How Fintechs Challenge Traditional Banks

banking is essential, banks are not.

Bill Gates (1994)

Retail banking fintechs are gaining momentum by developing digitally accessible and streamlined retail banking services.

In Europe the first appeared with AtomBank, Tandem, Monzo, Starling bank, Revolut y N26 which, between all of them, attracted a total of 4.200 million dollars of investment and more than 30 million clients since 2014.

The UK has seen more fintech banking compared to other regions, as a result of more progressive regulations enacted to promote competition and break monopolies. These types of Fintechs have already begun to appear in other regions of the world, from Australia to Asia and the United States.

What is a retail alternative bank?

A fintech alternative to a traditional bank is a technology company that leverages software to digitize and streamline retail banking. These types of companies use digital distribution channels, generally mobile, to offer more competitive banking services to individuals, such as current and savings accounts, loans, insurance and credit cards.

Alternative Banks vs. Traditional Banks

Unlike traditional retail banks, which offer physical branches for personal banking, alternative banks take a digital-first approach, often relying solely on web and mobile platforms. Alternative banks prioritize an improved user experience, appealing to those who want to be able to bank from their phones rather than visit a retail branch.

Alternative banking fintechs started with clients who lost faith in historically traditional companies after the global financial crisis. These companies “challenge” the standard business model by charging customers low and transparent fees, providing faster services, and providing a better user experience through always-on digital interfaces.

In addition, many of these new banks target specific demographic groups that are underserved by traditional banks, such as consumers in the lower income brackets or those with poor credit histories.

From personal contact to digital banking

In 2009, there were 240.000 bank branches in Europe. At that time, customers still relied heavily on visiting the branch and were starting to use online banking. But fintechs bet that online, specifically mobile, would be the next channel for retail banking distribution. That was prophetic prophetic.

Since then, the rise of digital banking has had a substantial impact on the drop in the number of branches. The number of European bank branches has been reduced to 165.000. And a quarter of these are expected to close in the next 3 years, according to the consultancy Kearney.

Juniper Research It says that, by 2024, 3.600 billion people, nearly 1 in 2 adults, will use digital banking services, including desktop and mobile channels. The UK has seen one of the most widespread adoptions of digital banking services thanks to otherwise unavoidable regulatory changes.

During the Covid-19 pandemic, closures due to bank mergers and branch closures further accelerated the adoption of digital banking, a boon for many competitors. For example, the global use of mobile banking and payment apps grew by 26% in the first half of 2020 compared to the same period in 2019 according to a survey of Adjust y Apptopia.

Fintechs have benefited greatly from the transition to digital, as traditional banks still maintain a branch-centric business model. These banks, however, have also developed their own digital offerings, investing significantly in digital transformation to keep up with changing consumer demand.

How fintechs have impacted regulation

In the wake of the 2008 financial crisis, the most advanced regulators in the EU have made it easier for fintechs to obtain the necessary financial licenses to operate. For example, it can be seen how the most important fintechs have taken advantage of the new regulation to grow: AtomBank, Tandem, Monzo, Starling bank, Revolut y N26.

AtomBank, Tandem, Monzo, Starling bank, all based in the UK, and N26, based in Germany, obtained a full banking license, with one taking up to 2 years to be processed by the regulator, but it expands the services that these banks can offer to consumers. By pursuing this time-consuming process, these new entrants are betting that this recognition by the regulator would build trust with consumers and allow them greater flexibility in building their offerings. It is interesting how this same process is the one that Paypal followed more than 20 years ago in the United States, described in the magnificent book The PayPal Wars (2004)

The strategy of RevolutIn the UK, on ​​the other hand, it was to have an e-money licence, which can be obtained much more quickly, although the scope of services that can be offered is more limited. This option was created in 2011, as part of the UK Electronic Money Regulations.

Fintechs have also been able to expand within the EU by taking advantage of the European Economic Area (EEA) passport. The passport allows a company licensed in 1 of the 27 EU member states to provide financial products or services in another country without the need for additional authorization. N26, for example, has used the passport to expand its service to more than 20 countries in the European Community.

Investment and main investors of the new banks

Strategies against Regulators

AtomBank, Tandem y Starling bank they had a more traditional strategy, they prioritized having a banking license before launch and created a set of services that required such a license, believing that this would give them a competitive advantage around their platform. AtomBank, for example, launched a savings account and loan product for small and medium-sized enterprises (SMEs) following regulatory approval.

The biggest drawback of this strategy is losing the impact of supply entry in a new market. Due to the slow process of regulators, AtomBank was late in bringing its product to market and did not launch it until mid-2016, 18 months after registering with the Financial Conduct Authority (FCA).

Another drawback is that a revocation can occur. Tandem lost its banking license as it was unable to secure financing. It acquired the banking division of Harrods at the end of 2017 as a way to restore the license, but that was a process that added cost and time.

Monzo y N26 They took a middle ground. They wanted to attract customers to their platform while looking for more agile methods to regularize.

In the case of Monzo, it did so by launching a prepaid card instead of a full checking account product. The benefits of this strategy include getting products to market faster, gaining customer feedback, and fixing bugs during early product launches. But the downside is that it can jeopardize further growth.

Monzo it was going through a period of rapid growth, adding some 60.000 users a month when it was awarded its banking license. In December 2017, it stopped adding new customers as per its initial launch and announced plans to transfer its 500 existing customers from prepaid cards to Monzo's own checking accounts. Until I could complete this task and reopen the registry, Monzo lost the activity of hundreds of thousands of customers on the waiting list.

Another drawback is having to rely on corporate partners while waiting for the license. In the case of N26, used the back-end of the payment processor Wirecard to get your payment interface up and running. This meant giving Wirecard a part of each transaction.

With a completely different strategy, Revolut challenged conventional marketing strategy by applying for an easier-to-acquire e-money license and targeting foreign exchange instead of checking accounts (similar in use to checking accounts in the United States). Revolut he initially focused on frequent flyers, a niche he believed was underserved. He created a digital currency exchange app, which allowed people to exchange money more frequently between countries without the need to set up multiple bank accounts.

Revolut took advantage of the European passport to expand throughout Europe and partnered with other fintechs to grow rapidly. He was able to launch this product without waiting for a letter, while gaining access to a list of potential clients for an eventual bank offer.

Since then, Revolut received a European passport card through the Bank of Lithuania and applied for another in the UK in the first quarter of 2021. The company now has 15 million individual customers and 500.000 business customers.

The fastest growing fintechs (Monzo, Revolut y N26) quickly acquired customers through viral growth strategies and without first seeking a banking license. As of May 2021, between the 3 banks they have a combined customer base of over 27 million users.

The other 3 companies, AtomBank, Tandem y Starling bank, waited until they received their licenses, which delayed their growth for up to 2 years. Because of this, these banks burned more cash along the way than their unauthorized counterparts. To date, they have a combined 2.9 million customers, just a tenth of what their competitors have collectively amassed.

New regulations drive fintech business models

In recent years, EU and UK regulators have continued to actively allow new banks or fintechs to grow. This includes regulations such as the UK Open Banking Standards and the EU Payment Services Directive (PSD2), which were phased in in January 2018.

Open banking standards require the UK's 9 largest personal and business checking account banks to implement open standards for access via application programming interfaces (APIs).

Open banking and PSD2 standards allow third parties to securely access customer account data upon request. This means there is a huge opportunity for fintech companies like these new banks to plug into traditional banks and create new services for customers.

New Markets, Products and Partners

These new banks have the challenge of expanding their retail banking services, expanding into new markets and targeting their platforms towards unbanked customers. The path they choose is through agreements and collaborations with third parties that complete their offer in exchange for access to your customer base.

For Revolut y N26Partnering with other fintech companies to add new services has helped them cut costs and start breaking even.

Behind them, other new banks are pushing their deals with third parties, especially in the wake of UK open banking standards and EU PSD2. Starling bank It quickly capitalized on these standards, bringing banking APIs to market in 2018 and pursuing integrations with 25 fintech startups.

money box, for example, was one of the first associations of Starling bank. money box is a digital wealth management startup that makes fractional investments for clients that materialize with each purchase with other clients who also make purchases. money box took advantage of the API Starling bank to improve investment allocation time from once a week to real time.

However, the downside of this approach is that it is easy to replicate with other competitors. For example, money box was also associated with Monzo and had an existing partnership with Revolut. Other fintechs are also likely to increase their deals to achieve cheaper customer acquisition, increase speed to market with new services, and contain upfront infrastructure costs.

New banks may also look to partner with traditional banks to take advantage of new open banking requirements, speed up network speeds, and ensure information security. For example, the smallest Tandem y AtomBankthey may seek to benefit from larger institutional deals as they launch new product categories such as credit cards and alternative mortgages.

Due to the fact that these agreements in many cases generate a reduction in margins and create risk with the competition, some fintechs will seek to increase products internally through acquisitions. Tandem, for example, purchased Allium, a lender helping consumers bring green energy to homes, in August 2020.

Meanwhile, others aim to launch their own exclusive products to expand the range of services they offer. Revolut, for example, has already established an investment arm (Revolut Wealth) licensed to support pensions, exchange-traded fund (ETFs) and mortgages, while also launching commission-free stock trading to complement its cryptocurrency offering.

When the license is approved Revolut In the United Kingdom, the challenge for its traditional competitors and fintechs will be focused on what new products and markets are prioritized in the company. The conventional approach would be to launch a fully licensed current account product in the UK, but Revolut You can first look for growth opportunities in other sectors.

Opportunities by Demographic Orientation

Some fintechs are targeting products targeting very specific communities and socioeconomic demographics to differentiate themselves in an increasingly crowded marketplace.

In the United States, for example, companies like First Blvd, Greenwood y Cheese focus on underserved minority communities, while Daylight focuses on the LGBTQ+ community. Letter y unifimoney are developing private banking products for high net worth individuals, while capway y One they are targeting the underbanked. TomoCredit launched a credit card in March 2021 that is not based on the FICO credit ratio (USA criteria), but uses cash flow to calculate a customer's creditworthiness, usage data flow to determine a consumer's creditworthiness . With this product, TomoCredit targets youth who may not have a credit history.

The same diversification is taking place in Brazil, which has proven to be an ideal terrain for new banks. For example, Elias Bank caters to the needs of business women, Pride Bank caters to the LGBTQ+ community and zippy The shared transport sector serves the self-employed and independent workers.

This increasingly granular market approach introduces an additional layer of competitiveness and pressure on traditional banking in order to define a differential value proposition.

Opportunities in Financial Solutions Integrated Finance

Integrated finance, the practice of non-financial companies offering dedicated financial services, such as loans, to clients, is also on the rise. In recent months, companies as varied as the pharmacy chain Walgreens, the tax service provider HR Block or e-commerce platform Shopify have announced plans to launch bank accounts for customers.

For non-financial companies, providing selected financial services to their clients requires having a fintech infrastructure, which is time-consuming and expensive to build. Because new banks already have this infrastructure and the experience to implement these services, everyone, including customers, is in an advantageous position when integrating financial services.

VIEW Purchase financing (BNPL)