How neobanks are modernising banking

 

Banking is going through some changes thanks to the arrival of neobanks. The traditional banks continue to work at their own pace, and are still largely bound by legacy systems that go back decades. Change is not a simple process for them: it is similar to trying to change the direction of a massive oil tanker at speed on the high seas. In other words it is something that takes a while.

The arrival of the neobanks, which are the digital-only challenger banks, (there are challenger banks that don’t fit in the neobank niche because they are more like traditional banks) has caused an upset in the banking sector, but what is the real difference between a neobank account and the type of bank account that most of us already have?

The first, and most basic difference is that they are technology driven. And they don’t have physical branches. That can be off-putting to customers who feel more secure by having a branch that they can go to and talk to someone. In this way, neobanks have a greater appeal to younger sections of the population who are used to operating their existing bank account through an app and online.

Often neobanks don’t have a full banking licence, but they can still offer the range of services offered by traditional banks. They can do this because they have an alternative type of financial services licence, such as an e-money licence, or they have partnerships with financial service providers that hold an appropriate licence.

Opening a neobank account is extremely simple and can be done via a smartphone, or a computer in minutes. There’s no wait while all your documents are assessed by head office. This has a huge appeal for many customers, especially those people who may be dismissed by traditional banks, because they don’t have a large enough income to make them a ‘worthwhile’ customer. Some banks now insist that customers keep the balance in their account at a certain level, and this means many people are excluded from holding an account, or find that their account is suddenly closed.

And we all know that traditional banks often charge exorbitant fees. The neobanks offer free accounts, as well as a range of accounts with a monthly fee, but even these are much lower than an established bank would charge for the same service. Chime, for example, is a neobank in the US that offers debit cards and fee-free overdrafts.

Neobanks are also cutting out a sector for themselves with small businesses and freelancers, which is a sector that the traditional banks don’t serve very well. For example, UK neobank Coconut focuses on serving freelancers. They’ve developed specific accounting features, including VAT and invoicing that cater to the day-to-day needs of the self-employed. For example, a freelancer who needs to request payment from a client can use Coconut to send invoices directly from the app.

Overall, neobanks are changing the entire banking experience. It will take some more time to grow this new financial sector, but it seems to me that every day one meets yet another person who has added a digital-only banking service to the tools they use to manage their money, and that is progress.

Do we need credit card rewards?

This topic may resonate more with North American readers than with Europeans, the latter being not quite so obsessed with credit card rewards. I came across an article in Forbes by Alan McIntyre on this topic, which made me pause to think about the future of cards and rewards, and whether this rather old-fashioned system will survive in a more fintech-led financial system.

For some time Americans have been receiving bonuses for spending on their cards. They have come to expect these ‘gifts’. Of course all this comes at a cost to the credit card companies. According to new research from Accenture, rewards spending by the top five credit card issuers grew to $31 billion in 2018, up from $11 billion in 2015.

McIntyre suggests that the cash-back Apple card might be “the peak of card rewards” and that this entire system is on its way out. As he also mentions, card companies are having to figure out how to deal “with a less attractive volume-value trade-off.”

At the moment the payments industry is still on the winning side with the trade-off, as its revenue has grown by $50 over the last three years. It’s worth somewhere around $300 billion and it is expected to grow 4% by 2025.

However, the American payments industry is lagging a bit behind the rest of the world in this respect. In Europe and Asia, the consumer payments sector is moving to “high-volume, low-margin payments,” and “many of those are moving over account-to-account payment rails rather than over the card networks.” Here’s why it’s changing. In Asia, for example, it costs a merchant only 0.5% on average to accept an Alipay payment, while credit card payments in the U.S. can still be over 2% for many merchants.

The pressure on the North American payments industry to shift over to this model will come from the merchants. The consumer is less likely to change, because they love getting those rewards when they spend with their card. But that significant percentage difference in cost to the merchant is a big deal.

McIntyre says that recent research shows, “We are already seeing merchants begin to favoor debit over credit as a lower-cost payment mechanism, and favouring their own loyalty schemes rather than relying on those run by the card-issuing banks.”

And he says there are two other factors that will end rewards: “The first is the belated development of real-time payments in the U.S. and the opportunity it provides for merchants to have lower-cost payments that will be even cheaper than debit transactions.”

The second major driver of change will be “the continued internalization of payments by major retailers to avoid having to pay merchant acceptance fees at all.” Starbucks, Walmart, Uber and Amazon are the frontrunners in this system.

It seems unlikely to me, thinking over all this, that the old North American credit card rewards model will last for much longer. But I do think that whilst the merchants may be the driving force of this change, there will also be a need for consumer education, so that they understand why their rewards have been taken away.

5 fintech trends for 2020

As we approach the end of 2019 it’s the time of year when sector pundits start to look at trends for 2020. You’ll find these within nearly every imaginable product group, and fintech is no different. This year, as in mnay others, the trends are identified at the major conferences, such as Money 20/20, which took place in Las Vegas in October.

1. Product bundling

Fintech startups have typically released single products. Transferwise is an example. As a result, what a bank offered had been ‘unbundled’ by the fintechs. Now there is a move to rebundling products to provide a one-stop experience, but it’s still early days.

2. An holistic experience

Fintechs were initially about financial inclusion and affordable options, but now there is a move towards creating an holistic customer experience that focuses on financial health. Financial health is becoming more vertically focused. This trend includes companies that target specific demographics (e.g. seniors or kids), job categories (e.g. gig economy) and industries (e.g. dental practices).

3. A more global vision

US-based conferences in the past tended to focus on the domestic market, but this year has seen attendees arrive from around the major world regions. It forces the Americans to think more globally and recognise that some of the largest fintechs in the world are global, including the neobanks, such as Nubank in Brazil. We will definitely see an acceleration in the growth of fintech globally, as Asia and Europe are already outperforming North America.

4. More focus on security

Cyber threats are certain to rise, not least because quantum computing is about to come into play and its method of computing will upset the current cryptographic security.

5. From vertical to horizontal

In the beginning fintech startups were vertical, as they travelled alone, so to speak. But the big news is that in the next few years, it will look at horizontal integration as it introduces its innovative ideas to other industries, and also make it possible for non-financial firms like Amazon to offer financial products. It was apparently noticeable that a significant number of C-Suite execs from other industries were at the Las Vegas event.

Of course, fintech is still in its infancy, and we will see many more changes, probably in the not too distant future, as fintech evolves to meet a range of needs worldwide.

A bank you never heard of has died

How many of you can hold your hands up and say that you have heard of Raphael’s Bank?

It is one owned by an archangel by the way. It is Britain’s second oldest bank and it has existed for 232 years.

What happened to cause its quiet demise? It wasn;t on the news, because few people have heard of it, therefore there was no rush to get the government to bail it out. The bank, which was a leader in lending, sold its motor finance division in 2018 and stopped lending completely in April this year, as reported in Forbes by Frances Coppola. It has also now just closed its retail savings division. Its press release said,

“All savings account holders have been given sixty days’ notice, in line with regulatory guidelines, of the bank’s intention to return their monies to them and close their accounts.”

In 2015, the bank was an active lender, though it had no high street presence and operated mainly through brokers and third parties. Its main strength was in motor finance, including mobility scooters and such like, and it was known for its range of retail and small business loans. It was also a significant provider of pre-paid credit cards in the UK, and had a string of ATMs. Coppola says, “It was, in short, a small full-service bank. Just the sort of bank the highly concentrated UK banking marketplace needs.”

However, story of its death goes back to who owns it, because it wasn’t really an independent bank, despite its independent sounding name. It is owned by Lenley Holdings, which also owns the International Currency Exchange (ICE). And Lenley didn’t want to support a small British bank, so it put it up for sale in 2016.

The expectation was that Russian and Chinese buyers would leap at the opportunity, but none emerged. Meanwhile Raphael’s kept expanding its services, including becoming the banking partner for Transferwise in the UK. And it partnered with Vodafone and PayPal in their mobile money initiative in Germany.

In fact the bank was doing very well in 2017 and reported a profit of over £22m ($28.57m), which was a significant increase on the paltry £25,000 ($32,470) of the year before.

Some onlookers say that the Brexit fiasco spooked overseas buyers, which is likely true, but then in 2018 the bank reported a massive loss of nearly £4.5m ($5.84m). The chances of finding a buyer now were rapidly disappearing, which is why it closed its motor finance and asset finance activities, and sold its motor loan book. Therefore in 2019 it was judged that it couldn’t be sold as a going concern, so Lenley decided to liquidate it.

It is not a catastrophic situation for the banking community, but it is an interesting story for startup neobanks. Just remember, even though this bank opened for business before the French Revolution, in the end it was defeated by a combination of geopolitical events and a low Euribor rate that decimated its evolving payments division.