A sublime overview, Marc. You make a point though on how the culture in American IBs ensures the right incentives for their employees. Clearly Goldman’s 1MDB scandal must be an exception here?
Yes, you're right. The daily trading distribution chart shows that every firm has a certain tolerance for loss days. I wonder if firms have a tolerance for legal/reputational risk?
Sorry didn't realise that comment posted... to conclude
1.
The impact of plentiful/cheap capital. Listening to the Tinkoff CEO, it’s clear that they had to be much more disciplined with spend than the UK fintech challengers. It'll be interesting to see how the "path dependency" dynamics of this play out.
If from day one you're looking for products that can make money and customers that are willing to pay for them, you end up with a very different customer base, very different internal culture, and very different competencies than a company that focuses on user growth first and foremost (not to mention the narrative you must maintain for investors).
It has always been claimed that the one upside of ZIRP has been the money funnelled to startups and innovative new companies, however cheap capital fosters wastefulness as much as it does innovation. Creativity always needs a constraint.
2. On going global as a financial account app, what is interesting is that you need to re-discover product market fit in each country as the user needs are different across the world when it comes to a consumer banking account.
It's interesting to contrast Revolut with Transferwise/Wise, which has gone global but plays in a specific vertical that is a pain everywhere. This is not the case with an account. In the UK for Revolut the key was free foreign card spend and FX, however in other markets this either will not matter as much (US, or Eurozone) or will not be the most compelling feature (e.g. in Ireland and other smaller EU countries with poor local banks, Revolut is the only serious fintech in the market and therefore benefits from massive network effects as it is used as an instant cash transfer app. 25% of the Irish population has a Revolut account vs maybe 10% in UK).
It's a strategy that can only work with a high ability to execute and plentiful cheap capital, but it has had success so far. I wonder in the future if we'll see Revolut exiting poorer performing markets and then doubling down on the ones where it has major traction over time?
Yep, this is an aspect of what I was trying to get at with point 2. The core issue is that the route to profitability and potential levels of profitability from banking products (lending, card issuing, account fees) is different in each market due to customer needs and regulation as you say.
Margins aren't necessarily a developed / undeveloped thing entirely - take India where card interchange is razor thin due to regulatory policy to discourage holding cash. It's yet another reason why neobanks and lenders have struggled to scale globally in the same way as payment gateways who can offer the same narrow service in each market and provide true value add features to justify fee markups.
Thanks Marc for the interesting history of IB. I was wondering for a long time, would the banking system in any country gradually transition to being more inclined towards IB? The presence of Investment Banks, is it become of developed economies?
Take for example India where I understand the banking system very well, and the income/profitability of these banks is mostly depending on direct lending. There is no mention of Investment Banking anywhere and if they intend to transition to it. Any idea why such system is not there in India yet?
Thanks Marc for the interesting history of IB. I was wondering for a long time, would the banking system in any country gradually transition to being more inclined towards IB? The presence of Investment Banks, is it become of developed economies?
Take for example India where I understand the banking system very well, and the income/profitability of these banks is mostly depending on direct lending. There is no mention of Investment Banking anywhere and if they intend to transition to it. Any idea why such system is not there in India yet?
Capital markets tend to be deeper in developed markets particularly the US which is what gave US banks a head start globally. Indian banks like ICICI and Kotak do have securities businesses but they nevertheless compete with Goldman and Morgan Stanley even in their home market.
It is interesting to think through how the future decade of IB will adjust with SPACs, Direct Listings, and Software businesses taking over more market share from traditional, capital intensive operations. Any advice on how to think through some of these changes and how it will impact the capital markets, specifically as it pertains to career opportunities? How would you go about getting into IB today if you had to start over?
Well, SPACs are a big boon for the investment banks. In fact, they get paid multiple times: once for the initial capital raising, once for the merger, once for the PIPE, etc. But yes, disintermediation is a threat.
Thanks for the additional color on SPACs and focusing on a niche. Found your newsletter last week and currently have 8 tabs open with your previous posts...thanks for sharing your compounded knowledge with the rest of us.
A sublime overview, Marc. You make a point though on how the culture in American IBs ensures the right incentives for their employees. Clearly Goldman’s 1MDB scandal must be an exception here?
Yes, you're right. The daily trading distribution chart shows that every firm has a certain tolerance for loss days. I wonder if firms have a tolerance for legal/reputational risk?
Yes. I guess $3bn exceeds GS’ tolerance levels ^^
But great question.
superb history of the Investment Banking,
Great article Mark.
For me the Tinkoff vs Revolut debate raises a few other observations:
1. The impact of plentiful/cheap capital. Listening to the Tinkoff CEO, it’s clear that
Sorry didn't realise that comment posted... to conclude
1.
The impact of plentiful/cheap capital. Listening to the Tinkoff CEO, it’s clear that they had to be much more disciplined with spend than the UK fintech challengers. It'll be interesting to see how the "path dependency" dynamics of this play out.
If from day one you're looking for products that can make money and customers that are willing to pay for them, you end up with a very different customer base, very different internal culture, and very different competencies than a company that focuses on user growth first and foremost (not to mention the narrative you must maintain for investors).
It has always been claimed that the one upside of ZIRP has been the money funnelled to startups and innovative new companies, however cheap capital fosters wastefulness as much as it does innovation. Creativity always needs a constraint.
2. On going global as a financial account app, what is interesting is that you need to re-discover product market fit in each country as the user needs are different across the world when it comes to a consumer banking account.
It's interesting to contrast Revolut with Transferwise/Wise, which has gone global but plays in a specific vertical that is a pain everywhere. This is not the case with an account. In the UK for Revolut the key was free foreign card spend and FX, however in other markets this either will not matter as much (US, or Eurozone) or will not be the most compelling feature (e.g. in Ireland and other smaller EU countries with poor local banks, Revolut is the only serious fintech in the market and therefore benefits from massive network effects as it is used as an instant cash transfer app. 25% of the Irish population has a Revolut account vs maybe 10% in UK).
It's a strategy that can only work with a high ability to execute and plentiful cheap capital, but it has had success so far. I wonder in the future if we'll see Revolut exiting poorer performing markets and then doubling down on the ones where it has major traction over time?
Here's a curious take on the success of Tinkoff in Russia and why it would be hard to reproduce in advanced economies (link in Russian) — https://vc.ru/finance/219278-pochemu-uspeh-banka-tinkoff-nevozmozhno-povtorit-v-evrope.
The author suggests that it's not possible to achieve such level of profitability in a tightly regulated and competitive market.
Yep, this is an aspect of what I was trying to get at with point 2. The core issue is that the route to profitability and potential levels of profitability from banking products (lending, card issuing, account fees) is different in each market due to customer needs and regulation as you say.
Margins aren't necessarily a developed / undeveloped thing entirely - take India where card interchange is razor thin due to regulatory policy to discourage holding cash. It's yet another reason why neobanks and lenders have struggled to scale globally in the same way as payment gateways who can offer the same narrow service in each market and provide true value add features to justify fee markups.
Very compelling insights, thanks Deane.
Thanks Marc for the interesting history of IB. I was wondering for a long time, would the banking system in any country gradually transition to being more inclined towards IB? The presence of Investment Banks, is it become of developed economies?
Take for example India where I understand the banking system very well, and the income/profitability of these banks is mostly depending on direct lending. There is no mention of Investment Banking anywhere and if they intend to transition to it. Any idea why such system is not there in India yet?
Thanks Marc for the interesting history of IB. I was wondering for a long time, would the banking system in any country gradually transition to being more inclined towards IB? The presence of Investment Banks, is it become of developed economies?
Take for example India where I understand the banking system very well, and the income/profitability of these banks is mostly depending on direct lending. There is no mention of Investment Banking anywhere and if they intend to transition to it. Any idea why such system is not there in India yet?
Capital markets tend to be deeper in developed markets particularly the US which is what gave US banks a head start globally. Indian banks like ICICI and Kotak do have securities businesses but they nevertheless compete with Goldman and Morgan Stanley even in their home market.
It is interesting to think through how the future decade of IB will adjust with SPACs, Direct Listings, and Software businesses taking over more market share from traditional, capital intensive operations. Any advice on how to think through some of these changes and how it will impact the capital markets, specifically as it pertains to career opportunities? How would you go about getting into IB today if you had to start over?
Well, SPACs are a big boon for the investment banks. In fact, they get paid multiple times: once for the initial capital raising, once for the merger, once for the PIPE, etc. But yes, disintermediation is a threat.
As for career opportunities, only advice I would proffer is to carve out a niche.
Thanks for the additional color on SPACs and focusing on a niche. Found your newsletter last week and currently have 8 tabs open with your previous posts...thanks for sharing your compounded knowledge with the rest of us.