Challenger Banks: inflection point or moment of truth?
As Starling, Revolut, Monzo and Tandem bank all seek further investment, questions are being raised whether there is funding round fatigue among investors due to a lack of clarity around margins and doubts about longer term funding.
Signing-up new customers hasn’t proven difficult for most of the Challenger Banks. A.T. Kearney’s study concluded that 20% of UK Consumers now say their daily banking relationship is with a Neobank, unsurprisingly this rises to one in five for millennials.
On the surface, it appears, consumers use their Challenger or Neobank accounts (and app) for their daily cash account view, multiple times per day. Turning these eyeballs into active revenue lines and solid margins is where account aggregation offered by Open Banking will come into play.
Theory into value -The alchemy of digital disruption.
Visibility of balances, fees, interest payments etc. across multiple banks, in-itself won’t drive the value required for either the consumer or the account providers. It is the application of live data in the form of the customer’s financial liquidity, overall wealth and credit utilisation and how it is presented to the consumer that will provide the key to value. An example of this is Clearscore, by providing free credit score information to the consumer, paves the way for them to tailor offers from partners wanting to target specific credit & risk profiles. The gamification of the user experience adds depth and a compelling interaction bolstering usage.
None of this is new thinking, in the same way that the Mobile Phone becoming the consumer’s primary device was widely predicted in the decade prior to the iPhone being launched -but it took the iPhone to reinvent the user experience along with app developers (partners) to facilitate it, for this to become today’s reality.
Corralled Partners or Walled gardens?
The battleground of product offering will depend on whether they use a walled garden approach by providing all products in-house or build-out their offering using partners. Many Neo and Retail banks state partnering as an area of critical importance, however, having led partner engagement on both sides of the process between tier 1 banks and fintechs, my experience is that reaching a commercial agreement is usually the easy task, the real challenge lies in overcoming the cultural reticence to support value generation for a partner without treating it like a zero-sum game -not just in revenue or margin contribution but also in operational integration, service development, regulatory compliance, audit & risk as well as contractual terms.
Back to the Future 2020 style.
Retail banks have long understood the trade-off between a gateway service and a profitable service. Gateway services bring customers into the branch where more complex and profitable services can be sold, the challenge for retail banks was always the economics of scale versus the importance of product segmentation to achieve profitability. Challenger banks may be able to readily introduce new services in their apps. but just like retail banks, they will be constrained by how quickly their customers can understand and take-up new products, moreover, the moment the user experience is dis-continuous between the services in the app, the disenfranchisement of the users will be greater than that of a traditional bank whose customers have arguably gotten used to unconnected services.
Success for both traditional and challenger banks may well lie in who can work BEST with external partners -but arguably it always has been!
No wonder investors are scrutinising the Neobanks business models, revenue lines, product margins and customer share /cross sell capabilities. What is more surprising is, when using these criteria, how well some of the established retail banks are placed.
Whoever wins in the conversion fom eyeballs to service clicks is likely to win big, justifying the stratospheric valuations desired by both investors in Neobanks and shareholders of Retail banks alike.