FEATURE STORY - PAGE 6 How N26 Is Changing Its Expansion Strategy, Competing For US Customers NEWS & TRENDS DEEP DIVE Varo Money optimistic about Challenger banks’ fraud receiving 09national banking charter struggles and14 the banking industry troubles they signal DECEMBER 2019 © 2019 PYMNTS.com All Rights Reserved 1 DIGITAL BANKINGTRACKER TABLE OF CONTENTS What’s Inside 03 Mobile banking competition heats up as challenger banks and established FIs upgrade their mobile apps Feature Story Nicolas Kopp, U.S. CEO of German challenger bank N26, explains how the FI has 06 adapted its expansion strategy to better connect with American customers News and Trends The latest digital banking headlines, including Google’s foray into checking and 09 NatWest’s acceptance of Apple Pay Deep Dive An in-depth exploration of challenger banks’ security technology gaps and the banking 14 industry problems they could cause Top 10 Rankings 18 The highest-ranking B2B and B2C digital banking providers Scorecard See this month’s top scorers and a directory featuring more than 250 digital banking players, 19 including two additions About 159 Information on PYMNTS.com and Feedzai ACKNOWLEDGMENT The Digital Banking Tracker® was done in collaboration with Feedzai, and PYMNTS is grateful for the company’s support and insight. PYMNTS.com retains full editorial control over the following findings, methodology and data analysis. © 2019 PYMNTS.com All Rights Reserved 2 What's Inside Challenger banks are outgrowing the wild-card factor Around the digital banking world that initially attracted early adopters, and the digital Some banks are hoping to entice customers products they offer no longer differ from those pro- with additional mobile payment services. United moted by their established counterparts. Sixty-two Kingdom-based NatWest launched in-app Apple Pay percent of United States customers satisfy most of support for its business banking customers. Apple their banking needs online, and 69 percent say they Pay is the most popular U.S. mobile payment app, will regularly use mobile banking apps within the next and the bank is hoping the integration will improve three months. Customers thus seem to see challeng- its clients' payment flexibility and security. ers as normal fixtures in the financial landscape. NatWest is not the only FI counting on mobile up- This shifting perception may cause concern among grades to retain consumers. Bank of America (BoA) digital banks that rely on their outlier reputations to recently released an updated version of its mobile drum up business. Today’s consumers are less for- app for both Apple and Android devices that enhanc- giving and tend to blame their financial institutions es its artificial intelligence (AI)-enabled chatbot, (FIs) when they cannot seamlessly manage their dig- Erica. The bank stated that the redesigned solution ital banking experiences via laptop or smartphone. offers better service quality. Challengers like Monzo and N26 can no longer hide Legacy banks are beefing up their mobile offerings, behind veils of inexperience, and they now face back- but challengers are finding ways to become inde- lash when they make mistakes. pendent financial players. FIs like Varo Money are This developing vulnerability to criticism is especial- seeking digital banking charters that would allow ly dangerous when concerning fraud and security, as them to insure deposits without partnering with es- challenger banks can struggle to muster the resourc- tablished banks. The FinTech was one of the first to es to keep fraudsters at bay. Many end customers receive preliminary approval for such a charter in still perceive that digital banks may not be the saf- 2018 but has yet to receive full approval. est, and challengers must address these worries to For more on these stories and other digital banking establish trust. Legacy FIs are meanwhile racing to headlines, read the Tracker’s News and Trends sec- innovate and add the latest technological features to tion (p. 9). their platforms. ACKNOWLEDGMENT The Digital Banking Tracker® was done in collaboration with Feedzai, and PYMNTS is grateful for the company’s support and insight. PYMNTS.com retains full editorial control over the following findings, methodology and data analysis. © 2019 PYMNTS.com All Rights Reserved 3 WHAT'S INSIDE N26 evolves to compete in a crowded field The European challenger bank market is becoming highly saturated, and many older financial start- ups are moving into new regions. Both Monzo and N26 entered the U.S. earlier this year, but such challengers cannot be complacent with their offer- ings — especially as they expand their reach. In the Tracker’s Feature Story (p. 6), Nicolas Kopp, U.S. CEO of N26, discusses why the bank adapted its custom- er service strategy for American consumers and how it tailors its financial offerings to individual markets. Deep Dive: Digital transformation gives fraudsters more opportunities Cybercriminals often wield innovative technologies to squeeze through online security gaps and access banking data. Fraudsters are taking advantage of Europe’s rapidly growing open banking ecosystem, for example, where FIs of all sizes are connecting their data through application programming interfac- es (APIs) for further innovation. Smaller banks have less to spend on security, however, which could give bad actors more opportunities to enter the larger ecosystem. This month’s Deep Dive (p. 14) analyzes how fraud tactics are changing amid the proliferation of digital innovations and challenger banks, and what FIs can do to keep out cybercriminals. December Digital Banking Tracker® updates The December edition of the Digital Banking Tracker® includes profiles of more than 250 financial players, including two additions: Tide and Twine. © 2019 PYMNTS.com All Rights Reserved 4 WHAT'S INSIDE 5Five Fast Facts 49% 73% 67% Segment of Portion of small banking users businesses that Share of U.S. aged 18 to plan to tap their consumers 34 who have existing banks for who most often switched or their next banking 62% access their bank 8% considered products or accounts via switching FIs services online and mobile for better online channels experiences Portion of Rise in the Americans who number of small conduct most businesses using of their banking their FIs’ mobile through online banking apps channels between 2018 and 2019 © 2019 PYMNTS.com All Rights Reserved 5 How N26 Is Changing Its Expansion Strategy, Competing For US Customers © 2019 PYMNTS.com All Rights Reserved 6 Challenger banks fit uniquely into the global bank- Axos Bank to bring its services to U.S. users and ing ecosystem. They have outgrown their statuses comply with regulatory standards. as alternatives to more established financial play- Kopp said managing the customer side before the ers in Europe, where digital FIs like Monzo, N26 and launch was trickier, however. Both European and U.S. Starling Bank are operating full-scale platforms, but consumers primarily bank online but differ in how they have experienced less development in the U.S., they do so. Americans are used to receiving points making the country an attractive prospect for inter- and cashback on purchases, for example, a phenom- national expansion efforts. enon that is not as common in Europe. Germany-based N26 launched in 2013 and began “Another key consumption difference for our users is operating in the U.S. earlier this year. Its U.S. CEO, [that] people have lower savings rates here in the U.S., Nicolas Kopp, recently told PYMNTS that the move so their affinity [for] credit products, credit cards, came after N26 considered the digital banking per- loans, overdrafts — whatever it may be — is high- ceptions and preferences of local consumers. er versus, for example, comparing it to continental “You have a market that has high-level phone pen- Europe,” Kopp said. “It is hard to generalize, because etration, [and] people are really tech-savvy and are Europe is such a different market in many aspects, used to trying out new products,” Kopp explained. too, but … savings rates in the U.S. are [about] five “At the same time, I think some of the payment and times lower than what they are in Germany, so [we banking infrastructure is fairly outdated. I think that opened] a few specific products … to help address combination … made [it] a really attractive option for that difference here in the U.S.” us to expand into the U.S.” One such product is N26’s Perks program, which Competing in a crowded field offers discounts on subscriptions to entertainment, fitness and health apps. The company also rolled out Financial service providers must take certain steps a feature called Spaces that creates micro-accounts to enter any new market, such as tailoring products geared toward specific savings goals. N26 is far to customers’ needs and ensuring offerings adhere from the only institution offering such products to to regulations. N26 partnered with San Diego-based U.S. consumers, though, and it must contend with © 2019 PYMNTS.com All Rights Reserved 7 FEATURE STORY large-scale technology players like Apple, Google and “One key difference [between challenger and legacy Facebook that are making their own financial ser- banks] is the fact that you can go to a physical branch,” vices moves. Kopp said. “I feel that psychological safety net does play a role when you speak to customers across the “I get asked [this] question a lot: ‘Are you worried country. At N26, we do not have branches and we will about that [competition]?’” Kopp said. “I think that, at not have branches, so … approaching customer trust this stage — around the evolution and the awareness from that perspective is definitely something that [we] of these products — it’s actually helpful to have more need to think through.” mass in the industry. I do think some of the movement that has been going on … is actually potentially net Certain fraud concerns like identity theft plague FIs of positive [and creating] awareness around the space.” all types.