The European fintech American dream is being called into question
A double US banking application blow has called into question the fintech dream of landing on Wall Street. In this week’s column, Samuel Norman takes a look at the expansion roadmap for Europe’s top fintechs as well as the latest response to the booming profits in UK banks half-year reports.
Denied, denied, withdrawn. That is not a Henry VIII rhyme, but the recent track record for Europe’s fintech darlings chasing a US banking charter.
In the span of a fortnight, the Office of the Comptroller of Currency (OCC) – that’s the US’ banking watchdog that greenlights national permits – blocked bids from both Wise and Bunq.
Wise, the UK fintech that transferred its primary listing to the US last year, was blocked on the grounds of “significant supervisory and compliance concerns”, regarding its anti-money laundering controls. It has been operating in the US since 2015, working under a money transmitter licence. Meanwhile Bunq was told to produce a plan more “specifically built for the US market”. The OCC also appeared to take a dim view of boss Ali Niknam’s plan to manage the US arm on a part-time basis.
Both firms have said they intend to re-apply.
The two-week double blow called into question the pre-written script of cracking the US market that many of Europe’s fastest growing firms play to. It has also helped curtail the belief that the US banking sphere was a land of deregulation, just waiting for Europe’s top talent to wash up on the shore.
I’m not quite sure, though, whether this sharp reality has landed properly across the City quite yet. One lawyer told me this week they would have to stress to their fintech clients that an IPO in the US was not the be-all and end-all, specifically for firms still in that mid-cap base.
Some do appear to be getting wiser (no, not them). In our deep dive on Zilch, I revealed the payments firm’s founder had hoped his fintech would take off across the Atlantic but quickly re-evaluated the judgement following conversations with Monzo’s TS Anil, who advised closer to home was the better path.
Zilch confirmed it had “curtailed” its US operations in its 2024 accounts after rolling out its buy now, pay later offering to a waitlist of over 150,000 Americans in 2022.
There still remains excitement for bringing activity to Wall Street, not least because of some of the Trump administration’s pro-banking reforms.
The changes have hiked the benchmark where firms face tougher prudential standards and easing restrictions on speculative assessments.
Undoubtedly, it has helped stir up excitement for a US permit. In a short window, Paypal, Nubank, Coinbase, Revolut and Bunq all registered interest. A few months ago, I wrote in this column that fintechs were rushing to Wall Street to capitalise on their American dream.
But the latest results suggest it might not be as easy as it appears on paper. Entering the US market – let alone building enough local scale to satisfy investors – is proving to be a grueling regulatory marathon.
In the US, banks face a dual banking system split between federal regulators and individual states. Operating without a national charter forces firms to navigate 50 individual state licences and compliance regimes. Europe’s shining star Revolut knows this trouble after abandoning plans in 2023 following years of friction with California’s watchdog. When it went for a second swing, it was no surprise the digital banking giant applied at the national level.
Monzo withdrew its application for a US banking permit in October 2021. Years later the firm is now stopping all operations in the region.
Bank investors get ‘too comfortable’ with booming returns
The line of hungry onlookers demanding a bigger piece of the banking sector’s profit haul is growing by the day – and it’s not just the taxman in the queue.
Britain’s big four banks – Natwest, HSBC, Lloyds and Barclays – made £29.2bn in profit for the first six months of the year. Almost half of this – a cool £13.7bn – was paid to shareholders through dividends and share buybacks so far this year.
Gary Greenwood, equity analyst at Shore Capital, said there was growing concern that investors and some management teams “are becoming too comfortable extrapolating current conditions indefinitely”.
“It is difficult to look at numbers such as these and conclude that banks are not currently overearning,” he added.
Higher interest rates, structural hedge tail winds and tough credit conditions have all helped deliver boosts to the sector’s return on tangible equity (RoTE), which measures a company’s income as a percentage of its equity.
Shore Capital puts Lloyds’ retail unit’s RoTE at 32 per cent for the first-half, whilst Natwest’s is placed at 27 per cent.
“The critical question for investors is whether these returns represent a new normal or the peak of the cycle,” Greenwood added.
Some of the momentum has come from banks upgrading their income forecasts for the year on the back of an elevated interest rate path. Lloyds is not expecting the Bank of England to reduce rates from 3.75 per cent until late 2027.
The sharp change in monetary direction followed the Iran war sending oil prices soaring and fanning the flame of inflation across the globe. It’s this line of reasoning that left-wing MPs and lobbying groups are using to justify their demands for a fresh tax on the sector.
“Investors risk mistaking cyclical tailwinds for structural change,” Greenwood added.