Key findings on upcoming trends in the banking sector.
Read our full research “Money of the Future”. Download PDF (20MB)
Earlier, when we talked about “mobile banking” – we meant Simple and Moven, and their competitors, or rather “followers” of the “first wave”. But now there is a second wave of interest about this topic. Atom (UK), Tandem (UK), Secco (UK), Mondo (UK), Monese (UK), Starling (UK), Anna (UK), Number26 (Germany), LunarWay (Denmark), Fidor (Germany and UK ) – this time, the focus is not for the United States, but for the United Kingdom. It happened there after a number of local regulator steps to stimulate the emergence of new players and their licensing. Many interesting teams with great experience and ideas came to the flow.
Chris Skinner is the chairman of the The Financial Services Club, owner of banking consultancy Balatro, and author of several books including “The Future of Banking in a Globalised World”, wrote , that 2016 will be about mobile wallets, leveraging what mobile can do at the point of sale. You’ve already got Samsung Pay, Android Pay, Apple Pay, Chase Pay, and a host of other players out there, but at the moment banks and mobile operators haven’t really understood what the wallet and pay system can do. That will start to mature next year into contextual models which incorporate advice, sales and marketing. This means having the data analytics to begin with to know consumer preferences.
…convenience is driving a fundamental change in consumer behaviour.
In terms of behavioural changes in 2016, a key theme will be expectation enhancement. If your friends are getting great services from a particular bank and you’re not, then you’ll start question that. So when Barclays’ Pingit came out, other banks stepped up and launched their own version. Most consumers are apathetic about their bank provider. They don’t see any advantage in switching, which is why you typically don’t see anyone doing so even though the process is now far easier. Apple Pay is still not achieving expectations.
A lot of people thought that from day one it would take over as the wallet of choice for every payment the consumer makes, which is ridiculous. The service is interesting because of its Apple Watch integration and the contactless capability if you’re in London, particularly on the underground or in stores with contactless payment, like Starbucks and Costa. The fact that people are using this service highlights how convenience is driving a fundamental change in consumer behaviour.
Even so, mobile bank users globally are forecast to more than double by 2019, according to a 2015 KPMG report. Generation Y, the so-called millennials, born from the 1980s to the early 2000s, may be the most fertile hunting ground. Almost 67 percent prefer mobile apps for banking, compared with 46 percent of baby boomers, aged 51 to 69, according to PricewaterhouseCoopers. A study by Viacom’s Scratch research unit called “Sorry Banks, Millennials Hate You” found 71 percent of 18- to 34-year-olds would rather go to the dentist than listen to what their bank says.
The German startup has been trying to reinvent the average banking experience in Germany and Austria. It is now expanding to six new European countries — France, Greece, Ireland, Italy, Slovakia and Spain. Anybody who lives in one of these countries since December 2015 can open a bank account in 8 minutes by downloading the iOS or Android app. You just need to make a video phone call and show your passport to a representative. After that, you can transfer money to your bank account and you’ll receive a MasterCard. Number26’s banking partner (Wirecard Bank) actually holds the money and holds a German banking license — your money is safe.
You can set up push notifications for everything. For instance, every time you use your Number26 card, you can receive a push notification to make sure that the transaction was approved and there is no fraudulent use. You can temporarily disable features on your MasterCard. For instance, you can block online payments or ATM use in just one tap.
Opening and maintaining an account is free — Number26 already makes money from MasterCard’s cut on every transaction. Even better, there is no foreign transaction fee. You can travel to the U.S. and pay everything with your Number26 card — you’ll pay the exact amount without any additional fee.
Number26 is available in German and English but the company will launch apps and websites in all languages in the coming months. Your account will be based in Germany (you get a German IBAN), but it doesn’t matter if you live in the Eurozone.
The company already has 80,000 clients after launching less than a year ago in Germany and Austria. Number26 wants to act as a fintech hub, integrating other financial products into its app. The company would like to provide credit, saving and insurance products in each of these countries.
In April 2015, the company announced a fresh $10.6 million in funding, with PayPal cofounder Peter Thiel’s Valar Ventures leading the round. This was only Valar’s second European startup investment.
Though Number26 could have applied for its own banking licence and gone it alone, that approach would have taken longer. By partnering with Wirecard, and using MasterCard, it can scale quickly, and it may never need to obtain its own banking license. But how much does Number26 want to scale — it’s now in eight markets, what about elsewhere? What about the U.S.? “The financial services market is not a niche market — if you have one percent of the German market alone, let’s say one million accounts, you have a billion-euro company,” said Tayenthal from Numbr26. “You wouldn’t even have to go outside of Germany. If you go into Europe, that’s 400 million customers.” Also, the way Number26 is currently set up means it can operate across the European Union fairly easily, but any move to enter non-E.U. markets would be a different proposition.
A big red flag for me is companies that don’t have a clearly defined monetization strategy. This applies across all industries — be it an email client, messaging app, or whatever. If someone promises great things, but doesn’t want to charge me, that makes me wonder.
“We and our investors are not overly concerned about making fees for now — we’re concerned about winning customers,” said Tayenthal. “We can prove that we can win customers at a fraction of the price that traditional banks do. Our overhead costs are a small fraction, and once you get a customer, and they trust you, you can also monetize.”
While the company isn’t announcing a specific plan yet, monetization strategies may include charging for products such as overdrafts, insurance, savings products, and so on.
Number26 plans to systematically “rebundle” and create tight-knit integrations with other startups that focus on one specific vertical. What this could effectively mean is that through your Number26 bank account, you could access TransferWise’s cost-cutting currency exchange service, or perhaps even a Robin Hood-style stock investment service.
“Our vision from the start has been to build Europe‘s first bank account for the smartphone,” added Number26 CEO and founder Valentin Stalf. “We see traditional banks as having failed to adapt to the demands of the digital generation. The response to Number26 has been fantastic and we‘re thrilled to expand to further markets.”
“Design has changed a lot of industries: fashion, travel, music,” Stalf told the audience at WIRED Money. “Design may be user experience, but it’s also about user interface.” And if you want to be digital-only, this is where you need to excel. As an example, NUMBER26 has begun customising bank statements, believing people are not interested in all their transactions but only the ones that are irregular. “I don’t believe in the historical or chronological model,” says Stalf.
Perhaps more important to Stalf’s lack of fear is the company’s relative youth when compared to the incumbents. While the average age of NUMBER26 employees is 28, with 40 percent of them working on the tech side, Stalf says of the big banks: “Imagine you have people just 55-year-olds on the board deciding digital strategy. I already find it challenging to think how an 18-year-old uses their mobile.”
Atom Bank, a UK mobile banking startup and app aimed at hip, youthful consumers that has yet to launch its commercial service, announced in November 2015 that it has closed an £82 million ($128 million) round of funding.
The round is being led by strategic investor BBVA — the Spanish-based banking giant that last year acquired U.S. online banking startup Simple for $117 million. BBVA is taking a 29.5% stake in Atom Bank for £45 million ($68 million), working out to a post-money valuation for the startup of £152.5 million (just under $230 million).
Other investors in this round include previous backers Woodford and Toscafund, as well as Marathon and Polar Capital. The total raised by Atom to date is £135 million, and the company, which picked up a banking license in June 2015, said that this will be the last money it raises before launching to the public in early 2016.
The idea behind these startups is to disrupt the current banking regime by doing away with the extra costs of running brick and mortar operations, and passing on the savings to their digital-savvy consumers. (Developing markets like Brazil, in fact, are particularly interesting in this vein, given their high proportion of unbanked consumers who own and use smartphones.)
Founder and chairman Anthony Thomson was the co-founder of the UK’s low-cost flexible banking outfit Metro Bank. And its CEO is Mark Mullen, the former chief executive of first direct, HSBC’s groundbreaking telephone/online-only bank.
The other thing that Atom is banking on to set itself apart is its square focus on 18-34 year-olds and providing a financial experience that meets their expectations of services today. In the lead up to Atom’s invite-only beta and full commercial launch, the company — which has been described as the “Uber of banking” — has been teasing details of its service, promising to deliver a new kind of bank to a new generation of hipster savers and spenders.
The app — which will be the primary way that customers interact with Atom — has been designed by a team of engineers who come from the gaming industry. And the idea will be to use newer innovations in areas like push messaging, machine learning and anticipatory computing to make Atom’s banking services easier to use and more likely to be engaged with.
In addition to personal banking and savings, Atom aims to offer other services such as business banking, loans and mortgages, and potentially some kind of social media forum that it describes only as “shared wisdom” for the moment on its site.
For Atom, the BBVA connection could help it with marketing as well as help with bigger technical challenges and operational advice down the line. And as a bank with no large retail presence in the UK, BBVA has no competitive conflict with its Atom investment.
Tandem Bank wants to join mobile bank pioneer Atom in launching 2016 year. Tandem has become the second digital-only lender to be handed a banking license, as the Bank of England seeks to increase competition in the sector. Tandem is the 14th bank to receive a license from the PRA in the past two and a half years, as the authorities at the Bank of England seek to encourage more competition in the sector.
The lender – which plans to offer digital services including current accounts, credit cards and loans on via mobile apps and its website – gained approval from the Financial Conduct Authority and the Prudential Regulation Authority. Tandem will be a so-called neobank — a new, online-only, mobile-focused bank with no branches (although it will have call centres).
Tandem’s founders are Matt Cooper, co-founder Capital One, and Ricky Knox, who also founded money transfer firm Azimo. Mr Knox said the aim is to differentiate the bank from the rest of the market by using customers’ data to offer good deals on the money they spend, such as utility bills as well as on financial products.
“For too long, traditional banks have made money at their customers’ expense – for example by letting them borrow long term on credit cards, or not advising them to move money into newer savings products carrying higher interest rates,” he said. “We want to build a bank that challenges this model by putting our customers’ interests first and by working in Tandem with them as their partner in money.”
That will include helping customer avoid overdraft charges and missed payments, as well as finding the best loan and savings rates even if it is with another bank, Tandem said.Knox has a long history in fintech (financial technology), helping to found international currency businesses SmallWorldFS and Azimo. He adds: “The reason there’s an opportunity for a new digital bank is because there’s a new generation of people growing up who have very different relationships with their institutions. They want mobile banking.”
He did say that the company is currently in the process of raising a big round of funding “similar to Atom’s. Knox says Tandem differs from Atom in that it is more customer focused, rather than technology focused.
He says: “We know their crew [Atom] pretty well. I think the really big difference between us and Atom is I think Atom are very focused on the mobile experience as the driver for everything they do.”
Mr Knox said it would aim to work with people to manage their money, rather than focusing on product sales. The lender plans to mine “big data” to better tailor products to customers’ requirements. Unlike Atom, Mr Knox said Tandem would not be digital-only, as it would also provide a call-centre. “We expect people will use mobile as the primary banking channel, and the call-centre for large transactions,” he said.
Canadian neobank Koho has struck a deal with Visa as it gears up for a launch early 2016 year, taking on the country’s big five providers in the battle for Generation Y. With a particular focus on 18 to 34 year olds, Koho aims to launch within two months, promising to offer a better service than traditional banks, more suited to the digital age and with fewer and more transparent fees.
Having raised $1 million in funding, the Vancouver-based startup has now teamed up with Visa on a prepaid card for customers, which will be issued by Peoples Trust Company, the chartered financial institution which will hold funds on Koho’s behalf. Payment processor Galileo has also been brought onboard.
Koho’s founders, who come from tech startup backgrounds, say that they launched the outfit because Canadians have to endure antiquated banking practices while still paying some of the highest fees in the world to a big five that made $29 billion in profits last year.
“We think Canadian consumers need to raise their expectations. It’s not just about core functionality, it’s about understanding your financial position and providing the tools to help you improve it. Whether you’re saving for travel, a dog or a house, Koho can help you get there faster,” says CEO Daniel Eberhard.
Lunar Way (Denmark)
Danish neobank Lunar Way is vowing to spread across Northern Europe, bringing its mobile-centric services to a host of countries by teaming up with local regulated banks. The firm, which is backed by Scandinavian venture fund Seed Capital, has signed up a partner bank in its home country of Denmark and says that it is now in negotiations with local providers in Norway, Sweden and Germany about similar deals in the hope of spreading across the continent in the first half of 2016 year.
Lunar Way claims that this partner model is the first of its kind for European neo-banking, giving it the advantage of rapid scaling as it competes with a host of new digital players. “Now that we have the platform and legislation in place, all we need is to find the right partner bank in any European country, and we are in business. We aim at creating the best from both worlds of banking. On one side a whole new way of looking at customers and user experiences, and on the other the regulative quality from the established banks,” says founder and CEO, Ken Villum Klausen (previously CEO and founder of successful fintech-startup Wallmob).
Monese, a service that aims to simplify mobile-first banking, opened September 2015 its virtual doors to customers today following a three-month closed beta
Instead of proof of a UK address, a minimum opening balance or the provision that your salary is paid into the account, Monese lets users sign up for a new account from a mobile device in just a matter of minutes. Your debit card will then arrive in the post. That makes it ideal for people who have just moved country, which often presents the ‘chicken and egg’ scenario of needing an to open an account, but also needing to receive regular payments from your job to open an account.
It’s also hard to get proof of a permanent UK address without a bank account. Monese makes a few checks to ensure you are who you say you are and requires you to have a registered address somewhere within the EU. As it doesn’t offer any sort of credit (it’s ‘positive balance’ banking only), there’s no credit check being carried out and no marks on your credit history as a result, if you worry about that sort of thing. Checks are based on supplied official documentation (a passport, for example), social media data and facial recognition data – part of the set-up process is to take a selfie.
The account, contactless Visa debit card and accompanying app are all free to use for basic transactions – up to a point. Monese-to-Monese account transactions and in-store debit transactions will always be ‘free’, but other sorts of transaction, like taking money out at an ATM or making a transfer require credits.
Each month, account holders get five free credits, and can earn more by inviting new users to the service. Once the free credits run out, each transaction is then charged at a 50 pence flat rate.
Perhaps one of the most useful features for Monese’s target market is the ability to hold multiple positive balances in different currencies, which should help avoid foreign exchange fees on business trips or holidays. A spokesperson for the company says the multi-balance feature will roll out to account holders soon.
Monese says its international money transfers are up to 10 times cheaper than high street banks and are charged at the mid-market rate plus 0.5 percent.
Starling Bank has recruited a former regulator and a number of industry heavyweights for its board while raising $70m to spearhead its attempt to move into the UK banking market. The new digital bank, founded by Anne Boden, the former chief operating officer of Allied Irish Bank, is aiming to lure mobile-focused customers and provide a superior current account service to those offered by the incumbent high street banks.
The emergence of Starling follows in the footsteps of Atom Bank and Tandem, two digitally-based challengers that received regulatory approval for launch last year, and heralds a new generation of tech-savvy banks.
They are among a host of new lenders trying to break into a market not only dominated by four big names in Lloyds, Barclays, HSBC and Royal Bank of Scotland, but also one with longstanding customer apathy to switching accounts.
Investors are drawn to new challengers for their high growth prospects and their freedom from the burden of old systems.
Starling has secured $70m of investment from Harald McPike, the founder of QuantRes, a Bahamas-based quantitative investment manager. Starling, which is awaiting regulatory approval to launch, revealed that it has appointed Oliver Stocken, who previously served as a non-executive director of Standard Chartered, as chairman.
Victoria Raffé, Marcus Traill and Craig Mawdsley are joining as non-executive directors, alongside Mark Winlow and Steve Colsell, who were appointed earlier in 2015. Ms Raffé spent two decades at the Financial Conduct Authority, after holding a number of senior positions at Fidelity, Prudential and KPMG. Her final role was as director of authorisations and left in a shake-up a year ago. Mr Traill has held a number of senior positions at QuantRes, alongside Mr Mawdsley. Mr Colsell has served as chief financial officer within divisions of Lloyds Banking Group.
On August 2015 Starling was in talks with investors to raise at least £10 million ($15.7 million) to fund the launch of its mobile-first current account early 2016 year. CEO and co-founder Anne Boden told Business Insider:
“We’re funded at the moment by a series of high net worth individuals. We’re out there raising our next round of funding which is going to be £10 million plus, not that I can give the exact figure. But we’re out there talking to investors about our next round.”
Starling, which hopes to get its banking license early 2016 year, is building a mobile-focused, data-driven current account that can be controlled from your smartphone. Boden was tight-lipped about specific features, but told: “Our target is people who are always looking at their phones because they’re living their life on their smartphones. All these apps on their phones make their lives better but their banking app doesn’t.”
«We’re creating the first smart bank in the UK. A bank that focuses on making money easy for people, so that they can answer the important questions like “can I really afford this?”, send and spend money with friends, and «We all know that the vast majority of the banks today are based on technology built in the 1960 and 1970’s, enhanced in the 1980’s onwards. These systems have just had more and more channels and propositions layered on, but the core structure hasn’t changed and that’s the problem that they all have.
We’re not building a traditional bank, we’re not taking an off-the-shelf banking package and adding a prettier interface, biometrics, and video chat. We’re building services for digitally savvy customers that make their lives easier. So yes, we’re starting from the customer needs and wants rather than starting from a specific product or a package». «Simple and Moven blazed a trail.
They were in that first generation of banking improvements, great veneers, bolted onto other peoples banking licenses, or traditional banking packages. They really pointed in the direction of what’s possible, and we’ve got a lot of respect for what they did.»
Mondo gave Business Insider a look inside its “smart” app that customers can control their current account from. Mondo is currently in a testing phase and released around 500 pre-paid debit cards that can be controlled from the app since October 2015. It hopes to get its full banking license at the start of 2016 year and launch a current account shortly after. Founder Tom Blomfield says Mondo’s “entire experience is designed around your smartphone.”
Through the Mondo dashboard where you can see all your transactions, how much you’ve spent that day, and how much you’ve got left in your account, which is linked to the app. The dashboard also gives you a graph, pictured at the top of the screen, that lets you see what your spending is doing to your bank balance over the month.
For every transaction, Mondo automatically pulls data on things like location, type of shop, pictures and logos. It also automatically gives relevant tags — in this case #food. When you spend money the app will also notify you so you can keep track of your spending and make sure it was actually you that spent the money.
The app uses all the data it collects to give you clever visualisations of what you spent where. It uses geolocation on the phone to track this. The app also uses data to spot anomalies — say if a bill is way higher than it should be that month. You can also compare your spending to previous weeks and months to make sure you’re not overspending. If you do overspend and run out of money for the month, Mondo will send you a message asking if you want to take out an overdraft. That’s how the startup plans to make its money.
These are just some of the features we’ve seen. The startup wants to make the app way smarter than anything around at the moment and there’ll likely be lots of other cool features when it launches fully.
Mondo is busy writing its own full stack banking software from scratch. This is enabling the company to create what Tom Blomfield (CEO and founder) calls on his LinkedIn profile a “smart” bank, with features that aren’t always possible simply by plugging into legacy banking software and infrastructure that often dates as far back as the 1970s.
After UK’s regulatory changes introduced in July 2013, an applicant technically only needs £1 million in capital, but also has to provide a business plan and assurances it can remain solvent. To that end, it will be interesting to see how quickly either company is able to get regulator approval and if they secure further investment beforehand.
It was 21 May 2015, and a historic moment for Tom Blomfield. Stood at a cash machine in Clerkenwell, central London, the ambitious young entrepreneur withdrew money from a brand new account with a new bank at which he was the only customer. Five weeks later, Mondo has 30 customers testing its prototype account. Blomfield – a former management consultant now on his third business startup, all before the age of 30 – said a crunch meeting with the Bank of England on July would determine whether Mondo gets the formal go-ahead to apply for a banking license. The full process would take another six months.
Digital banks, however, are not for everyone. “My granny knows her bank manager by name,” said Blomfield. Mondo, by contrast, is “for people who get frustrated if they have to wait more than two seconds for things to get done … It’s for people who live their lives on their iPhones”.
Based in a loft-like space in Clerkenwell, Mondo shares an office with Passion Capital, a venture capital firm that has pumped £2m into the new business.
The business model clearly relies on a low-cost base. No branches and, Blomfield acknowledges, customers who will need to borrow. “If you’ve got seven days left before payday and you’ve got £50 left in your account, it’s not difficult to predict you are going to go overdrawn,” said Blomfield. Mondo aims to let customers block their account until funds become available or borrow a sum, say £200, at prices in the middle of those being offered.
At today’s rates that suggests a 20% annual equivalent rate – roughly equal to that on a typical overdraft, but with no other fees to pay. The startups could offer notifications to customers such as warnings about going overdrawn, reminders of bills to pay and information about how they spend their money.
Blomfield reckons there is huge potential: “I think that in the next two or three years a bank will be launched that will become the scale of Google or Facebook.” “We don’t want to be building a bank behind closed doors,” Blomfield says. “The real value is not in the ideas but in the execution.”
Blomfield’s time at Silicon Valley incubator Y Combinator in 2011 shapes his approach, so much so that he sometimes dons a T-shirt with the Y Combinator motto: “Make Something People Want.” Blomfield earned a law degree at the University of Oxford. A few years later, he teamed up with two fellow Oxford grads to build GoCardless, a simplified system for companies to accept recurring payments.
Blomfield still has a stake in GoCardless, which processes $1 billion of transactions a year. Banks continue to offer customers a static list of deposits and withdrawals rather than providing timely updates or useful tools to analyze spending or saving. In a world of instant messaging, many lenders don’t communicate in real time.
Blomfield’s current bank (which he declines to name) took two weeks to alert him he’d overdrawn his account by £800 and then charged him £20. “The banks have their hands in your pockets constantly, taking money out,” he says.
He likens the banking behemoths to Blockbuster Video, while digital startups such as Mondo are like Netflix. With the right technology and open-minded regulation, Blomfield says, even as staid and entrenched an industry as retail banking can be disrupted. “We think,” says the guy who doesn’t look like a typical banker, “there will be a generational shift in how banking works.”
The early stage, pre-license challenger joins the likes of Atom, Starling and Mondo in taking a mobile-first approach to winning customers from the small collection of high street giants that dominate the British scene. Secco is co-founded and led by Chris Gledhill, who spent nearly three years at Lloyds as an innovation technologist before quitting to embark on the new venture in July 2015.
Explaining the rationale for Secco, the firm says that banks “have lost their way, they can often seem to be greedy, sales focused and profit driven organizations”. What’s more, it claims, banks have failed to keep up with customers living digital lives. The startup is planning to use technology and data to change how banking is done. Not only is it hoping to make branches redundant, but banking apps too, with customers using messaging apps to access things such as balances.
In Secco world customers will send and receive payloads, not payments, where they exchange a “Facebook like and a tip for a busker in return for a digital copy of the song; a business card for the conference slides, or even simply pay for your market lunch and get a recipe.” A pair of spending boundaries will develop over time, based on habits and goals, while for more prosaic products like loans and savings accounts, Secco will simply act as an aggregator, using data to offer options from other providers.
Down the road, Secco wants its users to become ‘data brokers’ – treating their data as a currency to spend, lend and invest. Secco and its users will each hold a cryptographic key, and both will be needed to confirm a transaction, in Secco’s in-house token-based digital currency, from which the bank will take a small cut.
The bank will be built around a distributed database, which functions in a similar fashion to bitcoin’s blockchain. The entire data of the bank is spread around everybody’s phone, so it’s owned by everybody and nobody. However, it will run on something Gledhill calls a ‘blocktree’, currently awaiting patent, which he claims will solve a lot of the problems that come with bitcoin’s technology.
“The blockchain is a linear structure, it’s very rigid. A blocktree gives you the ability to branch off these separate, mini blockchains to do offline transactions which can be merged at a later date.”
Fidor (Germany, UK)
Matthias Kroener, the online-only lender’s chief executive, says it is more like a social network than a traditional bank, with online communities offering finance tips, peer-to-peer loans and financial market trading facilities.
German bank Fidor – derived from the Latin word for trust – launched in September 2015 the UK, offering a current account, savings bonds and international initially, as well as an online community which it says as been a bit hit in its home market. Over the coming months the bank said it will study the UK market further and decide which type of loans to offer.
Fidor launched in Germany in 2009 and has offices in Berlin and Munich, as well as five staff in London.
So far 300,000 people have used its services, including the online community, and the bank has 100,000 customers. In 2014 it made a profit of €2.5m (£1.8m). In its home market, Fidor offers 25 different products, including brokerage services, precious metals trading facilities, crowdfinancing offers and even peer-to-peer loans, where customers can post on the online community that they want to borrow money, which other customers can offer to lend to them.
Fidor named as “one of 6 best online-services in Europe” (Forbes), “best online bank of the year” (Wired), one of TOP50 innovative companies in the world (Fast Company), just won Global Banking Innovation Awards in Las Vegas.
Its entry into Britain follows the growth of promininent European bank sincluding Handelsbanken from Sweden and Spain’s Santander and Sabadell groups.
He hopes that the bank could gain as many as 50,000 customers in the next three years, and said he chose Britain as the bank’s first foreign market because Britons tend to be more open to new technologies than those in other parts of Europe. He expects its customer-base will initially be made up of more financially savvy customers – over time, however, he hopes that Fidor will appeal to a much wider range of customers, including those who are dissatisfied with their current bank and want a different alternative, as well as those who want to use this wider community of customers to learn more about financial management. As more customers give their feedback, more products will be introduced.
Matthias Kröner described the approach as “a marketplace, shielded by a banking licence.” The digital bank is unusual for two reasons — firstly, it puts a big emphasis on the idea of “community” in banking. Its message board is a key part of its offering and it encourages customers to request services, changes, and offer advice to other customers. Secondly, it’s built more like an app store than a traditional bank. In Germany, Fidor offers core banking services but partners up with other companies to offer things like peer-to-peer loans and foreign exchange transfer. (It has plenty of other innovative features, like linking interest rates to Facebook likes.)
Fidor’s banking model is based around its online community, where users are financially rewarded for giving and receiving knowledgeable financial advice, as well as evaluating and reviewing financial products and services they are interested in. Each customers is able to build a personal profile where reputation is gained through ‘karma’. Regular interaction, sound advice and feedback builds a customer’s karma, improving their rating and online credibility. “We’re putting the community at the heart of Fidor.
This personalised approach to banking gives every customer a voice in how our bank is run, as well as giving them unprecedented control – setting their own interest rates, or naming the current account card that the bank will use for example, are just some of the options we’ve explored.”
Fidor’s savings rate starts at 0.25%, but increases with every 2,000 likes on the social media site. Bank features ‘community karma’ – for instance during trial phase, participants received £5 for finding spelling mistakes.
A German bank allows customers to set their savings rates based on its number of likes on Facebook.
“We are the only bank paying money for asking questions. I don’t there is another bank on the planet to be paying for asking questions. Normally you get an annoyed look,” said Kröner.
“Icon” of neobanks from the “first wave”: Simple (US)
Simple has shunned many of the features of traditional banking, including bank branches — it has none — and fees, which it got rid of in September 2015. The company functions online and through its mobile app, plus a network of more than 55,000 ATMs nationwide. Josh Reich positions Simple as a technology start-up that’s hyper-focused on customer service and user experience, more in line with the Ubers and Instagrams of the world than the giants on Wall Street.
“We’re very much designed to build banking for how people think rather than how banks work,” Reich says.
It doesn’t rely on fees for revenue — it profits off interest margin and interchange fees — Simple doesn’t necessarily care if a potential customer has a history of overdrafts or bounced checks, which means it can acquire customers traditional banks may have declined. Its user experience mimics the same things people are used to doing on other apps, including taking photos and associating them with transactions, adding memos talking about who you were with or what you were doing and adding hashtags to expenses to automatically categorize them.
Simple also tries to cut down on any friction involved in money management — instead of showing users their account balance after logging in, it shows a “safe to spend” number, which subtracts any upcoming bills to give customers a more realistic figure.
Simple tries to be user-friendly the old-fashioned way, too: Its employees send handwritten thank-you notes and original drawings to customers, stuffing the notes into envelopes along with colorful stickers and temporary tattoos. A recent one reads, “Hey Jonathan, I just wanted to send you a lil’ ‘Welcome to Simple’ swag … we’re so excited to have you as a customer!”
In the three years since it launched, Simple has acquired hundreds of thousands of customers — the company won’t give an exact figure — and customer growth continues to climb about 10% a month, says Krista Berlincourt, a company spokeswoman. That’s the equivalent of a bank with about 850 branches.
In 2014 Simple, which has 285 employees, was acquired by BBVA for $117 million. It continues to operate as a separate business and has grown so rapidly that it has had to move office buildings in Portland four times, with plans already underway for a fifth move next year.
Simple’s atypical status as a bank is evident in its office culture, too, which screams tech start-up. There’s cold-brew coffee on tap, a communal kitchen with an endless supply of snacks and even a bike technician the company brings in occasionally to work on employees’ bikes, which are hanging on racks throughout the office.
Toward the end of the day, employees can be found hitting balls at the pingpong table and gathered in the board game room. The office embodies the company’s culture of creating enjoyable experiences, for both employees and customers. “If it’s not (fun), you’re not going to use your bank,” Berlincourt says.
When the online banking service Simple got started, one of its promises to customers was that it would eliminate many of the excessive fees that traditional banks charge while also offering an improved and mobile-optimized banking experience. However, while Simple certainly did away with a number of the most common banking fees – like maintenance fees, overdraft fees, or minimum balance fees, for example – it still charged fees for other, lesser-used services. But the company announced in September 2015 that it’s ditching all fees.
Going forward, Simple says it will continue to generate revenue from interest and interchange fees – that is, it splits the interest margin with its partner banks and it splits the service fee merchants pay to the issuing bank. “This revenue model is a manifestation of our belief that you should have access to your money when you need it, without paying fees,” explains Simple co-founder and CEO Josh Reich.
“Today’s elimination of all fees is one example of how we’re constantly working to remove any inconvenience our customers feel from using a branchless service,” he adds. “It’s also the right thing to do. You shouldn’t have to worry about how much it’s going to cost to access your money.” “Rather than generating revenue when customers make mistakes, Simple earns money from interest and interchange, or rather, when our customers use their accounts,” explained Simple CEO and co-founder Josh Reich. “This revenue model is a manifestation of our belief that you should have access to your money when you need it, without paying fees.”
They have developed a cult following with a feature that automatically pulls aside a little bit of money each day toward personalized goals. Most budgeting tools allow users to plan but do not actually move their money, which arguably made Simple more effective. Plus people loved Simple’s pastel-accented app and website, as well as its clean white debit card.
Where Simple isn’t beating the big guys is on interest rates paid out. Users earn just 0.01% on money held in a Simple account, which is $1 for every $10,000 in the account and no more than a traditional bank. “Interest rates are so low right now that you can gather headlines that are disproportionate to the actual savings to consumers,” says Reich. “You are going to end up paying a lot more in fees unless you are a super rich millionaire who has got hundreds of thousands of dollars in your account. We figure the better thing to do financially for customers is to eliminate points where they are paying actual cash.” That said, he concedes a lot of different business models can work.
Seed by two ex-Simple guys positioning looks like “Simple for SMEs”. Seed thinks that business banking is opaque, expensive, and behind the times. The company, which is part of the Winter 2015 Y Combinator class, wants to shake up banking, bring it into the API era, and rip out unnecessary fees to make it, according to its CEO Brian Merritt, as “easy as possible to start and manage a business.”
Merritt and his co-founder Ryan Hildebrand are both former Simple denizens. What the hell is a banking API? It’s the set of programming tools that Seed will use to build its own set of first-party clients. In short, Seed is releasing the digital structure that it will employ when it builds Seed apps for the browser, and smartphones. Seed expects to ship its own clients in the next three to six months, according to its CEO.
Seed is not a bank, a technical term that comes with heavy regulatory structure. Instead, it’s a banking service that sits on top of an extant bank. That doesn’t mean that Seed doesn’t offer normal bank bits, like deposit insurance. In fact, instead of offering the normal $250,000 inFDIC insurance, Seed will insure up to $50 million.
The company promises “free domestic wire transfers, free ACH transactions, free check sending, and low-cost international payments.” Seed will charge on a recurring basis, like many other business-facing startups.
Oddly enough, while Silicon Valley is the place where much of the digital world is invented, the core guts of finance and capital in the area are often neolithic.
Mobile banking startup Moven has raised in October 2015 $12 million from a group of venture investors. It brings the New York-based fintech company’s total fundraising to about $25 million and will help fuel Moven’s international expansion in places including Canada and New Zealand. The company’s year-over-year growth rate from October 2014 to this year was 400%.
Also, in May 2015, Moven, which pioneered a smart phone banking app that helps users track their money and improve their savings, is expanding internationally with bank alliances and a partnership with Accenture. The Accenture alliance will help Moven go global by providing the savings solutions and new features through banks around the world.
Accenture and Moven will also collaborate on design and implementation services for developing new digital banking capabilities — such as next-generation account opening, biometric authentication, real-time marketing — and help improve the overall service experience for Moven’s end-users.
Moven founder Brett King has been quoted in the press as stating that, as of early 2015, the company had “tens of thousands of cardholders and hundreds of thousands of people [that] have downloaded the smartphone app.” A U.S. Moven account consists of a MasterCard debit card and an account at CBW Bank, a technologically aggressive bank based in Weir, Kansas. Moven has a licensing agreement with Westpac in New Zealand and has partnered with TD — Toronto-Dominion Bank — in Toronto.
Moven, which already links to the Android Moto360 and Samsung Gear smartwatches, has expanded to include the Apple Watch. Moven, provider of a leading mobile-first, financial management app, is one of those early in exploring the efficacy of smartwatches. Regarding smartwatches as a delivery platform, Bob Savino (CTO of Moven) stated that the “first generation of wearables is not disruptive enough.”
For the present, the watches are useful primarily for push notifications. With Moven app users on all smartwatches will be able to receive instant receipts, see insights on their spending habits via Moven’s spending meter and be gently nudged to save their spare cash. Moven has also launched an emergency cash feature that combines GPS technology and understanding of a user’s spending to alert them when they are entering a restaurant or grocery store where their average spend exceeds the money they have on hand. It offers a cash advance with clearly defined fees.
The new renovated version of Moven won Best in Show at Finovate in San Jose on May 2015. The Impulse Savings app from Moven introduces several innovative feature including:
- ‘Lock Away Savings’ Prompts: With ‘lock away savings’, users are notified whenever their spending behavior has placed them far enough in the green (below their average spending) that it makes sense to set money aside. Moven gamifies that moment, turning that typical impulsive spending moment into a savings moment. This savings feature is perfect for the wearable form factor.
- Visual Wish List Leveraging Pinterest, etc: The ability to set up a visual wish list of items a user wants to save for, as well as the option to quickly and simply curate these directly from a user’s Pinterest board and others in a few simple taps.
- ‘Break the Glass’ to Unlock Savings: When users have reached a savings milestone, they can access their savings by tapping the app interface three times to simulate ‘breaking the glass’ – employing simple behavioral gamification to make the user think before spending their hard earned savings. If they proceed, their savings funds are immediately transferred into their Moven spending account for their desired purchase.
- To combine checking, savings and lending services, Moven unveiled its Emergency Cash feature to provide users the spending capacity for their regular purchases beyond current balances. The emergency cash notification leverages GPS-technology to alert users when funds are low as they enter their favorite or most frequented places.
- Using Moven’s real-time behavioral insights on a user’s typical spending habits at any location (i.e. average grocery shopping bill), users receive a notification offering them a real-time overdraft opportunity. This notification comes with a transparent upfront fee, to help bridge the gap between typical spend at the location and their current balance. The emergency cash advance is settled when the next deposit is made.
Brazil is one of the world’s fastest growing mobile markets, with 90 million smartphones in circulation among a population of about 200 million. Nubank, which has developed a platinum Master Card credit service that you apply for and manage using only your mobile phone, has picked up $30 million. The Series B round was led by new investor Tiger Global Management, with existing backers Sequoia Capital, Kaszek Ventures and QED Investors also participating. The company was not disclosing its valuation in this round.
Since launching its service in September 2014, at the same time that the company also announced its $14.3 million Series A round, Nubank has picked up more than 200,000 applications from interested users, with 100,000 of them still on its wait list. Those using cards have made more than 750,000 purchases so far. (The company has now raised $46.3 million to date.)
Founder and CEO David Vélez — who himself used to work for Sequoia helping it scout opportunities to invest in Latin America — says that growth has been completely by word of mouth and by intentionally creating a waitlist while it continues to optimise its algorithms.
Part of the funding will be used to speed up that process as well as start to extend into a wider base of users beyond the relatively restricted pool of well-off millennials that it has picked up so far as its earliest users.
Typically in Brazil, to get a credit card, a customer has to physically go to a bank to apply for it, and then she or he receives statements through the mail and has to go through lengthy phone-based processes when querying charges or making changes to their services. Banks, in turn, charge users fees for things like going over your agreed limit, and charge interest rates of between 10 percent and 12 percent per month for unpaid totals.
Nubank, being a mobile-only operation with none of the same overheads as a bank, charges no fees and has a lower interest rate, 7.75 percent. Vélez says that in fact that rate could end up going even lower over time as the company gets more efficient and takes on more users. Nubank makes its fee from the interchange for each transaction, which is close to 2 percent. “We are so efficient that this is enough for us,” he says.
The other area where Nubank has been particularly strong has been in developing a database and system for how it approves customers. Banks usually use around 10 variables when assessing a customer, while Nubank taps into between 2,000 and 3,000, Vélez says. This is important for a few reasons. The first is that it shows the power of how much more data can be crunched in the digital only platform adoped by Nubank; the second is that it makes for a more accurate picture of the would-be customer; and the third is that it lays the groundwork for what Nubank might try to tackle for future products. “We see an opportunity to provide great customer experience and lower fees across all financial products,” he says. ”We are looking at more savings and credit products.”
Why London is booming?
There are almost 30 new banks starting up in the UK and they fall into either a digital bank camp (Atom, Civilised, Lintel, Mondo, Secco, Starling, Tandem) or a challenger bank camp (Aldermore, Handelsbanken, Metro, OneSavings, Shawbrook, Triodos, TSB, William & Glyn). These neobanks we can take more seriously than some of the Fintech start-ups, because many are run by ex-bankers who have been around the block. Even so, the FCA say that many of these neobanks turn up with the idea that they will succeed because they are not a bank, they are more tech savvy, they understand millennials, they are nice and cuddly, etc and so on.
Should they pass muster, it might thank Chancellor of the Exchequer George Osborne. He’s overseen the regulatory revamp that’s made it easier for startup banks to get off the ground. Osborne said he wanted to make London the “fintech capital of the world.” In March 2015, he said the Bank of England should grant at least 15 new licenses in the next five years. “Osborne is a real tech geek,” says Rohan Silva, a former technology adviser at 10 Downing Street, pointing out that the chancellor learned to code as a teenager. “Investors and entrepreneurs haven’t started new banks in this country because they knew the regulators wouldn’t let them,” he says.
Under BOE and FCA rules, a new entrant can hold as little as £1 million in capital initially. An applicant needs common equity Tier 1 capital of 4.5 percent of risk-weighted assets, significantly less than the 9.5 percent required under the old rules that still apply to existing banks. To become a UK bank you need at least £20 million of funding just to get through the gate with a license. The Bank of England says it will use its discretion to give startups more time than before to build the additional capital required under Basel III.
The big four banks—Barclays, HSBC Holdings, Royal Bank of Scotland Group, and Lloyds Banking Group—control 77 percent of the U.K.’s 65 million personal checking accounts. Customers aren’t overwhelmingly happy with the available choices. Only 60 percent say they’re satisfied with their bank, a 2014 survey from consulting firm Accenture found.
Brett King, co-founder of Moven, wrote: “Boris Johnson [Major of London] has become a big advocate of Tech and its role in job creation and investment in the London economy.” FinTech is the hip term given to “Financial Technology”, or the use of technology to reform, reboot and disrupt old-school banking. Some great examples of this were being showcased by Johnson and the “Innovate Finance” initiative that is sponsored by the City of London.
Johnson told for King: “We’ve got the banks, we’ve got the biggest financial sector anywhere in the world, but we’ve also got the expertise. We’ve got more people involved in the sector than any other European Capital and probably any capital in the world, and it’s growing the whole time.” “We’ve got the brains. We’ve got the coders, the young graduates, and it’s a fantastic place to live…it’s the buzz, it’s the bars, it’s the vibe. It’s safe, it’s clean, and it’s green.”
Yes, the British are coming, but more importantly, Tech is coming to reimagine the finance sector, and that can’t be anything but a net positive for consumers, employees and entrepreneurs alike.
Britons are now checking their bank balance on their mobile phones more than anywhere else, leaving more traditional services like a visit to the high street branch in decline. Banking apps were used 10.5m times a day across the country in March 2015, eclipsing the 9.6m daily log-ins to internet banking services, and both services are still growing rapidly, according to data from the British Bankers’ Association. More than eight million people downloaded banking apps in the past year, while two million people have also signed up to Paym, a service allowing payments to be made to mobile phone contacts. In a typical week, Brits are transferring £2.9bn through apps.
“Technology is changing our lives and banking is no different – it is now easier than ever for us to check our balances, pay our friends and manage our money,” said Anthony Browne, chief executive of the BBA. “The rapid take up of apps and mobile banking appears to be a real game changer for the British public.” ”It is vital that the government invests more in 4G and high-speed broadband to ensure that as many people as possible can be included in the revolution that is sweeping through banking,” said Mr Browne.
Banks are deploying new technology as they fight for a share of the current account market. More than a million people switched bank in the year to March 2015, up 7pc on a year ago, Payments Council figures show. Services are still changing rapidly. More than 3,000 people have already used the Nationwide Now service, which enables customers to apply for mortgages and other services through a video link with a staff member.
Who will be the next after UK?
The European Banking Federation’s (EBF) Blueprint on Digital Banking aims at helping to understand more effectively the digital transformation initiated by banks. The EBF Blueprint focuses on the challenges and opportunities in retail banking. It also explains why banks should be considered as strategic players in the Digital Single Market (DSM).
With the aim of encouraging discussion and reflection among banks and EU policy makers, the EBF Blueprint proposes recommendations on which to build a proper framework for a workable DSM. Recommendations, to ensure that the reforms undertaken will lead to the desired effects: restoring trust, creating a competitive and innovative market, and boosting economic growth and employment.
In particular, the EBF blueprint provides indications on the changing environment driven by customer expectations, a description of today’s digital bank representing an innovative customer experience, and a portrayal of the bank of the future. And more importantly, the barriers and opportunities for banks and their customers linked to some fundamental issues: better access to banking products and services, big data, payments (mobile/instant and e-invoicing), cybersecurity, crypto-technologies, e-identification, digital skills (education, competencies, recruitment), and the importance of removing regulatory inconsistencies and ensuring fair competition.
Australian bank customers are among the world’s fastest adopters of mobile banking, a trend that is predicted to make the big four prime targets for technology-based firms eyeing banks’ huge profits. Mobile banking has overtaken online banking through a desktop computer as the main way for customers to interact with their bank, and Australian consumers are leading the charge, consultancy Bain & Company says.
Survey figures from Bain showed that 38 per cent of Australian customers’ interactions with their bank occurred via a smartphone or tablet in 2014, up from 22 per cent a year earlier. “Australia is leading the world in adopting mobile banking, and at the same time taking the unnecessary interactions out of the branches,” Bain partner Gerard du Toit said.
Mobile banking has overtaken desktop-only digital banking at three top banks in the US — Wells Fargo, Bank of America and JPMorgan Chase.
Mobile banking customers were 53% of the size of total online banking customers at three banks. BI Intelligence, Business Insider’s research service, has argued that migration to mobile banking is a huge opportunity for smaller banks and credit unions that don’t have the resources to compete with larger banks on metrics like staff per-customer and branch locations per-customer. A good mobile banking app is an inexpensive way to provide customers with many services that would otherwise require going to the bank and interacting with a representative.
Friends or foes?
KPMG’s inaugural Challenger banking benchmarking report, The Game Changers (May 2015), looks at the financial results of Challenger banks and reports on the key trends behind them. It suggests the Challenger banking sector is outperforming bigger players in terms of growth and returns, but that there are hurdles ahead.
A digital bank is not based on whether there are branches or the availability of a mobile banking app. A sustainable digital banking organization delivers the majority of products and services digitally. It also allows for real-time digital interactions with a culture that allows for rapid response to innovation opportunities. In financial services, new digital fintech start-ups, benefiting from lower barriers to entry, are offering solutions that are responding to these needs before many legacy banks can respond. Globally, entrepreneurs and even traditional banks are creating digital-only banks or neobanks that embrace a digital-first strategy.
Simple, Moven, BankMobile, Number26, Atom, ZenBanx and NuBank are just some of the firms testing the waters. These neobanks have digital technology at the core of their value proposition. Opportunities exist for existing organizations that can leverage the new technologies to engage an increasingly demand consumer in close to real-time, but legacy challenges are difficult to overcome.
In the white paper, Designing a Sustainable Digital Bank, IBM makes it clear that a great mobile app does not make a bank a ‘digital bank. Neither does closing branches. According to IBM, “A true digital bank is built on the value proposition that most products and services are delivered digitally. Its customers expect to use digital channels for their day-to-day banking activities. The digital bank’s infrastructure is optimized for real-time digital interactions and its culture embraces the rapid change of digital technologies.”
According to the IBM white paper, “There is no shortage of direct banks – some started by entrepreneurs and others backed by major traditional banks – that have failed to take off due to low customer adoption.” “Digital banking requires a deep transformation of the entire banking organization including the digitization of processes and extraction of insights from data.
Even the bank’s strategy, business model and mindset should become more digitally oriented. Those that are most adept at harnessing digital technologies can become industry leaders.”
New technologies, fintech competitors, shifts in consumer expectations represent both challenges and opportunities for existing banking organizations. Those organizations who don’t move quickly may be left behind. The good news is that many of the digital solutions that have been introduced in the past few years could represent partnering opportunities as well as ways to reduce back office expenses.
Chris Skinner dismisses the idea that ‘some geek in a bedroom’ could create the Uber of banking, but back in the 1980s, IBM probably thought there was no way some geek could eliminate their stronghold on personal computers, yet that’s exactly what happened. Michael Dell famously started Dell Computer from his college dorm room. He became the youngest chief executive of a Fortune 500 company just eight years later. A dozen years after that, IBM got out of the PC business, selling it to Lenovo. And as the waves of disruption continued, Dell was later knocked off its own throne by Apple and other companies. All entrenched players in these industries face battles for profit margins and further consolidation, but disruptive innovation makes those battles even harder.
The incumbents argue that their longstanding positions will give them sufficient time to adapt and react to any disruption, yet advance warning seldom provides disrupted incumbents with protection. Kodak wasn’t unaware of digital photography, but the company was unable to shift its legacy culture and operations quickly enough. Bankers would do well to heed the advice that Mr Skinner has written about extensively in many of his other articles and books: Do the hard work to transform old infrastructures, cultures and business models.
By Life.SREDA, a Singapore-based Venture Capital fund that focuses on financial, mobile and internet businesses.