HSBC challenges fintechs with digital wallet

Major bank HSBC is challenging its fintech rivals by launching a multicurrency digital wallet, called HSBC Global Wallet, which will enable businesses to make simple and secure international payments.

The digital wallet is first launching in the US, the UK and Singapore and offers payments in Euros, sterling, Hong Kong dollars, Canadian dollars, Singapore dollars, Australian dollars and Malaysian ringgit. Curiously, there is no mention of US dollars!

According to reports, HSBC clients will be able to send money in a number of currencies, and hold and manage those currencies. However, the ability to receive payments will only be added later this year.

This is the latest in new product offerings from HSBC intended to appeal to its more digitally-minded clients. Last November it launched a free mobile-based service that customers can use to hold, manage and send funds in various currencies to HSBC customers in over 20 markets, 24/7 and in real-time without incurring any fees. This product –the HSBC Global Money Account – was aimed at wealthier customers, whereas the new digital product is primarily for small- and medium-sized businesses with international supply chains.

Diane S Reyes, HSBC’s global head of liquidity and cash management, said, “HSBC Global Wallet makes it just as easy for our customers to deal with a supplier or a client on the other side of the world as it is to deal with one on the other side of town.” She added, “By fully integrating this solution into our everyday business banking platform we’re giving our clients a virtual presence in markets around the world.”

What we are witnessing is an attempt by the banks to claw back business lost to fintechs, such as Transferwise (now Wise), Revolut, N26 and others that offer their customers borderless accounts. Even Santander bank in the UK is offering its PagoFX app to the UK retail market and sole traders, and it is also available in Spain and Belgium. The focus of the Santander app is on easy international payments with transparent fees and exchange rates.

This all sounds good, but there is one thing they have forgotten and that is cryptocurrencies and stablecoins. PayPal has moved into crypto and so have the major card networks, such as Visa and Mastercard. There are others as well. So, whilst the banks are attempting to appeal to those customers who moved to the new digital banks and draw them back (which remains to be seen, as HSBC doesn’t have quite the same hip appeal as Revolut), there is a swathe of people who want more advanced features, such as being able to earn money on crypto, lend or borrow against it, and trade it, all in one place.  No doubt, HSBC’s new products will gain traction with its loyal customers, but whether it will win them new ones is another matter.

Will cryptocurrency help Mastercard to grow?

It could have been the case that Mastercard ignored cryptocurrencies and the fintech revolution in payments, but the opposite is true. As one of the leading payment networks in the world, it has instead forged relationships with startups, and even added new products to its core range.

Now, as cryptocurrencies are showing strength, Mastercard is once again demonstrating its flexibility by supporting cryptocurrencies.

According to Trevor Jennewine, Mastercard’s data reveals “as many as 20% of consumers now own cryptocurrency in certain countries,” and merchants and financial instotutions are taking notice of this. Last year Mastercard expanded its cryptocurrency programme last year, making it easier for partners to issue crypto payment cards.

In the USA, Mastercard has teamed up with Bitpay – a payment processor that allows merchants to accept digital currencies like Bitcoin at checkout – and launched a prepaid crypto card in June 202o. This card allows consumers to make in-store and online purchases anywhere Mastercard is accepted, with funds loaded from their BitPay wallet. Consumers can load their card with BTC (Bitcoin), ETH (Ethereum) and other cryptocurrencies and BitPay converts those funds into fiat currencies, such as USD, EUR and GBP.

BitPay noticed a spike in transaction in July, one month after the launch, and has recently added support for Apple Pay so that customers can use an iPhone to make contactless payments.

In Europe, Mastercard has partnered with London-based fintech Wirex to launch a crypto debit card. This is a slightly different product to the BitPay card. The Wirex product allows consumers to spend up to 18 digital and traditional currencies in real time, meaning the funds are not converted until the moment a purchase is made. Furthermore, the Wirex card also allows consumers to earn 2% cash back (in cryptocurrency) on any in-store or online purchase.

Although the products may be slightly different, the one thing they have in common is this: at some point prior to completing a transaction, the cryptocurrency is converted to a fiat currency. This means that it’s fiat currency, not cryptocurrency, that’s flowing through the Mastercard network. But that is about to change.

Mastercard’s CEO Michael Miebach recently announced plans to add digital currencies directly to the company’s network. This means no more conversion to fiat currency, which should make it easier for consumers and merchants to adopt crypto payments.

This is an important move for crypto enthusiasts, because it removes one of the biggest arguments against cryptocurrency use, i.e. they are difficult to spend. Plus, for Mastercard, it adds another form of payments to its product range, and this could be a major growth driver for the network, especially if cryptocurrencies keep gaining traction.  It also shows forward thinking on the part of Mastercard.

Bitcoin buying made easy

There have been some grumbles in the crypto media recently about the difficulties people are encountering when trying to buy Bitcoin. This excellent article by Bailey Reutzel summarises his problems, which is surprising considering he is a seasoned cryptocurrency owner who has been buying it for years. He found that at a number of exchanges he was locked out because of his New York location. In the end he went to PayPal, and after he’d discovered that you can’t buy Bitcoin from a PayPal business account, he set up a personal account and successfully completed a transaction.

PayPal entered the crypto market recently, making it easier for the regular Joe to buy BTC, and it appears to have paid off. According to Martin Young at Cointelegraph, “$242 million worth of digital assets changed hands on the platform during 11th Jan.” PayPal’s recent record was $129 million on 6th January. And, since 1st January, its daily volume has increased by 950%.

This is a moment to reflect on, because as Nuggets News’ Alex Saunders tweeted, “retail has arrived.” That is important for achieving mass adoption.

There is a downside to using PayPal the critics say, because PayPal is like a ‘gated community’ that doesn’t “support withdrawal functionality.” Twitter user Toomas Zobel suggested that the surge in PayPal volume maybe have resulted from retail capitulation, and that there was no way to see if this was a buy or sell volume. He remarked that retail buyers were probably rushing to realise profits when BTC hit $40,000.

However we should be mindful that the PayPal and crypto relationship is just beginning, and that it has plans to extend cryptocurrency services to its 26 million merchants in the coming months. Undoubtedly this will fuel further demand for cryptocurrency and for PayPal’s services. Above all, for the inexperienced crypto buyer, it is a far easier proposition to set up a PayPal account and buy crypto there than venture into the exchanges such as Binance and Coinbase. When you make buying crypto easier for those who have never invested in stocks, you open up the market to the mainstream: something that crypto has been waiting to happen for years. Let’s see if 2021 advances the buying and use of crypto even further.

Neobanks need to own their niche

Currently there are somewhere around 256 neobanks in existence, according to Exton Consulting. These brands offer a digital-only experience that are perceived as customer-centric and easy to use, as in opening an account only takes a few minutes. They are also lower cost to use than their physical banking counterparts.

However, only a small handful of these banks have achieved substantial profitatbility. Their names will be familiar: Revolut, N26, Monzo, Nubank and Chime amongst them. The others, which are significant in number, are unlikely to be profitable for the foreseeable future, according to Accenture research, which revealed “the average UK neobank loses $11 per user yearly.”

Part of the problem is the rising cost of providing a service, whilst the margins generated per customer remain low. Finextra correctly reminds us that disrupting the traditional banking market was always going to be a long-haul business, and that it really needs large amounts of venture capital investing to keep the LTV/CAC ratio in good shape.

CAC is ‘customer acquisition cost’, and LTV is Life-Time Value in this case. The LTV is a measurement of the average revenue generated by a customer in a 1, 3 or 5 year period. Clearly, neobanks want this to be as high as possible, but it is one area where they are being challenged, as the average is around 15€ per customer per annum. Banks like N26 and Monzo obtain revenue mainly from “the low debit card interchange fees,” but this results in very low LTVs. Less travel and smaller purchases during the 2020 pandemic has had a big effect on this.

The CAC is calculated by taking the total money spent on customer acquisition and dividing it by the number of new customers. Neobanks do much better than traditional banks in this regard, “with an average CAC of neobanks around 30 euros versus 200 euros for incumbent banks,” Joris Lochy reports at Finextra.

Lochy says that what we are going to see this year is a switch from chasing growth to increasing profitability. Neobanks are being strongly encouraged by VC investors to provide more profitable products, such as investments and credit: products such as credit cards, overdrafts, salary advances and purchase financing. They are also likely to chase small business customers, and provide Banking-as-a-service services to other Fintechs or even banks.

It also follows that some neobanks will stop offering free services. They used these effectively to grow their customer base, but now they may need to charge more fees.

Threats are also coming from the incumbent banks, but perhaps the biggest threat is from Big Tech stepping into this space. As Lochy suggests, what the neobanks need to do is “find a niche where they can excel and not fight head to head with the large banks.”

Finding a niche

This is likely to come by restructuring and rethinking the product offering to provide an even more personalised service, probably in the credit sector. Some would also be better off by targeting a specific consumer group and tailoring their product offering to them. For example, the Longevity Bank is for Seniors, and there are ones focusing on women, freelancers and SMEs. Ultimately, what neobanks need to do to survive, is offer something that no other bank, credit union etc offers – that’s what ill really bring home the customers.