- Challenger banks have struggled to increase its customers and sales
- Enormous discontent with conventional banks have led to the emergence of mobile-only fintech banks
- Existing trend shows that many fintech digital-only banks would be absorbed by larger conventional banks
With a growing adoption of mobile banking technologies, consumer expectations have increased in managing their personal finances on the go. Commercial banks have heavily invested in mobile technologies, real-time data capabilities, and cross-border instant payments transfers to acquire customers, reduce operational costs, and increase sales from digital banking.
Many incumbents tell us in our conversations that they are committed to provide best-in-class “on-the-go, anytime and anywhere” banking services with core banking functionalities. These banks know that the digital space will provide the most revenues and customer relationships in the next decade.
However, the arrival of fintechs has forced banks to take a hard look at their own capabilities and relevance in today’s financial landscape.
More than a dozen of mobile-based banks such as Simple, GoBank and Moven in the US, Germany’s Fidor Bank, WeBank/MyBank (China), and UK’s Atom, Mondo and Starling have emerged in the past years, offering basic suite of deposit and lending products.
The entire industry was put to test with the emergence of fintech start-ups, especially in China, US, and Europe. These digital-only, challenger banks delivered mobile-focused services and products, supported by cloud-based technologies and server platforms, pulling the carpet from under the banks’ feet. For example, the FOS open technology platform developed by Fidor Bank can be plugged into application programming interfaces (APIs). The bank does not often act under their brand name for loan issuances but cooperates with loan partners and generators, infinancing and refinancing those parties.
Banks have realised that their own organisational hierarchies and technology legacy systems are key barriers in shaping a more flexible and faster market response, which can close the gap between service offerings and actual customer experience. Fintech is out there–sometimes even with the support of regulators–to bridge this gap, which is faster, more efficient and cheaper.
Trouble ahead for mobile-only fintech banks
However, many mobile-only fintech banks, excluding China, have not yet made any real impact in their respective markets, while facing an increasingly difficult operating environment. Most digital-only, challenger banks were established during the post-financial crisis years, when banks faced enormous discontent among its customers and the momentum in new digital mobile technologies took off.
These market advantages are fading with banks racing to remake themselves. This challenge is compounded with a low interest rate environment and the inability to attract enough critical customers, which is a key concern for fintech players. Brett King, the founder of Moven, has highlighted that the fintech bank is the largest neo-bank globally, with an average of 150,000 new users per month across three countries.
In China, e-commerce giants, Alibaba and Tencent, went head-to-head in 2015, to launch their own digital banks. Tencent was set-up by WeBank in January 2015 while Alibaba established MYBank in June. Although there were high expectations that these banks would succeed in targeting individuals and small businesses which are underserved by traditional banks, the two digital banks were affected by regulatory constraints.
Chinese regulators did not allow account opening via online or face-recognition technology and still requires face-to-face applications, giving MYBank difficulties in the early stages after it was launched. WeBank also struggled to get the cooperation of local banks such as China Merchants Bank, who prohibited its customers from linking their bank accounts to WeBank's mobile application for wealth management. In addition, the regulator also denied WeBank’s application to receive funding from foreign investors, thusreducing its valuation from an expected $5.5 billion.
In UK, increasing competition in banking is at the heart of the government’s long-term plan which aims to make it easier for customers to switch accounts. Yet, to date only two million customers have used the seven-day Current Account Switch Service launched in September 2013, falling well short of the five million per year that some expected. With almost 50 million current accounts open in the UK, the figure indicates that just two percent of customers are using the seven-day system each year benefiting mainly the large main street banks with competitive deposit account pricings such as Santander and Halifax. Banks themselves have a keen interest not to advertise this scheme among their own customer base, and awareness appears to be on factor for the poor result. The Competition and Markets Authority (CMA) in the UK is investigating currently the personal current account market.
Fidor Bank is the canary in the coal mine
Fidor Bank was founded in Germany in 2009 as one of the world’s first fintech banks. It gained a banking license in the UK in 2015 and has attracted 120,000 customers in the last six years. A key part of Fidor’s banking services is the bank’s message board which has 350,000 members.
However, the recent announcements of the French bank, BPCE, to acquire Fidor Bank, BBVA’s purchase of 30% stake in Atom Bank in 2015, and rumours that Lloyds UK is interested in buying Mondo, are a canary in the coal mine.
Nevertheless, it would be an irony if the real impact of those fintech challengers on the retail banking status quo actually happens, not as stand-alone commercial entities but as part of larger conventional banking groups, retaining operational and system independence from their parent banks.
Fidor’s management repeatedly emphasised that it will keep Fidor Bank independent. “Given the fact that nobody intends to change Fidor’s corporate culture or its management team, we can assume that our customer-centric attitude will remain,” said Matthias Kröner, founder and CEO of Fidor Bank. Marriages are never a play of equals and it remains to be seen whether Fidor Bank can stay independent the way its management envisions it.
Fidor Bank has developed the agility to succeed in building critical scale with a wide variety of businesses in different industries where other peers have failed. Its deal with Germany’s Telefonica to deploy O2 Banking using Fidor’s technology has given the bank access to 40 million customers of the telecom company in the country.
And as part of the BPCE group, Fidor was allowed access to more than 35 million customers and 8,000 branches of the group in France. Kröner said in a world of increasing volatility, it is important to be a member of a strong group. BPCE believes this strategy is a key step in accelerating its digital transformation. On the other hand, Fidor Group is not just a bank, it also has its IT businesses that aim to become a global operating and entrepreneurial partner for digital infrastructure solutions – which BPCE can leverage.
The Fidor-BPCE deal, which Kröner called an “attack formation”, did not proposed a new business model for challenger banks. Conventional banks already have two options in digital transformation – transforming the entire bank or spinning a separate entity. National Australia Bank (NAB) and BNP Paribas have taken the latter direction when they created UBank and Hello Bank! respectively.
Jibun Bank - a yardstick to watch in the coming consolidation
Japan’s Jibun Bank is the only profitable mobile-only banking player in Asia. One of the differentiating factors of the bank since its inception in 2008 is the 50-50 joint venture between Bank of Tokyo-Mitsubishi UFJ (BTMU) and mobile network operator KDDI. The two companies agreed to create a separate bank pursuing their complementary goals. In its decision to spin off Jibun Bank, BTMU took into consideration the limitations posed by the scale and cross-integration of its own back-end systems, which gives less room and time to innovate. Jibun Bank also adopted a different core banking system from its parent bank, which is based on an open source to provide more efficiency and flexibility in developing new products and services.
If BTMU had created something totally new within this framework, it would have slowed down the process of launching new financial services and penetrating the mobile user space. In its first year, Jibun Bank has already accumulated more than 500,000 new customers.
In 2015, the bank reported the highest number of mobile banking accounts in Japan at two million, for a compound annual growth of 11.15%. Although the bank’s average cost-to-income ratio when it first launched its financial products and services was 90%, Jibun Bank reached profitability in less than five years. It has also strengthened its own advertisement channels. Productivity-wise, the bank was able to serve two million customers with about 200 employees, coupled with automated banking transactions. In 2015, the bank generated a total annual revenue of $218 million or equivalent to $1 million revenue per employee.
Despite offering alternatives to incumbents on a couple of fronts, fintech-only banks are still struggling on how to attract a large scale of customers and increase sales. Current developments suggest that most of them will likely be absorbed by bigger conventional banking groups, albeit keeping a certain degree of managerial and operational independence. This might transform retail financial services in a more fundamental way although it remains uncertain. In the short term, mobile-only fintech challenger banks have to prove that they can operationally benefit from this partnership.