The situation with Trade Republic, the second most valuable fintech company in Germany after N26, has recently received a lot of discussion in the media. Both Trade Republic and N26 are full-fledged online banks with the ability to invest in securities, i.e. they also perform brokerage functions.
And then it was announced that Trade Republic is putting the idea of its own IPO on the back burner. As the person who headed the Board of Directors of Otkritie Broker in 2017-2022, such a story could not help but interest me, says Konstantin Vladimirovich Tserazov.
An IPO is an opportunity to attract additional capital and confirm the company's value in a market way. Studying the business of Trade Republic, I see that this fintech platform is opening offices in France, Spain and Italy, and generally plans to invest in expansion in Europe. But this requires funds, and the company should think about strategic sources of financing.
One of the key points is the business model of the brokerage business in Europe, and how sustainable and interesting it is for investors. Starting next year, the EU will ban brokers from receiving payments from market makers and third-party organizations for the flow of orders (payment for order flow, PFOF) sent to them.
This means that a solid source of revenue, sometimes up to a third of all income, may simply disappear for many brokers in the region. In such a situation, brokers will be forced to raise commissions for their services, since other sources that generate revenue (such as fees from exchange-traded fund managers for promoting their ETFs) will not be able to grow significantly, adds Konstantin Tserazov.
What does this mean? After all, in Switzerland and the UK, in countries outside the EU, but still in Europe, such restrictions are not introduced. This means that brokers in the EU should present to the public a clear understanding of how their business model will change step by step. Moreover, decentralized financial solutions are increasingly creating competition for neobanks and online brokers.
And all this needs to be presented to the public in a broad sense, and not just to investors. Why is this important? Current clients of online brokers in the EU are potential participants in their future IPOs. We need to work with them in this direction in advance, before entering the stock exchange.
And then, we must always remember: you cannot miss the favorable moment for entering the IPO. Otherwise, you can “wait too long” and wait until new fintech solutions lead to the need to either leave the market completely or force you to radically restructure your business model. But the upcoming changes in EU legislation require serious attention.
Preparing for an IPO is a lengthy procedure, including working with the information field. And I have always paid attention to the quality of this process, monitoring the strategic recommendations offered to Otkritie Broker clients. Speaking about stock recommendations in general, for example, in 2021, 88.2% of investment ideas generated income for Otkritie Broker clients. In the same 2021, by December, the number of active Otkritie Broker clients increased by 35% year-on-year, and this became one of the best results for the entire brokerage industry not only in Russia but also in Europe. Moreover, if we take into account the high comparison base, that is, what was achieved in previous years, from 2017 to 2020.
Therefore, if I were Trade Republic, I would adjust their communication with investors and clients to provide a clear “roadmap” for entering the IPO, so as not to miss a convenient moment. After all, for example, the Philippine fintech startup GCash this year actively began preparing to appear on the stock exchange with its shares.
When entering other country markets, you also need to consider the possibilities of attracting capital to your business. In this regard, the UAE-based fintech platform Jingle Pay provides an interesting example.
Not only did Jingle Pay choose Pakistan as one of the areas for expanding its operations, but it also ended up with a new strategic investor from that country.
As it became known recently, Bank Alfalah from Pakistan became a co-owner of Jingle Pay with a 9.9% stake.
So what are we seeing? In Islamabad, you can find money for a UAE fintech startup if that startup establishes regulated and efficient transfers for Pakistan. Pakistan sees value in this, and the result: you can get funding from there.
And what is especially interesting is that one of Pakistan's leading banks, with more than a thousand branches, is investing in a UAE fintech startup, that is, it sees the need to absorb new financial innovations. I also saw this as necessary for Otkritie Broker, pursuing a course on digitalization, on developing our own corporate fintech solutions, which eventually became a reference and benchmark for other participants in the brokerage services market in the CIS and Europe, Konstantin Vladimirovich Tserazov summed up the week.