Can neobanks sell their tech to others

Slowing growth at Thought Machine and 10x illustrates challenges

“ We are a technology company” Marianne Lake JPM CFO Feb 2016

“We are a technology firm. We are platform” Lloyd Blankfein GS CEO early 2017

“We want to be a tech company with a banking license” Ralph Hamers ING CEO August 2017

Banks wanting to be tech companies is not new but can banks sell their tech platforms to other banks?

Many of the leading UK neobanks like Revolut are looking at geographical expansion of their product offering but Starling and OakNorth are both trying to sell their tech to other banks.

Starling’s pivot from a planned geographical expansion into “Banking as a service” selling its tech platform to other banks is getting some headlines these days with management bullish and shareholders talking up potential to create a decacorn business. It is early days but so far all they have announced are contracts with Salt, a Romanian digital bank and AMP in Australia.

Products vary from vendor to vendor and Starling will say “Engine” is a one of a kind “Banking as a service” product but it is worth checking in on the peer group. Legacy vendors in the core banking engine space include the likes of FIS, Temenos and Finastra but the cool sexy new tech players…cloud-native etc….are Mambu, Thought Machine and 10x Technologies.

Mambu was valued at $5.3bn at the peak of VC bubble in a December 2021 and generated $165m of revenues in 2022. Thought Machine and 10x are more recent and smaller and just reported results for 2023 illustrating how tough it is to keep growing in this market.

10 year old Thought Machine has customers like Lloyds Banking Group, SEB and Intesa Sanpaolo. It’s valuation doubled to $2.7bn in 2022. But 2023 results out a few days ago were not good.

2023 revenues of £47.8m for Thought Machine are up only 13% year on year. License fee revenues of £37m were up 27% year on year. Gross margin was just over 40% hardly top tier SaaS level. 2023 operating loss of £77.9m was broadly in line with the £73.5m for 2022. The majority of costs (£85m) are headcount related and grew 15% year on year reflecting an average headcount of 597 up more than 15%.

Thought Machine has cut headcount slightly near the end of 2023 and still has £106m of cash on its balance sheet but with this level of cash burn it will need fresh funding soon and investors may question the lofty valuation given its poor financial trends!

A similar trend can be seen at 10x, which is most famous for providing tech for the the JPM Chase UK digital bank. The firm launched in 2016 was valued at $700m in a 2021 fund raise. 2023 total income/revenues of £24.4m compared to £25.6m the prior year. The company highlighted some phasing as buildout fees transitioned to recurring fees. Despite some cost cutting the operating loss of £54m in 2023 compared to £60m the prior year. The year end cash position was £16m only. Average headcount of 327 in 2023 versus 401 in the prior year.

The bottom line is that legacy banking software either from legacy vendors or in-house builds is sticky and difficult to displace. If the sexy core banking start-ups like Mambu, Thought Machine and 10x are finding the going tough for Starling Engine to become a multi-billion dollar business may be pie in the sky.

Software is known for its amazing economics - high gross margins, low incremental costs - and high valuation multiples BUT getting to “escape velocity” as Peter Thiel describes it only happens for a few.

Sometimes it is just better for a bank to be a bank and not a tech vendor!