VIEW How Fintechs Challenge Traditional Banks
In a previous post, How Fintechs Challenge Traditional Banks, the market gaps they had taken advantage of, the regulatory impact, the strategy, etc. of a series of Fimtechs in the United Kingdom and Europe were described. This publication mentions success stories in Australia, the United States and South America.
What is a retail alternative bank?
A fintech or alternative bank 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.
New Banks in Australia
While new banks have come a long way in the UK and Europe, the Australian banking sector has only recently opened up to these types of disruptors. The ups and downs of Australia's nascent alternative banking market serve as a case study, and as, for disruptors from other regions.
Australia began opening up to alternative banks after a series of regulatory changes came into force in May 2018. These regulatory changes were the result of a year-long investigation into alleged misconduct by many Australian banks.
The Australian banking sector is dominated by 4 major banks: Commonwealth Bank of Australia, Westpac, National Australia Bank y ANZ Banking Group. Together, they make up 74% of the Australian banking sector, according to data from IBIS World.
To minimize fraudulent behavior among Australian banks, a Commission made 76 recommendations. Among these was the creation of a restricted licensed depository institution (ADI) licence, issued by the Australian Prudential Regulation Authority (APRA), which would allow alternative banks to operate on a restricted basis for 2 years while they work towards a license. ADI complete.
Five representative alternative banks emerged from this regulatory change: Up, Judo, Volt, Xinja (currently has ceased its activity) and 86400.
Up, one of the first alternative banks to hit the Australian market, did not go the route of applying for a license. Instead, it launched in partnership in October 2018 with Adelaide Bank y Blessing Bank, allowing it to bypass the license requirement and establish a trusted reputation early on.
Judo received its full banking license in April 2019 and was founded with the goal of helping small businesses obtain loans and lines of credit, among other services. The alternative bank achieved unicorn status in December 2020, after a $212 million round, which saw it reach a $1.2 billion valuation.
With a solid loan portfolio, Judo is one of the strongest alternative banks in the Australian market. Judo states that the Covid-19 pandemic has been beneficial for businesses, adding nearly $800 million in loans to their portfolio, thanks to customer payment delays and difficulty accessing traditional banking services during the crisis. The APRA data underscores the assertion of Judo. During the pandemic, the alternative bank's loan portfolio increased by 40% to nearly $2 billion, even as overall small business lending had fallen by 2%.
Volt it was the first Australian-based alternative bank to receive a restricted ADI license in May 2018 and subsequently the full license in January 2019. However, it did not immediately launch a banking product. The bank began by establishing Volt Labs to build brand awareness and trust with its customers to ease the transition from a large traditional bank to a challenger bank.
While the bank's first consumer product, a savings account, is still in its infancy, it is leveraging partnerships with other players to establish itself as a banking-as-a-service (BaaS) platform. For example, Volt has been associated with Microsoft and cloud-based technology provider Lab3 to provide white-label banking services to other fintech companies in Australia. Volt has raised more than $100 million in funding since 2019.
However, the Covid-19 pandemic has created uncertainty for several alternative banks in Australia. For example, Volt was forced to delay its IPO plans in 2020.
Another challenger bank based in Australia affected by the uncertainties related to Covid-19 is Xinja. The bank, which had taken the ADI route
in 2019, he was forced to give up his banking license and return A$378 million in customer deposits in December 2020. Xinja he attributed it to "COVID-19 and an increasingly difficult capital raising environment that affects who is willing to invest in a new bank." Your customers have transferred to National Australia Bank.
Xinja had entered the market with a prepaid card linked to a mobile app that tracked spending and offered tips on how to optimize spending. He then launched a savings account that offered a high interest rate of 2,25%. This service could have bankrupted the bank, since Xinja it was unable to generate the cash needed to fulfill the promise of high-interest payments. The bank never created a credit product, from which the incoming interest could have offset the interest it paid to its customers.
Another alternative bank that emerged was 86400, a consumer lending and payment platform that was granted a banking license in July 2019. Shortly after, the bank announced a $21 million funding round led by Morgan Stanley. However, the period of 86400 as an independent banking entity did not last long: it was acquired by National Australia Bank in January of 2021.
New Banks in the United States
Monzo, Revolut y N26 have sought entry into the US market, but face significantly higher barriers to entry due to regulation and competition.
Banks must not only comply with federal regulations, but must also comply with the laws that govern financial services activity in each state. Additionally, while the US Office of the Comptroller of the Currency (OCC) has proposed a license for fintechs to allow non-depository institutions to engage in lending, the license has faced legal challenges. The OCC continues to argue the issue in court.
Alternative banks trying to expand in the US also face competition from existing fintechs. In July 2020, the alternative bank Varo, based in the United States, became the first fintech to receive a full banking license in the country, although it took more than 3 years to achieve and an estimated cost of 100 million dollars. Similarly, after years of effort, the point-of-sale payment company Square obtained its own full-service banking license in March 2021.
Applying for a full service banking license in the United States is very expensive, legally risky and time consuming, so going down this route will not be feasible for most alternative banks, domestic or foreign.
Still, Revolut applied for a banking license in March 2021. Although Revolut was launched in this basic serviced country in 2020 by partnering with a national bank, the license would allow it to expand its products to include personal loans, deposit accounts and commercial banking.
New Banks in South America
Latin America also represents a great opportunity for growth and, subsequently, a very competitive market for alternative banks.
70% of the region's population is unbanked or does not have access to banking services. Additionally, mobile phone adoption is high at 70%. These 2 factors offer favorable conditions for alternative banks to break into the traditional banking sector. There are currently more than 40 alternative banks based in Latin America.
N26 received its license to operate in Brazil in early 2021, after announcing plans to launch in the country 2 years earlier. Revolut also announced in 2019 that it would launch in Latin America in partnership with Visa.
Brazil, in particular, has become a very attractive market for alternative banks. The country is home to Nubank, which was founded in 2013 and currently offers services in Brazil, Mexico and Colombia. The company was valued at $25.000 billion in January 2021, making it the most valuable private technology company in Latin America. With 35 million customers, Nubank It is one of the largest challenger banks in the world.
Another relevant new bank in Brazil is Neon, founded in 2016 and focused on savings and investment products.
Argentina is the second largest market for alternative banks in South America after Brazil, with many players competing for clients. wala It is one of the biggest. The bank has a prepaid debit card product, which links with the financial management application to give users a better understanding of their finances. Founded in 2017, the bank had 2 million users as of September 2020 and has expanded into Mexico.
Mexico is also fast becoming a hub for these types of banking fintechs. A large part of the country's population remains unbanked, making it an ideal market for new banks. In addition, consumers are tech-savvy and willing to adopt digital banking solutions, and regulators are embracing fintech companies to help drive financial inclusion.
Nubank de Brasil, which launched operations in Mexico in 2019, announced plans in April 2021 to expand its offering in the country. It now has 1,5 million users in Mexico. bnext de España also launched in Mexico in early 2020 and had onboarded 60.000 customers as of summer 2020.
As these alternative banks expand their reach, it is clear that
no product or market is beyond their reach. However, they will have to make the right strategic bets to take advantage of regulation to their advantage and stand out from the rest of the more traditional sector and from the rest of their competitors.
