POLAND – 03/21/2021: In this photo illustration, a Robinhood logo is also displayed on a smartphone … [+]
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The Robinhood trading platform will go public next week under the ticker ‘HOOD’. Robinhood’s public offering is likely to be valued at over $ 35 billion, along with a recent round of fundraising for European digital bank Revolut, the acquisition of asset manager Nutmeg (by JPMorgan), and a listing of trading platform eToro (in a special purpose vehicle ), Robinhood’s IPO marks a decisive moment in the transition from “old” banking to so-called fintech. As such, it is a good milestone from which to assess a number of evolving trends in the financial sector.
The Robinhood IPO is a sign that the fintech world has “arrived”, but like many totemic IPOs, it can mean a climax or climax for digitally driven companies too. Remember, a few months ago we pointed out that prominent stock market listings (e.g. from Glenore to Coinbase) mark the end rather than the beginning of a market trend.
In my opinion, the fintech megatrend is only just beginning from an industry perspective and will continue to develop over the next ten years. It also reminds us that investing in established banks is largely unsuccessful, especially in Europe and Asia, where bank performance apart from the ups and downs of the yield curve from poor governance, inefficient IT spending and short deadlines.
To put this clearly, the MSCI European Equity Market Index has doubled since May 2006, while the MSCI European Banks Index has halved. It doesn’t look as if the European banks will catch up anytime soon, although these “dinosaur” banks (which together still hold well over 700 billion euros in investor capital. In contrast, the global fintech benchmark in the doubled in the last three years.
This doubling was the result of the emergence of a number of new financial ecosystems – retail, retail options market, and crypto, to name just three – each with its own grace, excitement, specific sociology and anthropology (from the master of the universe). Options Traders to Crypto Bros – The Crypto Universe Is Not Women Friendly), to the meme stock traders of the Wall Street (WSB) betting discussion board on Reddit.
Given the rise and fall and resurgence of WSB traders, Robinhood’s IPO will be an excuse for many commentators to spread the phrase that we are witnessing the “democratization of finance,” but the reality is that we are seeing democratization risk in the sense that various forms of financial risk (leverage, liquidity risk, information asymmetry) are packaged and sold to the public.
On the other, less democratic, even elitist side of the financial industry (established hedge funds and family offices) there is a greater demand for “private assets” (high quality loan funds, venture capital and investments in growth companies) and this is in many ways one of the more interesting ones, less commented parts of the financial world and certainly among the most lucrative.
Another trend that needs more attention, especially from anyone looking to invest in fintech, is how the fintech business model works or not. From the outside, Robinhood appear to be highly profitable trading engines, in fact a review of the 400-page SEC S-1 regulatory filing for the IPO (which includes over 70 pages on “risk factors”) shows this despite having $ 81 billion in client assets Robinhood earns the lion’s share of its revenue from selling data on client transactions to mainly two large hedge funds. In this respect, it is more like Facebook than UBS or Bank of America.
At the same time, with the constant advance of technology companies into the financial sector, a strategic, industrial structural change is taking place in the financial sector. Fintech’s logic allows tech companies to enter the financial world – either as trading platforms, finance social networks, or payment platforms, which then develop a broader range of services (TransferWise, recently listed on the London Stock Exchange as “Wise”, is a good example).
What is not entirely clear here is how the tech and fintech ecosystems will transform both the established banking system and the entire financial system – with implications for monetary policy and regulation.
The Robinhood pre-IPO documents also show that 14% of client assets are in crypto, which is huge from a standard asset allocation perspective from a portfolio perspective (I imagine a reasonable portfolio theory approach would be 1-2% would). Still, it shows that “crypto” has captured the investment narrative especially among young people, and this has a lot to tell us – about the “spirit of the market” today, not least because of the dangers it poses to prosperity.
In this regard, one of the most significant trends in the years to come will be the battle between centralized and decentralized finance – led by governments and regulators, but it will span many areas – law, philosophy, politics, and technology. One of the challenges ahead will be making the entire U.S. regulatory system accountable for crypto assets like Bitcoin and the infrastructure that powers them.
In theory, the “Defi” world (decentralized financial world) operates outside of the “old” centralized financial world and its real economy, but “Defi” cannot be independent of the much larger centralized financial world (consisting of JPMorgan, Central Banks and Governments). To this end, the “defi” winners will be those who can adapt to the “old world” and who are vigilant geopolitical sensitivities to the evolution of the world financial order.