New trends on the market: Are neobanks the future of B2B banking? Clara Grillet, Louise Pacaud

Contents New trends on the market: Are neobanks the future of B2B banking? ...... 2 The catch-all segment we all know about but cannot define ...... 2 Comparison shopping: what are the offers out on the market? ...... 4 Neobank deployment strategy: a limited life cycle ...... 6 Traditional banks still have a part to play ...... 6 What are the take-aways from all this? ...... 8 About the authors...... 10 About Initio ...... 11 Contact ...... 11 Initio Belgium ...... 11 Initio Luxembourg ...... 11

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New trends on the market: Are neobanks the future of B2B banking?

By Clara Grillet and Louise Pacaud – Confirmed Consultants at Initio, Square Group

It is nothing new that neo-banks represent a threat to the traditional banks’ business plan. Geared towards digital native and mobile clients, neobanks offer a kind of online flexibility that local branches strive with much difficulty to fight.

Competition to attract, and retain, clients is growing fiercer Neobank v. traditional bank established market players and newcomers. Contenders have now entered what was previously deemed the traditional banks’ reserved A neobank may be defined as a hunting ground: the B2B sector. Since 2015, new neobanks have regulated online banking platform, emerged and quickly spread in the European banking market: without local branches. Activities, Revolut, Bunq, Monzo and N26, to name but a few. These neobanks such as self-banking, are often - let’s call them mixed neobanks - first targeted mass retail exclusively made directly by the customer via a smartphone. On the customers before launching an offer for independent workers and contrary, traditional banks refer in businesses. Their main selling assets remain remarkably similar: a this context to more or less long- transparent offer - read no hidden costs - lower prices and daily established banking companies with banking made easy thanks to streamlined tools. Other new incomers physical branches and with varying have since chosen a different approach. The likes of Qonto, Holvi, levels of digital services. Anytime, Manager One and the brand new Prismea are dedicated from the get-go entirely to servicing only the B2B sector.

In Belgium, mixed and business-only neobanks compete for the same segment: independent workers and small businesses. They aim to answer precisely the kinds of needs that their target customers value and where traditional banks tend to underperform. But is this enough to effectively challenge the status quo? Do B2B-only neobanks represent a real challenge to traditional banks? How does the emergence of neobanks affect market offering?

In other words, should traditional banks take these competitors seriously?

The catch-all segment we all know about but cannot define The banking industry distinguishes between the business market and the corporate sector. Definitions may vary from one bank to another, although the segmentation commonly depends on the number of employees or the company’s total revenue. Traditionally, the corporate segment has been assisted by a dedicated department and commercial force. In the meantime, a comparable allocation of resources is seldom to be found for the business segment. Although small in comparison with the retail sector, the business market does prove more lucrative per customer. The net banking income of a business client is approximately 5 times higher than that of a retail client.1 Today, this market represents more or less 1 million businesses and an

1Exton Consulting study - Les professionnels et les services financiers, 2016 ; https://fr.slideshare.net/ExtonConsulting/exton-consulting-etude-les-professionnels-et-les-services-financiers 2

ever-growing client pool. In Belgium, the number of freelancers and small businesses has had a compound annual growth rate of 5% since 2013.2 Moreover, business clients overall rarely go bust. A quarter of all Belgian small businesses have a high risk of bankruptcy; and only a small percentage does indeed declare bankruptcy. No doubt, the business segment bears a high potential. It is therefore not surprising for new entrants to target this market. And yet, many traditional banks do not invest sufficient resources, largely because it is a heterogenous segment. Indeed, the business market comprises clients with very diverse profiles. It combines natural and legal persons, multiple legal statuses and, within the European Union, more than 900 codes exist to reference clients.3 Addressing such a wide variety of clients is a real challenge for banks, even more so for mixed banks who try be perceived by the public as being both business-friendly and tailored to retail customers.

Evolution of the number of starters in Belgium Business legal form repartition in Belgium 120000

100000

80000

60000 39% Natural person 40000 Legal entity # starters # 61% 20000

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Flemish region Brussels region Walloon region Foreign seat

Source: Graydon, PME report January 2019 edition

In contrast, neobanks specialising in B2B must only appeal to a single market segment. This evidently simplifies product design and tailoring user experience to fit the core customers’ tastes. Of course, the clients of neobanks are likely to be diverse, too and neobanks are therefore not immune to the problem of heterogeneity. But the targeted information they display is likely to be clearly visible and easily accessible. Traditional banks, on the other hand, make information available, too but it is all too often difficult to find with an inadequate internal search engine. This is no small feat. No one likes to spend time peeling through pages and pages without finding the information one is looking for; a business client even less so. Information facilitation and tailor-made services help build up the authority of neobanks. And that can very concretely increase their conversion rate.

2 Graydon, PME report January 2019 edition : https://graydon.be/fr/downloads/report-le-rapport-pme- edition-janvier-2019 3 When defining their professional activity, European businesses can choose among the 900+ codes of the European taxonomy: https://ec.europa.eu/eurostat/statistics- explained/index.php?title=Glossary:Statistical_classification_of_economic_activities_in_the_European_Comm unity_(NACE) 3

Comparison shopping: what are the offers out on the market?

In traditional banks, support for the business customer is embodied by a designated person. Companies are theoretically supported in their growth journey by a business advisor (also known as a business banker); who is marketed as the specialist a customer should talk with to receive advice on how best to make financial decisions.

Figure 2: range of business products from https://www.bankobserver-wavestone.com/6409-2/

Personal support also comes with a series of products designed, and targeted, for businesses. Such products include for instance short-term and long-term loans, credit line facilities and working capital, investments solutions, multiple credit cards, physical and online payment solutions, etc. Most banks also offer savings products. In Belgium, some are exclusively for independent workers, such as EIP or PLCI (in Dutch: IPT and VAPZ).4 The wide range of products and services dedicated to the business segment highlights how much a bank can gain from converting and retaining this type of customers. The very fact that these sorts of business- made products can be found in pretty much every banking institution highlights the importance of the business sector for banks’ profitability.

While traditional banks tend to put a wide range of products in the limelight, most neobanks home in on customer service by addressing the specific needs of business clients, i.e. in the daily banking and payments area. In other words, neobanks developed a simple strategy: attracting clients by making business administration easier. Here is one telling example. Holvi simplified processes for opening accounts so much so that a customer can register its first account in less than 10 minutes. Qonto, on the other hand, concentrates more on its dedicated services. It developed a bookkeeping tool for smaller businesses, as well as an easy way for business owners to customise access to finances within their team.5

4 The Engagement Individuel de Pension or Individuele Pensioentoezegging is a pension product whereby a company pays premiums to build up a pension capital for its executive manager. The Pension Libre Complémentaire pour Indépendant or Vrij Aanvullend Pensioen voor Zelfstandigen is a pension product which enables an independent worker to save for her pension; with the saved capital benefitting from abated taxes. 5 More information on the different offers for small businesses on Qonto’s website: https://qonto.eu/en/sme 4

Where B2B neobanks cannot offer a service or a product themselves, they partner up with a third party. Qonto and the online platform Legalstart work together to help entrepreneurs with the process of creating a company.6 But Qonto is not the only neobank to build partnerships. Most of the neobanks below provide a direct access to their API to allow for the integration of their services within other platforms. Where traditional banks rely heavily on the person of the business advisor to meet the needs of their B2B clients, neobanks prefer to develop targeted products and partnerships.

Figure 3: Table of functionalities and general information per neobank. Source :mind Fintech, « Les néobanques pour les pros ciblent les PME pour atteindre la rentabilité », 15.01.2020, available at: https://www.mindfintech.fr/article/17520/les- neobanques-pour-les-pros-ciblent-les-pme-pour-atteindre-la-rentabilite/

6 More information about the collaboration between Qonto and Legalstart for company creation can be found on Qonto’s website: https://qonto.eu/en/company-creation 5

Neobank deployment strategy: a limited life cycle Easy to use tools and 24/7 availability is all good and well, but can neo-banks offer a viable alternative to businesses when it comes to offering credit? In theory, a business owner can place its assets in various institutions. There is nothing that prevents a person to hold four accounts in different banks and decide to place here revenues from one activity and there domicile salaries. But for the administrative headache, it is relatively common for businesses to have multiple accounts. Yet in reality, a credit institution will ask a potential borrower to repatriate a maximum of assets in order to lower the risk associated with lending money. Because they do not offer loans, neobanks specializing in B2B suffer from an inherently fragile business model. Startups and mature businesses commonly resort to loans to finance growth. Whatever the size of the initial capital injection, companies will, in the vast majority of cases, at some point turn to some kind of investor for money. Banks represent a choice investor: they lend the required sum topped up with an interest rate, but do not seek to take part in capital and therefore do not affect management – unlike a business angel. In Belgium alone, a record 160 billion euros in loans were granted to companies in the first semester of 2019.7 Not having their own credit product does not in the least prevent neobanks from claiming their place within the market. Instead, they offer products from external, bigger actors, and keep only the front relationship they have with their clients. Thanks to this organisational makeup, neobanks display a wider array of financing solutions while sparing themselves the hassle of building a strong back-end service. Some retail neobanks already do so; such as the French neobank Lydia which enables its app customers to get a loan from Casino bank.8 Moreover, such partnerships need not be limited to classical credits. Rather, it may very well be extended to other financing opportunities such as crowdlending, equity loans, and factoring. And yet, B2B neobanks still represent a small share of the Belgium banking market. When they start their activity, countless independent workers and small companies still opt for traditional banks. A user-friendly app, around the clock availability and practical, easy to use tools seem to be no sufficient counterweight for them, especially as many traditional banks do offer some if not all of these services, possibly though with a lesser degree of end-user satisfaction.

Traditional banks still have a part to play Traditional banks have not remained idle in the face of such competition. They quickly reacted by offering new services. Targeted offers emerged for new businesses, geared to attract new business owners and start-ups. All the major traditional banks have it: “Starters pack” at BNP

7 L’Echo, « Nouveau record de l’encours des crédits aux entreprises », 09.10.2019, available at https://www.lecho.be/entreprises/banques/nouveau-record-de-l-encours-des-credits-aux- entreprises/10170075.html 8 Daxia Rojas, « Lydia se lance dans le crédit de consommation instantané avec Banque Casino », L’Agefi.fr, 12.12.2018, available at : http://www.agefi.fr/fintech/actualites/quotidien/20181212/lydia-se-lance-dans- credit-a-consommation-263434 6

Paribas - Fortis, “Business starter offer” at CBC, “Starter package” at Belfius or ING.9 Most of these offers include financial advantages: Belfius offers up to €1.000 worth of price discount, ING boasts 1 year of free services,… It must be noted that these perks are not limited to banking products. Traditional banks, too, have understood that entrepreneurs also look for efficient tools to make their life easier. ING developed in its package an invoicing tool as well as an online coaching program.10 CBC also invested in targeted customer support. It partnered with UCM (an organism which helps entrepreneurs with administrative issues) to offer some personal coaching to new entrepreneurs.11 Starters are not the only ones benefiting from such services. New developments focus mostly on business administration. ING joined forces with Accountable, a mobile app dedicated to the follow-up of the business activity and taxes, in addition of their invoicing tool (ING Invoice Solution).12 Belgian rival CBC also bumped up its game: it started a joint venture with Arco Information to create a new invoicing tool coined Soluz.ip, the aim of which is to provide a dashboarding solution within the CBC application itself.13 The recent pervasiveness of these added services demonstrates that traditional banks are increasingly conscious of the changing needs of their business clients. They must develop new services to remain credible and attract new clients. It also reveals a certain capacity to listen to their customers and to react rather quickly to answer their needs. Despite wide heterogeneity among its clients (retail, independent workers, more or less mature companies), traditional banks attempt to personalize services as much as possible. In France, traditional bank Crédit du Nord decided to counterattack neobanks on their own ground. It created a subsidiary called Prismea in January 2020, a bank that is both 100% accessible via a mobile app and dedicated to entrepreneurs. 14 First results are hard to analyse because Prismea is still in its beta version, though it vows to offer short-term credit in the near future. Although young, Prismea is on the way to offering more services than its direct competitors. The backing and experience of a traditional bank does seem to have a positive impact on neobanks’ time to market. Efficient neobanks may well be those who are offsprings of their more traditional mothers.

9 Starter Pack by BNP Paribas-Fortis: https://www.bnpparibasfortis.be/fr/La-banque-au- quotidien/Decouvrez/Approche/Offre-pour-les-starters/Starter-pack?axes4=prof Business starter offer at CBC: https://www.cbc.be/entreprendre/fr/campagnes/campagnes-2019/offre- starter.html Package Starter by Belfius: https://www.belfius.be/professional/fr/campagnes/starters/index.aspx Starters Package at ING: https://www.ing.be/en/business/daily-banking/current-accounts/starterspackage 10 More information about the content of the package can be found on ING’s website at https://www.ing.be/en/business/daily-banking/current-accounts/starterspackage 11 UCM, « Nouveau partenariat UCM et CBC Banque », 18.03.2015, available at https://www.ucm.be/Actualites/Nouveau-partenariat-UCM-et-CBC-Banque 12 More information on the offer by ING and Accountable at https://www.ing.be/en/business/daily- banking/incoming-payments/accountable 13 More information on Soluz.io at https://newsroom.kbc.com/soluzio-aide-les-clients-dans-leur-e-facturation 14 Mind Fintech, “Le Crédit du Nord annonce le lancement d’une néobanque pour les entreprises et mise sur le crédit », 11.12.2019, available at https://www.mindfintech.fr/article/17333/le-credit-du-nord-annonce-le- lancement-d-une-neobanque-pour-les-entreprises-et-mise-sur-le-credit/ 7

Neobanks, however, might not be the one-size-fits-all answer. Traditional banks retain a competitive advantage with regards to open banking and ecosystems. Neobanks, agile and ready to share their API as they may be, simply cannot compete as of yet with the overall market share held by traditional banks. Fintech and similar actors engaged in building ecosystems look primarily to the bigger companies when building partnerships. Should traditional banks decide to invest heavily in ecosystems, they could pull the rug out from under neobanks, who would then see their potential for growth dramatically weakened. Lastly, human relationships still matter for most entrepreneurs. Business owners seek regular advice when dealing with administration and financing. Their business banker, just like their accountant, remains a crucial and trusted element for the development of a successful business. BNP Paribas is well aware of what one might humouredly call “the trinity of business”, namely the business owner, its accountant and its business banker. BNP recently launched Advice Pro, an offer which targets younger companies who wish to have strong personal support from experienced advisors.15 Advice Pro advertises a tailored experience for every business client, with access to a large variety of experts, fully engaged in following entrepreneurs every step of the way. With Advice Pro, BNP wants every business banker to become a true partner for each one of their clients. Even with considerable investments in round the clock customer support and the development of online advisors, neobanks could be on the losing end. Human contact remains a major distinguishing element between traditional banks and neobanks, as well as prove to be a decisive element of client conversion. Yet, the emergence of B2B neobanks has altered market dynamics and changed customer expectations of what banking means for entrepreneurs.

What are the take-aways from all this? The face of the banking market is undoubtedly evolving, in Belgium as in other countries in Europe. Traditional banks retain a large share of the market, but an increasing number of neobanks have entered the arena. Competition is fierce, each appealing to certain qualities of their clients. While neobanks target digital natives with a strong app, round the clock availability, and easy to use tools, traditional banks wave the flag of (human) personal support in the form of the business advisor while improving their digital capacity. All in all, it is yet another story of competition and rivalry on a market. Where the battle used to be determined by digital layout and user experience, it is increasingly being fought on the financing ground. Neobanks like Mango, Qonto and Holvi are appealing to authorities to become credit institutions; i.e. full-fledged banks. Should they get the license, how long can traditional banks survive when newcomers are agile and offer comparatively better online services? More importantly, there is a gradual but ineluctable change in the way customers expect to be serviced. Banks, whatever their form, strive to develop financing solutions as much as business administration tools so that clients develop a stronger relationship with their bank. The more a client uses the services of their bank to run its company, the less likely it is to leave. Customer loyalty is ever more fragile and one might go as far as to say that traditional banks have been

15 More information about Advice Pro at https://www.bnpparibasfortis.be/fr/La-banque-au- quotidien/Decouvrez/Approche/Advice-Pro?axes4=prof 8

resting on their laurels for too long. Emerging competition in the form of neobanks have brought a definitive and vivifying shake to the market, redefining customer needs and customer service along the way. No one knows what the future may hold, but it sure looks like the banking market will continue to evolve beyond pure finance and credit.

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About the authors Clara Grillet, confirmed consultant at Initio Clara has experience in data, digital marketing and compliance. She acts as business analyst for various digital projects and follows closely the development of computer tools applied to business services. Louise Pacaud, confirmed consultant at Initio Louise is a polyvalent consultant, specialized in the project lead of digital changes including the creation of new online services, its promotion internally and externally and its optimization.

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About Initio Initio is a business consultancy firm specialized in the Financial Industry. Every day, our consultants contribute to the successful delivery of business projects by transferring their expertise to our client's management and internal teams. Initio operates in Brussels and Luxembourg and his part of the SQUARE GROUP, an international strategy and management consulting firm.

Contact

Initio Belgium Initio Luxembourg Boulevard General Wahis, 17 153-155 rue du Kiem - Entrée D Brussels, 1030 8030, Strassen Belgium Luxembourg +32 (0)2 669 77 44 +352 277 239 1 [email protected] [email protected]

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