Neobanks grow in 2020

Some good news to come out of 2020 is the growth in neobanks. According to Finextra, Exton Consulting has produced data showing that there are currently 256 neobanks globally, and several more waiting to launch.

The data indicates that a new banking business opened every five days over the last three years, and that Europe is still the main location of innovation, with three of the five most advanced markets being in the region. They are the UK, which is recognised as a neobanking powerhouse, followed by France and Sweden. It also reports that 50 million people in Europe have opened a neobanking account.

Europe leads in neobank innovation

Other markets are catching up with Europe, most notably South Korea and Brazil, but there is also substantial movement in the USA. China is somewhat unique in its challenger bank development, but it is unrivalled in terms of its numbers of clients using the “financial super apps” available there.

On the downside, not all challenger banks have been able to stay the course. A significant number of players relied on payment interchange fees as a revenue stream, and there has also been vulnerability due to rising number of defaults on loans. As a result, more than 30 neobanks have been wound down since 2015, with Australia’s Xinja being and an example.

New routes to profitability

Exton says: “On their quest for monetizing customer relationships neobanks have learned a first lesson: payment transaction fees, premium account subscription fees, or open banking commissions from brokering 3rd party services will in most cases not be sufficient to generate profits or breach beyond operational break-even.” It added, “Our expectation much rather is that Neobanks will need to offer additional products to jump the gap to sizable profitability.”

Digital lending may be one opportunity where the neobanks can thrive. Another option is, “the morphing of the product outside of financial services via the development of a super app, ” and a third possible route to profitability “lies in providing investment services to the mass affluent market.”

Exton concludes, “Irrespective of which path neobanks will take, we remain convinced that they will need to shift into profitability mode quickly as investor patience will not be unlimited. But for those that select the paths right for them, stay focused on it and grow up as an organization, the future remains bright and full of opportunities.”

Visa goes for USDC with Circle

Visa, the credit card giant, has joined with Circle to connect 60 million merchants to the US Dollar Coin (USDC), a coin on the Ethereum blockchain. This is yet another sign that cryptocurrencies are integrating even further with mainstream payment currencies.

Although Visa won’t have custody itself of the USDC, it is going to work with Circle to select Visa credit card issuers and integrate the USDC software with their platforms, so that it can be used for payments. What this means is that businesses will soon enough be able to make international payments in USDC to other businesses supported by Visa. The funds will then be converted into national currencies when they are spent anywhere that accepts Visa.

Circle is a part of Visa’s Fast Track program, and when it completes the course next year, that is when this new USDC program will begin, with the issuance of a new credit card that allows users to spend USDC. Visa’s head of crypto, Cuy Sheffield, said, “This will be the first corporate card that will allow businesses to be able to spend a balance of USDC. And so we think that this will significantly increase the utility that USDC can have for Circle’s business clients.” 

The partnership between Visa and Circle, helped by the $40 million investment Visa made in another firm developing a platform for holding similar assets issued on a blockchain, “is the latest evidence that the credit card giant sees the technology first popularized by bitcoin as a crucial part of the future of money,” Michael de Castillo writes at Forbes.

Sheffield said, “Blockchain networks and stablecoins, like USDC, are just additional networks. So we think that there’s a significant value that Visa can provide to our clients, enabling them to access them and enabling them to spend at our merchants.”

Currently, according to Visa’s data, “$120 trillion in payments annually are made using checks and instant wire transfers, costing as much as $50 each.” By contrast, since USDC settles on the ethereum blockchain, transactions can close in a little a[s] 20 seconds and, importantly, can be done for nearly free.

Visa has been making strong moves in the cryptocurrency sphere this year. In February 2020. Coinbase became the first company granted principal membership status by Visa. This means that Coinbase, one of the biggest crypto exchanges globally, can in turn issue cards to others.

Circle has done some rethinks of its own in regard to cryptocurrency. In 2019 it had a fire sale of its assets including Poloniex, Circle Invest and Circle Pay. It also rebranded its home page with a focus exclusively on stablecoins and central bank digital currencies. The attraction of the USDC is that it is built on the Ethereum block chain and only tiny amounts of the cryptocurrency ETH are used as “gas” to pay for the transactions.

Jeremy Allaire, the CEO of Circle Internet Finance, says of the new partnership and its probable outcome: “Imagine a capital marketplace that is for anyone who needs capital, or anyone who needs to offer capital that has the same efficiency that Amazon has for e-commerce, the same efficiency that YouTube has for content, effectively, capital markets with the efficiency of the internet, which is essentially zero.” He added, “And that will ultimately return trillions of dollars in value back to the economy, it will reduce costs for every business in the world, it will accelerate the way in which individuals can participate in commercial activity and commerce activity, in conducting their labor and interacting with businesses around the world.”

Can Google Plex win over banks and consumers?

It’s only a matter of days since I wrote about the relaunch of Google Pay. Now I turn my attention to Google Plex. With a beady eye on the way traditional banks are lagging in the mobile banking stakes, it has come up with a solution that enables the old boys to keep pace with the fintech challengers, or at least that is what it appears to promise.

Ron Shevlin quotes some observations from the Snark Tank, such as this summary of the Google Plex pitch: “You’re lagging in technology. Your current vendors are years behind. Consumers think you’re irrelevant. We’re hip, we’re cool, we have all the latest technologies, and boy have we’ve got data! Come partner with us on our new checking account!”

And to some extent the potential customers are buying it. Shevlin says “three big banks, four community banks, two credit unions, and two digital banks” have announced that they have formed partnerships with Google to use the Google Plex checking account tech in 2021.

Now let’s go back to Google Pay. Google Plex will be integrated into the app, which now has three new components.

First, it has a P2P and retail payments component that essentially mimics the Venmo model. This will allow users to, “Set up group payments, put multiple people in a chat and let them send and request money from each other. It will also track who has and hasn’t paid their share and let you tap a button to pester them,” according to The Verge.

Users can also use tap-to-pay, which is pretty old hat now, except that Google has added two new features – ‘Get gas’ and ‘Order food’. Apparently the latter refers to a food ordering system that will work with more than 100,000 restaurants. And consumers will be able to use the ‘get gas’ tab to pay for gas and parking via the app in 30,000 locations.

The ‘Explore’ feature will allow Google Pay app users to browse aggregated merchant offers, and they can receive merchant offers based on their spending activity. It sounds a little like Google ads and Facebook advertising all over again.

There’s also an ‘Insights’ tab which is described by Shevlin as “Google’s version of a personal financial management (PFM) tool,” similar to those available on other digital banking platforms.

Why is Google likely to win over banks to using Google Plex: It’s quite simple: Google has access to more data than any bank; Goggle has more merchant relationships, and it has more tech resources.

Of course, while the traditional banks might see Google’s offer as the fast and easy way to catch up with digital challengers, there is one critical factor to consider: will the consumer want a Google checking account?

Cash Is No Longer King

Cash has become something of a Covid-19 casualty this year. On the day-to-day level, people have been encouraged to pay with cards, because handling notes and coins is a way of transmitting the virus. The pressure on people to go cashless is facing a backlash though: When you use a card it is easy for governments and others to track your every move, whereas cash protects our privacy.

Ray Dalio, founder of investment firm Bridgewater Associates, has taken a look at cash from the investor’s perspective and warns us that it isn’t safe. In an interview with CCN, he said the high level of spending in America means the US dollar is no longer a safe investment. He isn’t the only one who believes cash is no longer a safe haven asset, and that it will perform badly compared with other asset classes, including gold, which has surged, he says, “because the market no longer believes in cash.” He also says that the Fed’s more relaxed view of inflation is another nail in Cash’s coffin.

Dalio told CNBC that cash, “ lulls investors into a false sense of security, based on the U.S. dollar’s historical role as a reserve asset.” Furthermore, according to Dalio, the Federal Reserve’s  spending spree since March has seriously weakened the value of cash.

In his view, “holding cash is equivalent to accepting a 2% annual stealth tax, as a result of inflation.” This may get worse as the Fed targets an average inflation rate of 2%. The ‘average’ Dalio says is important, because what it really means is “it will tolerate an actual rate well above 2% for considerable lengths of time.”

As a result, Dalio recommends a more diversified approach to investing: “Cash is a poor asset class … It’s a quietly bad asset class. Diversification is much better than cash.”

The market appears to agree with this, and there has been a move to other fiat currencies instead of the USD. The Euro, the Japanese yen, Chinese renminbi, and Australian dollar have all risen against the dollar, although this tide is slowly turning back in favour of USD. Plus it would appear that many investors prefer equities to cash.

One last word though. Dalio has an interest in talking down cash. His firm wants investors to pump their growing cash reserves into his fund. Even so, perhaps he does have a point, and cash will come under other pressures in the near future, such as the increased use of digital payments and cryptocurrencies, which have made substantial gains this year.