, however when the venture capital rounds run out we will see who stands firm and who falls.

This in effect will be the litmus test as to whether companies can actually challenge banks not only in terms of better user experience, but in terms of being a bona fide corporate entity that can scale, adapt, own its own IP and list its assets publicly.

Most certainly, the new technology and methods which could be seen as a “beta” environment for how the new type of financial services market could work is very valid among the new fintech challengers, rather in the same vein that Tesla attempted to show the world how a totally new approach to the motoring industry could be achieved with an amazingly good product yet no profitability, whilst Ford and GM present their shareholders with good news every quarter.

It will be of great interest to see in a few years time if this leading edge technology which is being fostered by startups will sustain the future for the financial services industry, or whether the term ‘unicorn’ is being used whilst the VC money is still flowing, and when it runs out we will all be back with the steady and evergreen Tier 1 banks.