In September 2020, Ronan Horgan, the chief executive Irish alternative lender Capitalflow, began to reflect on what was next for his business. The pandemic had shuttered vast tranches of the economy, and the outlook was uncertain. However, Horgan was satisfied that Capitflow’s book had proven itself to be “very, very resilient”, something he confirmed to The Currency in a podcast earlier this year.

So, along with Pollen Street Capital, the London-based alternative investment manager that had backed his vision to create a non-bank lender, Horgan started to think about what was next. Capitalflow had built up a decent-sized business since Horgan founded the company in 2015 with a loan book of €320 million and some 3,000 small-to-medium sized business customers on its books. Horgan could see what was happening in the Irish market. The pillar banks were underperforming, and rumours – later proven true – were circulating that Ulster Bank and KBC were planning to wind down their operations here.

He believed that this represented a big opportunity for Capitalflow if it could find the right funders. Pollen Street Capital felt the same. They both could see that digital banks were hoovering up deposits from European consumers, but that they didn’t have the lending experience and credit controls required to get this money working for them profitably.

Capitalflow decided to appoint Alantra, a boutique banking advisory firm with an office in Dublin, to seek out a digital bank in Europe to team up with. Anne Boden’s Starling Bank had publicly said that same month it “probably” wanted to acquire an SME lending platform, and it had already bought Zopa, a peer-to-peer lender. Revolut was looking at ways of making money too from its huge customer base, notably saying earlier this year it hoped to offer credit cards and loans to Irish customers once it got regulatory approval.

Horgan and Pollen Street Capital could see all these trends in the banking industry and became convinced they fit a place within the new world order.

Bank of the free

In December 2020, Capitalfow was first introduced to Bunq after Alantra made contact with its investment bankers, Torch Partners. Founded in 2012 by Ali Niknam, Amsterdam-based Bunq has a deposit book of more than €1 billion. Forty-year old Niknam was at that time its sole investor having ploughed €98.7 million of his wealth into growing the business.

Born in Canada of Iranian descent, Niknam moved with his family to Holland at the age of seven. By 16, he had founded his first business, and at 21 had set up TransIP, an independent domain name, hosting and virtual private server provider. In 2019 Niknam merged this business with Belgium based Combell giving the combined business a valuation of $1 billion. Niknam founded Bunq in response to the financial crisis when he could see rafts of entrepreneurs being wiped out as desperate banks called in loans and credit dried up.

Bunq trades as bunq – a name chosen as it reads the same upside down – and the bank also gave itself the slogan: “The bank of the Free.”

“I figured this was dangerous because if we don’t fix this problem it’s going to happen again, and who knows what’ll happen next time — it might be even worse,” Niknam explained in a 2019 interview. “So I thought, ‘okay, let’s build a bank then.’ Everyone called us crazy and thought it would be impossible — but we pulled through.”

Bunq founder Ali Niknam

By 2014 Bunq had a banking licence from the Dutch Central Bank, the first European bank licence obtained in 35 years. In 2016 it launched its first business products, before expanding the following year into Germany and Austria. Spain, France and Italy all followed. In April 2019 it launched in Ireland, before launching in all of the European Union at the end of that year. Bunq’s technology is the secret behind its ability to grow, and, in its home country of the Netherlands, it was dubbed early on as “Whatsapp for banking” because of how easy it was to use. In 2017 it became the first bank in the world with an open Application Programme Interface, making it easier for developers to interact with it.

In a series of video calls Horgan and the team in Capitalflow got to know the Bunq story, and they shared their own. The idea for Capitalflow also came from the financial crisis, albeit its founder Horgan came from a traditional banking rather than a technology background. He worked for 20 years in lending for Bank of Scotland (Ireland), and then became managing director of Bibby Financial Services in 2014. In 2015 he founded Capitalflow after meeting Pollen Street Capital’s managing partner Lindsey McMurray. Many of Pollen Street Capital’s team came from Royal Bank of Scotland so they were familiar with the Irish market, and convinced by Horgan’s vision for an alternative lender to the traditional players.

Capitalflow started in a small office in Phibsborough in north Dublin and by April 2016 had made its first loans targeting SMEs and business people by offering asset finance, invoice finance and property finance loans. To-date it has advanced over €650 million to Irish SMEs and has a loan book of more than €320 million and 3,000 business customers. Horgan told Niknam about how Ulster Bank, and later KBC, were withdrawing from the Irish market, and how this was a big opportunity for Capitalflow as a non-bank lender.

“It became clear to us in Capitalflow that if we wanted to take advantage of the local market and to scale our business, we would need more competitive funding terms,” Horgan said. “We currently have a mix of funding partners from wholesale international banks and a mezzanine funder along with Pollen Street Capital who have invested €50 million of equity in Capitalflow.

“To grow a substantial presence in Ireland and to keep up with the demand for our products and services from our customers we needed to seek an alternative funding arrangement that was more competitive and less reliant on wholesale bank facilities which by their nature can be narrow and inflexible.” he said.

Bunq with brilliant technology, European Union wide footprint, and growing deposit book represented an attractive match, he said.

European fintech’s biggest series A

Pollen Street Capital could see the synergies of combining the two businesses. A bigger deal started coming together, as Pollen Street Capital started to talk seriously with Bunq about investing in its business. The result of these talks was announced today as Bunq revealed that it has raised €193 million at a valuation of €1.6 billion. Both Pollen Street Capital and Niknam invested in the series A round, the largest ever series A round in a European fintech.

“Bunq was founded to challenge what banking is and can do. By putting our users first we have created a bank that is super focussed on making life easy in a sustainable way,” Niknam said.

“We’re extremely excited to join forces with Pollen Street Capital to further expand the bank of the free throughout Europe.”

Niknam also revealed that Bunq was profitable for the first time this month, unlike most digital banks which are burning large sums of cash as they scale.

“Combining the SME lending expertise of Capitalflow, the digital execution capability of Bunq and the ‘customer above all’ approach of both Capitalflow and Bunq creates a really exciting, high growth and self-sustaining platform with a pan-European reach that will mark a new standard in European digital banking.” James Scott, a partner at Pollen Street Capital, said.

Horgan said that Capitalflow had gotten to know Bunq well during six months of due diligence. “Unlike other digital banks, Bunq charges its customers for the use of its services, so it has taken a different route to market than most of the others by charging a premium for its products and services,” he said.

“Bunq believes that the Capitalflow brand and position in the market would be a great addition to its business and it will accelerate the bank’s route to profitability quicker.”

“By selling Capitalflow to Bunq and committing further equity to Bunq, Pollen Street Capital becomes a shareholder in the bank. From Capitalflow’s perspective we become a wholly owned subsidiary of Bunq and we can avail of its competitive funding through its deposit base. Our intention is to scale our business over the coming years and be a credible alternative business lender to the pillar banks. We have invested heavily in a digital platform over the past 18 months that will allow us to scale, and we hope in time to add further products in time.”

Horgan said he believed Capitalflow can be the “go to digital business lender in Ireland in the next few years and that we can offer choice to over 200,000 business customers operating here.”

He added: “Many of the team in Capitalflow worked with me in Bank of Scotland Ireland and it was a very sad day when the bank announced its exit in 2010. We had a burning desire to re-establish ourselves again and to learn the many lessons from the financial crisis. We now have a huge opportunity to do just that  and to make sure we have the right Governance structures in place with the right culture to make sure we are successful for many years to come.”

The road to €1 billion

The acquisition of Capitalflow by Bunq is subject to approval by the Dutch National Bank and this could take a number of months. But its ambitions are big in Ireland.

Capitalflow plans to triple its loan book size to €1 billion by 2024. Will Capitalflow expand into Europe like Bunq has? “Again, once regulatory approval is received we will consider all options and what is the right thing to do,” Horgan said, adding that being acquired by Bunq would have no impact on existing customers of Capitalflow.

He said Bunq was excited about its prospects in Ireland. “Our due diligence was very detailed, and we shared a lot of information with Bunq and their advisors,” Horgan explained. “All parties were very happy with the process and Bunq could see an opportunity to acquire a specialist lending business in Ireland that could speed up its route to greater profitability and that had the ability to grow in Ireland where there is a real lack of competition especially in business lending.”

Does Capitalflow want to be the new third force in Irish banking? Horgan doesn’t see things that way. “We want to offer choice to customers and allow them the freedom to choose whatever product and services they wish rather than dictating to them or putting ourselves out there as some kind of third banking force,” he said. “Bunq is a leading European digital bank that operates in 30 countries in Europe and we are delighted that they see the real potential for Ireland with their acquisition of Capitalflow. We’re all about giving business people choice.”