The Unicorn's Dilemma

Pity the pretty apprentice unicorn.

Life’s not so easy on the path to mythological status, especially as their dreamy valuations might be just that... a dream. A report from Rosenblatt Securities, cited in an article recently published by Sifted, suggested that a protracted downturn could wipe $76 billion off their combined market value.

Unicorns, of course, are defined by a valuation of $1 billion, and valuations, at the high growth, cash-burning stage, are defined by revenue and revenue growth. It’s very much part of investor culture. At Centtrip, we are regularly approached by potential investors seeking growth at all costs. 

For would-be fintech unicorns in a growth-driven world, the business model becomes one of simply buying customer accounts. But, chasing hollow customers simply increases investor risk. 

A recent analysis of challenger banks (neobanks) by Fincog is a case in point. 

Fincog analysed a selection of payment-centred challenger banks with a total, combined customer base of 28 million customers and a combined valuation of US$ 17.8 billion, i.e. an average cost per customer acquired of $635. Individual valuations ranged from $103 to $1,000 per customer. 

Yet, annual income per customer is shockingly low, ranging from negative (-$19.78) up to just $32.38 per customer per year. All are loss-making, with the nearest to breakeven coming in at a Net Profit per Customer of -$2.01. 

Meanwhile, old-world, old-fashioned Lloyds Banking Group serves over 30 million retail and business customers with a large, legacy cost base. It has income of $728 per customer and a profit per customer of $180. You’ve bought yourself a market.

So, here’s the unicorn’s dilemma. 

How do you deliver investor value without increasing investor risk? 

You’ve bought yourself a market, but is it the “right” market? If your goal is growth in customer numbers, the easiest way to achieve that is in B2C. And that’s just what we’ve seen – a myriad consumer-facing fintechs offering retina-singeing payment cards and funky-named accounts and services. Because, consumers are quicker and easier to acquire than B2B customers. 

Is that the best market? It will bring you customer growth, but the greater profit invariably lies in high-value B2B sectors. 

You need to serve the market you’ve bought. But servicing customers is hard, and expensive. 

For all their faults, incumbent banks and other financial institutions have a portfolio of products they can monetise. Challengers, typically, don’t. Often the challenger business model is built on unbundling – finding single services they can deliver better than the incumbent. The flip side is that you now have only one service on which to build customer loyalty or stickiness. 

And, worse, if you don’t do your one thing well, things can go wrong rather quickly. 

A recent article in The Times spoke of mounting complaints at digital banks. More than simple process or technology failures, customers were infuriated at the inability to talk with a human, being sent in circles by chatbots and automated phone messages. 

Yet, customer service is critical. The customers you attract first and most easily are, by definition, more flighty and less forgiving than the rump of later adopters that remain with incumbents. 

They came on your promise. They’ll leave on your (perceived) failure. 

Customer service, done correctly, is expensive. At Centtrip, we invest heavily in experts who understand both our world of finance and our customers’ worlds of music, marine, aviation or arts. 

Service is a necessary investment for wannabe unicorns because the last thing you want, if your business is feeling overvalued, is customers who feel undervalued.

The rush to rebundle 

Many unicorn wannabes are now facing a confluence of challenges. They’re chasing growth in B2C customers, while trying to monetise them with a limited portfolio of products, and support them with inadequate service. 

Hence, we’re now seeing a rush to rebundle – in the hope of monetising (and retaining) existing customers while attracting more with a new, one-stop shop offering. 

Rebundling might enrich the portfolio, but will we also see a rush to acquire more valuable B2B customers?

That will be hard to achieve organically. B2B customers need different marketing and – as above – deeper support. They also need services that were specifically architected to meet B2B needs for security and performance. Recognising this, the more deep-pocketed unicorns may find themselves on the acquisition trail, looking to buy B2B businesses with better customers for a more certain future. 

There’s also a further dimension. 

Wouldn’t it be easier to build your fintech business if you didn’t worry quite so much about risk and regulation? In a world of anti-money laundering (AML) regulation and KYC, taking on just a little more risk could, potentially, yield a lot more revenue. Too much caution could mean too little growth. 

But there are risks in relaxing risk management, not least that something could go wrong – an FCA investigation won’t hep investment prospects. More than that, an over-casual approach to risk-management and compliance will damage a fintech’s potential for partnering with traditional financial institutions – an increasingly important source of growth and investor exit (through acquisition). 

And, the pressure is on. Although last year was another record year for fintech investments, the WeWork debacle shattered many investors’ money-making illusions. They still want growth, but suddenly, VCs are cautious again: due diligence is deeper, fundamentals are in fashion. 

Apprentice unicorns need a business model that is more than simply buying empty accounts. They need to show growth and a path to profit. The super-niche solution? 

One of the biggest challenges facing fintech start-ups is a consequence of the unbundling strategy. Despite an impressive growth in customer numbers, these accounts are most often secondary accounts created with the intention of leveraging the unbundled service.

Neobanks have been relatively unsuccessful in capturing the more lucrative primary account market – typically the account into which personal salary or revenues flow. 

Rebundling is a response to that, seeking to better monetise existing customers. But random rebundling won’t buy loyalty or the primary customer relationship. 

At Centtrip, we’ve taken a more considered approach. We looked at the needs of specific, very demanding B2B sectors and built a suite of services around those needs. 

It’s not just technology services like fast and transparent international payments, or super-flexible, high-balance payment cards. It’s about expert, informed personal service. We work hard to understand deeply those sectors we serve. We know our business, and we know customers’ business, too. 

Business empathy builds loyalty. Useful, tailored, sector-specific services build loyalty and income, as well. 

We have growth – we’re already the market leader in music and marine – and we have a sustainable business model. 

Rather than trying to scale a homogenised offering, we seek to build scale by proving our service one super-niche at a time. Along the way, we develop superior capabilities and deep relationships with the most valuable customers. 

Niche-players will thrive because they deeply understand the customer. This is the answer to the unicorn’s dilemma.