Maybe Neobanks Are Mispriced?
By Ian Kar
I was re-reading Coatue’s thesis deck on the future of fintech the other day, which I highly recommend for anyone interested in fintech (you can check out the deck here…really excellent work by coauthors Michael Gilroy, Chase Packard, & Leslie Wang.)
A lot of the deck resonated with me—overall I really agree with a lot of the thesis’s. One that I wanted to double click on was a section on balance sheets.
“Balance sheets are necessary evils—Becoming a bank gives Fintechs control of destiny, but will trade on lower multiples,” the report states.
Short line but a lot to unpack—I generally agree that balance sheets are becoming necessary evils for fintech companies, and in particular, neobanks that have very similar functions to depository institutions. And, as you can see from the corresponding graphic, the economics of being a corporate card company are vastly different depending on your strategy—in the example, net revenue jumps 50 basis points if you own your own balance sheet. That might not seem like a lot, but at scale, 50 basis points adds up.
In a fictional scenario involving a consumer neobank, the benefits are similar: net interest income jumps up from 1.5% to 2.5% if you own your balance sheet. Coatue writes that neobanks that own their own bank can “see significantly more float revenue.”
So, why don’t more companies pursue their own bank charter as a way to increase profitability? Well, besides the fact that very few have the team or liquid assets to pursue a bank charter, another big reason is valuation multiples. As a chartered institution, your valuation multiple revolves around your book value, in accounting parlance, the value of an asset according to its balance sheet. Most tech startups prefer to be valued on crazy software multiples—the “somewhat normal” 20-50x times revenue multiples we’ve been used to seeing across hot fintech companies over the last few years.
Much of the Coatue deck revolves around the fact that there’s an economic recession coming; during recessions, businesses dependent on balance sheets “tend to trade on book value which becomes more valuable than topline valuations.” To me, that translates to: fintech companies that should trade on book value and don’t know it might be susceptible to downrounds in the near future and might currently might be extremely overvalued.
I think one of the things that we’ll end up figuring out over the next few years is what the actually valuation is around neobank companies. My guess is most neobanks are really overvalued—taking a look at Sofi’s valuation compared to its book value might give us a good indicator. Sofi’s price to book value right now is .77—better than Citigroup’s .51 but worse than JPM (1.53) and Goldman (1.198). Sofi—with their recent bank charter acquisition—is being priced by Wall Street as a full fledged bank; the reason its price to book value might be better than Citi’s is because its a tech enabled bank with cheaper customer acquisition costs (but, its a less diversified business than a JPM or Goldman.)
The other big question that I have is where these corporate card companies end up. They’re functionally delivering the same product as a neobank—a corporate card—but have seemed to stay away from focusing on other financial services like offering deposit accounts. Will they keep focusing on high quality software around their card programs, and offer other high quality software for the financial ecosystem that a business needs—putting them into the Bill.com/Intuit arena? Or will they offer more financial services for banks, making them more of a bank that trades on book value?
Lot of questions, and very few answers. But definitely interesting to think about!