ARE NEOBANKS POISED TO STAY IN FINANCIAL LANDSCAPE?
Geoffrey Laloux.
Initio Brussels
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Contents Are Neobanks poised to stay in financial landscape? ...... 3 A word about definitions ...... 3 Neobanks growth factors, why they are here to stay...... 4 Innovation will continue ...... 4 Neobanks are Fintech...... 4 Younger generations love them ...... 4 The Service offer will upscale ...... 5 Professionals will be enlisted ...... 5 More breadth and depth ...... 6 PSD II and Open Banking will sustain the growth...... 6 Neobanks may face tough time because… ...... 7 Disappearances and consolidations cannot be avoided ...... 7 Innovation is limited ...... 7 The Brexit could stop the European expansion...... 8 Good Customer experience is hard to build and harder to maintain ...... 8 Reputation is a double-edged asset...... 8 Being Online only may be insufficient to maintain strong customer relationship ...... 9 Transparency has its limits ...... 10 Incumbents are not dead ...... 10 In concluding ...... 11 Author ...... 12 About Initio ...... 13 Contact ...... 14
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Are Neobanks poised to stay in financial landscape?
Neobanks have raised the concerns of the public everywhere in Europe. Revolut, N26, Nickel, Starling, Monzo etc. are already known as key players in the industry. Most of them have succeeded massive fundraisings and are quite close to announce new capital injections in the press or the launch of new products and services. Despite impressive customer acquisition (more than 1 million customers for N26, twice much for Revolut…) none of these mobile-only neobanks have reached sustainable profitability1. Neobanks are still cash-burner companies and even if many of them are generously funded by venture capitalist or established commercial companies, they need to evolve if they expect to stay alive and last as key players on the banking scene. In this article we will check if Neobanks are equipped to stay or not.
A word about definitions
A Neobank could be defined as a financial institution with license, proposing at least a payment account and exclusively available online. Most were created from scratch well after the 2008 financial crisis, without the support of traditional banks and without using any traditional branch network (at least at the origination). Most famous examples are N26, Revolut, but also Fidor, Nickel, Atom or Starling. Their main distinctive characteristics are: - Mobile first (or even Mobile only) approach. - Open and transparent communication - Adaptive tariff structure (mostly based on Freemium model) - Customer centric approach illustrated by fast onboarding and leaned service offer.
We can distinguish Digital banks born in the 90’s and Neobanks. If Digital banks (also known as Digital challengers) are also online only, they differ by: - A digital-only approach built before the rise of smartphone era. - A service offer based on savings in the objective of future investments. They extended their offer since to propose personal loans, mortgage, regulated saving account or insurances. - A market position built on purpose around lower costs and therefore cheaper service offers.
Most renowned digital banks are Keytrade (Be), Boursorama (Fr).
This definition also excludes payments services providers or account aggregators who operates without license; as well as Spin Off banks like Hello, BforBank, Fortuneo, ING Direct, EKO etc. that share almost all characteristics of Neobanks with the difference of being backed by a traditional bank.
1 In December 2017, Revolut was the first digital challenger bank to claims to have reached the break-even despite a yearly loss of 16 million €. Since then and despite an impressive client base growth of more than 8.000 units per days, balance go back in the red again.
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Neobanks growth factors, why they are here to stay...
Innovation will continue Over the last 24 months, N26 announced a dozen of significant services upgrades, from the launch of new Bank (metallic) Card to the recent introduction of “Spaces”, a virtual money management service. Revolut is claiming to release on average every 3 weeks an improved version of its mobile app, while Monzo is providing its clients with no less than 11 new features for the first quarter of 2018. For Neobanks, the competition is not about how revolutionary will be their next service or how deeply they use innovation. But rather how they communicate about innovation and how they make it available for they clients. Communication is a core ingredient of their success and they use it as a strategy to fuel their customer acquisition engine. In the absence of large budgets dedicated to mass media communication, Neobanks will continue to rely on word of mouth - punctuated by innovation announcements - to stay in customer’s mind. Neobanks are Fintech. Neobank are more than traditional banks, they are fintech providers. Fidor, for instance, has developed a white labeled digital banking platform, Fidor Operating System. Allowing for quick and easy portfolio management and giving customer access to open front-end service. Fidor is also providing its clients state of the art API layer and banking modules. The platform is proposed through a SaaS model and will be used by Telefonica for its mobile- only bank, O2. Moven, a US service provider, is also proposing B2B solutions. In 2017, Moven has generated $7 million thanks to its white label contracts with TD Bank or to New Zealand’s Westpac, for instance. And its newly announced joint-venture with SBI Group will give access to the Asian market throughout a network of at least 60 regional banks. If Neobanks may struggle to compete with pure B2C players, they are strong competitors to traditional offers when it comes to front end B2B banking platforms.
Younger generations love them According to Julien Jaillon, CEO of Carrefour Bank & Insurance; 30% of C-ZAM customers have less than 30 years old, and 75% are lower than 50. For Revolut and N26 figures speak for themselves: 42% of Revolut’s users are between 25 and 35 years old; while N26 claims to have 59% of customers under 35 years old and even expect to peel away 5 to 10% of retail customers between 18 and 35 from established banks in Europe before 2020. Even if we estimate that Neobanks do not own more than 5% of the retail market, they appeal up to 35% of new customers per year. Why these 35% are making a difference? Because these new customers were previously unbanked, meaning that Neobanks manage to enroll customers with high financial development potential.
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The Service offer will upscale The reputation of Neobanks is based on superior customer experience and reactive support, these two features require extensive investment in human resources. If customer support is an attitude it is nonetheless a major cost center which can’t be supported by the classical Freemium or low-cost business model adopted by most of Neobanks. To balance the books, it is mandatory to increase the per-customer revenue by proposing premium services or more profitable products. N26 and Revolut have opted for a broaden offer with metallic bank cards, others like the French Nickel – historically focused on low cost and no-frills offers - is now proposing Chrome, an upscaled version of its basic offer. New comers don’t describe themselves as “low cost” alternatives to traditional banks. If they are able to propose transparent or a la carte price structures it is more a consequence of their cost structure than the result of marketing position. In opposition to most online banks such as Hello Bank or ING Direct, winning market shares by claiming to be “online only because cheaper”, Neobanks can be described as “cheaper because online only”.
THE FRENCH EXCEPTION A study, carried out by the European Commission in 2012, compared prices within 27 European countries for payment accounts and showed that France is ranking in the Top5 of most expensive countries. The yearly average cost for a simple payment account is in between 150 and 180 €. Way more expensive than in the United Kingdom (+50%), Deutschland (twice more) and up to three time more than through BeNeLux.
In such conditions, it’s not a surprise to observe communication efforts from French Neobanks about price differentiation (Welcome, Enjoy, Eko, C-Zam, Nickel) while it is more discreet when comparing to international competitors (N26, Revolut, Monzo or Starling).
Professionals will be enlisted Targeting professionals is a must for Neobanks to sustain profitable growth. And pioneers have already engaged in the conquest of this flourishing segment. Revolut has launched a specific offer intended to professionals (and has already on-boarded around 60 000 customers!), N26 is following the same path, while the French fintech AnyTime is a niche market player with professionals only services.
However, addressing the professional customers segment requires in-depth knowledge about its specificities and expectations. Appealing freelancers or small companies is more complex than managing retail payment accounts. Neobanks who want to tackle this market segment will have to build strong compliance designs without losing sight of their identity and enhanced customer experience.
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More breadth and depth Even if payment services could be great source of profits2, they are not seen as “cash cow” products. Plus, it’s getting more difficult to be the “first” bank of a household if you don’t have any Save & Invest or Loans solution. It is too early to say whether Neobanks will try to position themselves as top-of-mind banks and compete with Boursorama or Keytrade to occupy the first place in household. But initiatives to enlarge service offers are showing deep commitment from Neobanks to find their way to sustainability.
Loans and Mortgages are already available in the ATOM’s offer, while N26 is proposing travel and online insurances (backed by Allianz, one of its major investors). In some countries, the German fintech is even proposing consumers loans in partnership with local partners like Younited Credit (Fr) or AuxMoney (De). And depending on your country of residence you can also have access to extended services as insurance dashboards (virtual broker) or investment solutions.
In line with its values, N26 is building service offers through its partners ecosystem and third-party services are sold via N26 app using a white label model. Revolut is proposing non-life insurances (smartphone and travel) and starts to deploy a usage-based reward system (which could be compared with Amex rewards). But the English native fintech makes the difference by being one of the very few to allow to buy and exchange cryptocurrencies (Ether, Bitcoins etc.) directly through the app. PSD II and Open Banking will sustain the growth Possibilities offered by PSD II in terms of payment initiation and account aggregation are a remarkable opportunity for Neobanks. With their online / mobile user experience they are well positioned to attract clients interested by account aggregation.
Thanks to their digital mindset and business models, Neobanks are flexible enough to provide their clients with enhanced experience using ecosystems built from scratch. They are thus able to offer movie tickets, mobility services or miscellaneous online services directly in the banking app.
The introduction of Personal Finance Manager (PFM) based on account aggregation is also an option but many fintech are already proposing efficient PFM (Bankin, Linxo, Figo…) and taking advantage from PSD II to develop their own wallet or payment services. PFM tools are useful when customers hold multiple bank accounts (in traditional banks), but as previously observed, Neobanks’ customers are more likely to be newcomers in the banking landscape.
Last but not least, PFMs are unleashing full potential when wealth-related data is transformed into commercial proposals. As long as Neobanks won’t be able to propose a large range of Save & Invests services, PFMs won’t be a priority. Nevertheless, the situation is expected to change if Revolut launches its commission-free trading service as per announced in June in the AGEFI, for instance.
2 Revolut generates €1.7 billion per month in transaction volume, while N26 has a monthly transaction volume of €1 billion.
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Neobanks may face tough time because…
Disappearances and consolidations cannot be avoided As demonstrated by the successful acquisition of Nickel by BNP Paribas in 2017, when fast growing and disruptive competitors are arising it triggers traditional banks to act. BBVA already purchased the digital only US-based SIMPLE bank in 2014 and is also present in branches of ATOM’s and Holvi (a digital bank in Finland addressing the SME market). N26 is also facing complex decisions, as Tencent, a Chinese behemoth of digital services who already own a payment service widely in use in China (TenPay) is part of its major shareholders. This participation is undoubtably a strategic move for the berlin-based Neobank to ensure its survival but is could also ring the death knell of his independence. All Neobanks won’t be lucky enough to be backed by a powerful funder, and without solid short-term strategies to generate profit the most vulnerable should not see 2020. Innovation is limited Most fintech solutions are so far from current business models and structures that it is hard fr traditional banks to picture the innovation curve and target the right innovations. Yes, the onboarding process of N26 is superfast and friendly. And Monzo has done remarkable work on its open and transparent communication but beyond performant mobile applications and real time payment notifications, it’s business as we know it.
The navigation scheme of Lunar Way, a Danish Neobank is really innovative: By swiping left or right, customers can now see their spending overview, broken down by company. The app highlights the top 5 stores where customers spent most each month, also providing a month-by-month comparison. But if you forget the “wow effect”, only a traditional payment account and a piggy bank remains.
Because of regulatory constraints and barriers to entry, Neobanks and Fintech must be disruptive to outperform current business models. Using Blockchain in combination with Crowdfunding or crowdlending options could be examples of deep transformation able to build sustainable profitability.
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The Brexit could stop the European expansion. Atom, Starling, Revolut ... are all British Fintechs operating on UK banking licenses. In case of Hard Brexit - which is more likely to happen every day - they will no longer be able to access the European market. A catastrophic scenario for Revolut for whom France is its second largest market. As a backdoor, the bank is actively working on the obtention of ane-money license in Luxembourg (and a “full” license in Lithuania). Good Customer experience is hard to build and harder to maintain From the pessimist’s point of view, for traditional bank’s customer “Bad experience comes with the package”. But still customers’ loyalty is related to that same package, despite bad experiences habits and long-term relationships cannot be broken that easy. Neobanks are starting from scratch and must convince with the promise of optimized customer relationship and as smooth-as-possible user experience. If they fail to deliver, it’s the core perceived value which is at stake. For a long time, it was not possible to use Debit-Mastercard provided by N26 or Revolut in many park meters or with highway payment terminals. These interoperability hindrances were treated as top priority for both of them, knowing that such restrictions could be serious growth-killers.
(the typical comment that anxious the head of the growth of a Fintech)
Reputation is a double-edged asset. As Neobanks are operating online we can assume that they will have to build strong data security processes to avoid suffering from reputational damages. If their incumbents’ counterparts have yet wide customers databases with quite high client loyalty, as newcomers these online players could be killed by such incident and will not be able to benefit from years of notoriety. We could take the story of “Hush” as an example of what could ruin a promising market entry. The poor reputation of Its funder, Eric Charpentier, after failing to launch “Payname”3 has scuppered the French fintech ICO-based fundraising. It works the same for well-established companies when they get involved into public scandals, such as Facebook with the Cambridge Analytica case. These reputational factors are key to build and maintain trust in the market.
A reputation once broken may possibly be repaired, but the world will always keep their eyes on the spot where the crack was.
Joseph Hall
3 Now renamed “Morning” and part of Edel Bank (Leclerc Group).
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Being Online only may be insufficient to maintain strong customer relationship Amazon and Apple have learnt that already, when products become more complex, online sales must be supported by brick and mortar point of sales. According to a study conducted in 2017 by Mastercard, on average 6 out of 10 consumers across Europe already use digital banking apps, (vs. 9 out of 10 consumers in the UK), but only 14% would agree to switch to an app- based only bank with no branch network. Being mobile only may be deterrent for customers adoption; N26 the “Mobile only” bank is maintaining a fully operational web app while Revolut might propose a web-based alternative to his app soon. Even if millennials and digital natives are accustomed to online only services, there is a gap between using a smartphone for streaming service subscriptions and to commit to a financial institution exclusively through chatbots or app notifications. An interesting way to avoid this pitfall could be the balance between online services and some kind of agile- network of point of sales and support. Nickel rely on a growing network of point of sales located in tobacconists, and C-ZAM or GoBank are building customers’ journey from trusted sales points such as Carrefour or WallMart stores. With these innovative models where clients will be given the opportunity to open bank accounts or subscribe car insurances from supermarket’s front desks, we can foresee that standards are about to change.
(Source: 2018 Celent survey of banked adults in the United States)
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Transparency has its limits Transparency is part of the DNA of fintech and often used as a major sale argument. Online banks are building customers centric communicate on strategies based on transparency and private media channels. Monzo used wisely such strategy, including communication about fraud prevention or customer insights crowdsourcing. But these private channels could also may also backfire. Starling, for instance, discovered that forums could be diverted by a hyperactive minority using the communication space for private issues putting at risk data protection of sensitive customer information. To keep the control of its communication, Starling decided to discard the forum and to focus on newsletters. If these abuses and drifts do not question the core value of the bank, they demonstrate that when it comes to customer support and complaint management it is not always easy to find the right path to differentiate from traditional financial institutions. Incumbents are not dead Many “influencers” and innovation-guru from the web claim traditional banking is (almost) dead and that the future of banking rely now on Fintechs (or GAFAM). It would be presumptuous to ignore the capacity incumbent banks to react and thrive to maintain their market position. In Belgium, the digital leadership is already owned by incumbents such as KBC or Belfius, who can afford to pursue massive investment for many years in order to maintain their advantage without sacrificing their profitability. In France BNP Paribas will invest from 2 to 3 billion euros in its digital transformation within the next 2 or 3 years and has already launched its spin-off Hello bank in several European countries aiming at drawing millennials’ and digital-migrants’ attention.
2018 Press releases
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In concluding Four scenarios for the future of Neobanks :
1) The Neobank is acquired and assimilated into a larger financial group. The brand remains, service offer is enlarged and could eventually benefit from a branch network (mostly under conditions). Two options: a. the buyer is a bank; a pacification agreement is set and the “Neo” is kindly asked to limits its ambitions to a specific customer segment. In worst case, the fintech will be cut from its origins and assimilated by the large group. b. the buyer is a financial outsider, a telco giant or even a major retailer. In such case, the acquired Neobank is used to attack the financial market from the inside.
2) The Neobank fails to maintain a viable business model in the already red and crowded financial ocean. This is more likely to happen to niche Neobanks who will not succeed to develop Europe-wide customer base (or at least around a million of clients worldwide). As direct consequence, the Neobank disappears and existing customers may eventually migrate to another structure (as per demonstrated by SOON story. The spin-off from AXA).
3) The Neobank succeed to reach sustainability thanks to enlarged product offer relying partially on APIs ecosystem and third-party provided services offer (including loans, save & Invest and eventually insurances). But there is a high probability for those to remain second role players. British Neobanks are more likely to follow this scenario (Monzo).
4) the Neobank remain independent and succeed to appeal enough customers to challenge incumbents. Revolut is often mentioned as a good candidate to open the way. We should qualify this scenario as figures are still giving traditional institution as market leaders.
A fifth scenario may occur despite its unconventional and surprising effect: The Neobank (backed by generous funders) buy… a bank. Last January, MOVEN the US Neobank founded by Brett King in 2011 announced a new fundraising with Japanese group SBI and confirmed its intention to acquire an USA-based bank. Making MOVEN a full-fledged challenger bank. For financial technology companies seeking fast evolution this strategic move can solve both scale issues and impediments of the banking licensing.4
“The problem with building a bank is that the entry ticket is 50 million, that gets you the banking license, building the software and having the underlying capital to start the bank. But when you go to raise that money, you have zero customers, and zero product.” Anne Boden, CEO and founder of Starling Bank
This scenario is more likely to happen in the US market where more than 1.500 FDIC-insured banking institutions with less than $100 million in assets, including a sliver of failing banks, need to be saved. With average common equity around $12.5 million for a healthy bank of equivalent size, a well-established startup could pay $25 million and get fully licensed to be deposit taking.
4 In 2011, Prepaid debit card firm Green Dot, then valued at $1.3 billion, acquired the $37 million-asset Bonneville Bank in Utah – and his license to take deposit.
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Author
Geoffrey Laloux, has 19 years’ experience in digital transformation. He worked mainly for European Institutions and for Telecoms or Medias companies before joining the Banking sector with Initio in 2015 as manager in charge of the Business Line Innovation and Digital Transformation.
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About Initio
Initio is a business consultancy firm specialized in the Financial Industry. Our offering is focused on business consultancy combined with project methodology in order to assist our clients on the whole project cycle.
We have offices in Brussels, Luxembourg & Geneva. Through close collaboration, we can react swiftly on a wide scope of services in order to meet client needs rapidly with the highest industry standards.
Initio is part of the French group Square Management.
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Contact
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