Fiinu Bank (LON:BANK) will soon offer a Plugin Overdraft solution to millions of customers without anyone needing to switch their existing bank. The stand-alone unbundled overdraft can potentially be a Monzo-like phenomenon, and the long-term investing opportunity is immense.
About four years ago, 32 million people — or 62% of the population — used some form of overdraft annually. Today, only about 20% of the 100 million personal current accounts population include access to overdraft, whilst the cost-of-living crisis is increasing the demand.
The gap between supply and demand has resulted in over £10 billion short-term credit funding gap in the market and an increase in non-bank lending. By way of example, more than 21 million have resorted to BNPL, and according to FCA, some of these alternatives can have adverse effects on credit files. Fiinu’s primary research suggests that 53% of the population would be very likely to add a Plugin Overdraft to their current account for as long as they didn’t need to change their bank. Fiinu Bank plans a soft launch in late spring and a full launch this summer.
According to Panmure Gordon’s research (Jan 2023), the FTSE AIM fintech group with a ticker “BANK” could fetch a valuation of £1.2 billion — though, as usual with AIM investing, this is not a risk-free trade.
Plugin Overdraft: how it works
Fiinu was founded in 2017, by second-time entrepreneur Dr Marko Sjoblom, as a fintech platform and a provider of consumer banking products. The publicly listed group comprises two separate businesses: Fiinu Bank, which has been granted a restricted deposit-taking, will offer the flagship Plugin Overdraft, and Fiinu Services Ltd, which will provide Bank Independent Overdraft platform to other banks.
Podcast: Fiinu Plc: why this newly London-listed FinTech could be the next Monzo-like phenomenon
The Plugin Overdraft is an ‘unbundled’ overdraft solution. Fiinu provides customers with an overdraft facility by intelligently using the Open Banking scheme without anyone needing to switch their current account away from their present bank. Fiinu Bank loan book is funded through one-year fixed-term deposits, FSCS-guaranteed of up to £85,000.
The solution gives the customer access to mainstream credit, an overdraft, from a third-party bank, and unlike some non-bank alternatives, it does not negatively impact their credit score. According to the Experian website, an overdraft in the credit file can improve credit scores.
After receiving the restricted deposit-taking licence in July 2022, Fiinu is now in the ‘mobilisation’ period, where newly authorised banks typically operate for 12 months before fully opening up to trade.
As with any other retail bank authorised by the Bank of England regulators, the PRA and the FCA, the company is currently undergoing its technical audit. It is also advancing its operational capabilities, recruiting senior managers, building out risk, internal audit, and compliance functions, investing in IT systems, contracting with third-party suppliers, and finalising the company’s recovery plan. At the same time, the PRA/FCA continue to assess whether the group is ready to exit mobilisation and become fully operational.
For context, the total deposits a new bank can accept in the mobilisation period is just £50,000 — little more than pocket change in banking terms. Fiinu plans to exit the mobilisation by 7 July 2023 after submitting a Variation of Permission to the PRA/FCA alongside evidence that required actions and capital is in place.
Fiinu FTSE AIM IPO
Fiinu launched its IPO mid-July with a valuation of circa £53 million (20p a share). In common with most tech-focused companies, the AIM company has fallen in value to circa £35 million just after launch. However, it’s risen by a third over the past month, with the volatility suggesting it remains in price discovery.
It’s worth noting that gaining its banking licence and launching the IPO was a five-year process. CEO Chris Sweeney argues that the company’s ‘unique Plugin Overdraft is the gateway to better financial inclusion and a welcome addition of a product made possible through Open Banking.’
Meanwhile, the founder, Dr Marko Sjoblom, believes the platform will ‘create a new market where unbundled overdrafts will increase financial fairness and freedom for everyone, everywhere.’ The company raised £14 million when it became public and expected to raise further funds by the end of the mobilisation period.
Recent developments
On 19 December, Fiinu announced that TransUnion will be ‘supporting Fiinu Bank to help enable its innovative overdraft solution, using TransUnion Open Banking capabilities and credit reference data.’ The Open Banking information will be used to check eligibility without impacting anyone’s credit score.
TransUnion director Stephen Wishart notes that ‘the use of TransUnion Open Banking capabilities, alongside our credit reference data, will provide a comprehensive view of the individual’s financial situation, helping Fiinu to assess the finance that’s right for the individual’s needs.’
Most recently, the FTSE AIM company provided an operational update on 26 January in advance of full year-financial results expected in April. Describing the ‘significant progress’ made since the IPO, the company listed a reel of achievements; signing a contract with core banking platform Tuum, hiring key management personnel, signing a contract with a decision engine services provider, and selecting a critical Payment Initiation Service Provider.
In addition, Fiinu has received regulatory senior management functions (SMF) approval for the CFO, chief risk officer, and chair of the board risk committee. As is the core banking platform configuration and testing, all key microservices to support new customer onboarding and payments are now completed. System integration testing is currently ongoing with support from contractor Maveric NXT to provide assurance testing.
And most importantly, the FTSE AIM company remains on target to ‘exit from mobilisation following the required capital raise and subject to regulatory approval’ in July 2023.
However, the bank needs to raise £35-40 million before it exits mobilisation. But confident it will achieve this in the set timeframe and promises to ‘provide further regular updates as the business plan progresses over the coming months.
Potential valuation
Before getting into the specifics, there are three general points to consider for a potential valuation.
First, the UK and the world are generally on the straits of tightening monetary policy, with the UK base rate at 4% and rising. This is sub-optimal for a fintech like Fiinu seeking to get finance on decent terms — and it will need further financing to become self-sustaining; however, retail deposits tend to be the cheapest form of loan-book funding, especially in comparison to wholesale funding.
Second, valuing a company on its potential is, by its very nature, an imprecise exercise with a wide degree of variance. Fiinu has a banking licence, an excellent business idea, and a solid roadmap to profitability. However, things do go wrong, and this is not a risk-free investment — capital risks, credit risks, interest rate risks, liquidity risks, operational risks, and even potential conduct risks are the common pitfalls. Fiinu is not immune to these problems.
The third point is that Fiinu has serious potential. Other fintechs which have spotted a lucrative gap in the market — including Monzo and Wise — have jumped to multi-billion-dollar valuations. Wise has unbundled international transfers from the personal current accounts and proven the model as its valuation is nearly £6 billion.
This could be a similar opportunity to get in on the ground floor for those with a healthy risk appetite. Getting a UK banking licence is no easy task — possibly the most significant hurdle — which has already been cleared.
Now for the details.
Panmure Gordon analysts have put together an excellent research note and extrapolated their opinions based on a realistic hypothetical future model.
Under their model, they expect that Fiinu will grow to 500,000 customers within five years of operation, breaking even in year three, becoming fully profitable in year four, and will have broken even in aggregate by the end of year five.
Breaking this prediction down, they expect 75,000 net new customers in year one, another 75,000 in year two, and then further scaling up in years three to five. Panmure assumes initial average lending of £300 per client, with each use of the Plugin Overdraft lasting for circa 120 days per year/10 days per month. In terms of pricing, it assumes a competitive 32bps.
However, as previously mentioned, Fiinu must find £35-40 million in equity funding in the next four months. Panmure estimates this will need to rise to £100 million based on ‘conservative base case assumptions over the first few years of operation.’ To put this in context, Monzo needed to raise over £450 million in the same period, which is still loss-making.
For perspective, more rapid growth or collaboration with other financial services companies will require more capital to scale up and ensure smooth customer access to credit. However, such an increased growth rate would act as proof of work to potential lenders; therefore, additional financing would be reasonably easy to access.
But under Panmures, many assumptions, including that the customer base grows to 700,000 customers by year 10 — which seems a reasonable target — a DCF valuation would suggest an implied value of £1.2 billion within the next decade.
I think the terms and sourcing of Fiinu’s required financing is the key hurdle to overcome. After that, one problem that the company may have understated is getting those first 75,000 customers in year one; they may be underestimating just how hard it is to get UK consumers on board with new products, especially credit products, even if it is in their own best interests.
My final comment is Fiinu’s future competition problem.
Fiinu is currently targeting customers excluded from arranged overdrafts by traditional banks who must now seek far more expensive finance elsewhere. Suppose Fiinu can demonstrate that it can profitably offer overdrafts to these excluded customers. In that case, banks may again offer these customers overdrafts on better terms.
Fiinu would then compete for customers with the multi-billion-dollar titans. However, this is a future problem, most likely for the 2030s rather than today.
And at 13.2p per share, Fiinu is a solid speculative FTSE AIM opportunity for 2023.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.