Game On for Robinhood and Revolut

So, the Irish stockbroking version of Game of Thrones concluded this week with J&E Davy shareholders ceding power to its former master, Bank of Ireland. No blood, but there were some interesting twists in the tale. It is not that long ago Bank of Ireland sold Davy to its management team for €300 million. At least half that MBO purchase price was debt so the latest €600 million break up of Davy looks like at least a four-bagger for the leaders of the 2006 coup. Well played.

Some might find the game-type language a wee bit distasteful given recent governance issues on Dawson Street but there is method in my badness. Awkward and costly change of strategy or not, Bank of Ireland desperately needed to get back in the game to add some new revenue channels. Recent newsflow on Robinhood and Revolut would suggest ‘new revenue’ can generate serious valuation boosts.

First, consider Revolut which derives 12% of its revenues in Ireland. The UK-based financial “superapp” has just raised $800 million from Softbank and Tiger at a valuation of $33 billion, or slightly more than the value of Nat West! For those waxing on about winners and losers in the Davy deal think about that theoretical $4 billion valuation attached to the Irish portion of Revolut’s business. And that’s not even the eye-catching number.

Revolut’s 16 million customers generated revenues of £222 million in 2020 but for each pound of revenues there was an almost equal loss of a pound(£207 million). It is early days yet but the business model is possibly still in search of its mission as bank product/service or wealth/trading platform. Or both, as Bank of Ireland are trying now. Clearly, the pandemic hit Revolut’s original winner, its slick foreign exchange service, but it was striking to see that almost one third of revenues came from its trading platform used to buy stocks and….. cryptocurrencies. More games than banking maybe, but don’t knock it. Ask Robinhood.

Robinhood, the US-based trading platform, has just filed for an IPO in New York. Remarkably, the indicative valuation of the Robinhood IPO is the exact same as Revolut’s latest $33 billion mark. However, revenues of the former are almost triple that of Revolut, just shy of $1 billion in 2020, and it is not losing money. Net income was only $7 million in 2020 but here’s the interesting bit – it doesn’t charge its customers fees or commissions. How does that work? Well, arguably its product, like all free functions these days, is its customers. More specifically, the order flow of its 18 million accounts in 2020 generated PFOF(payment for order flow) from Wall Street market makers like Susquehanna and Citadel who value the “insight” provided by the early view of retail trading direction and activity. This might not sound in the best interests of the customers and the SEC are watching closely but there’s more to this in this writer’s view.

The unique conflation of pandemic, free trading, crypto currencies and social media championing of meme stocks like Gamestop and Tesla has created huge communities of new traders who enjoy the shared experience of taking on Wall Street. US financial writer, Matt Taibbi, describes it well :

“If and when IPO money comes, Robinhood will be on its way to becoming a finance version of Facebook: a free platform that keeps a sea of customers engaged with a hyper-stimulating user experience, while making money selling intelligence about those customers’ behaviors to expert wealth extractors on the other end. … Instead of stealing from the rich and giving to the poor, the American version takes in the young and sells them to computer-powered hedge funds; this Robin Hood is the house that always wins.”

That poor-to-rich summation is not quite the theme in Robinhood of Sherwood Forest. However, if customers, in the main, are playing for fun and not risking financial distress then the shareholders of Paddy Power/Flutter and Draftkings Inc can tell you these franchises are sustainable profit machines. We shall see, but we should also reflect on the enormous power of providing a community shared experience with money or pride at stake and the huge attraction of that buzz. Community recognition of skill is the motivation in nearly every game in history. Dreams sometimes come true and a staggering 47% of Robinhood trading activity is in the all-or-nothing world of options trading. Believe it or not, people are happy to pay to have fun. Fun also has warp speed growth potential.

I had never heard of Axie Infinity until last week. Then Packy McCormick in mentioned this Pokemon-like game which has its own little meta-world, crypto-tokens, competitive skills, and cash for crypto exchange all built on blockchain technology. Oh, and fun.

Viral fun which has required zero marketing spend. How’s it going? Well, in April Axie did $670,000 in revenues. In May, it did $3 million. June was $12 million and the first 18 days of July did $79 million. Revenue growth of 200x in just three months….Unreal!!!! Fantasy game but real revenues generated by more than 600,000 players around the world. So, when this writer sees Bank of Ireland pulling off a back-to-the-future strategic deal I do wonder whether financial services need to start thinking about communities rather than traditional products, revenue channels and functionality.

We have written before that finance will be embedded like a Stripe code in every business or service. Think Amazon and free delivery; finance is the new free delivery. Also, think fun and its virality. Not convinced? I will leave you with two final snippets, with thanks to the Morning Brew newsletter for flagging.

1. Start up, Virtually Human Studio(VHS), has just raised $20 million from some seriously heavyweight investors like Andreessen Horowitz and TCG Capital. VHS has developed a NFT platform called Zed Run which should tweak the noses of hobbyists in the equine community. Yep, this platform has a community of 14,000 “stable owners”, called #ZEDheads, who buy, sell, race and breed virtual horses. Each of ther horses has its unique blockchain verified token(NFT) which can cost up to $45,000 each. So far, $30 million (Yes!) of virtual horses have been bought and sold. Zed Run gets a fee every time there’s a race, trade or birth.

2. If that’s just a little bit too far for some of you then pay attention to some more traditional “hobbies” with serious wealth outcomes. How about the art market? The art market’s $1.7 trillion of assets beats the entire crypto universe and also delivers. Art prices in the 1995-2020 period have trounced S&P 500 returns by a whopping 174%.

We have no hope of forecasting the future accurately for Revolut, Robinhood or Bank of Ireland but a rapidly growing creator economy seeking community, shared experience and fun feels like a wealth creation ‘banker’ for those that can service it well. Game On.

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