The rise of the neobanks Part 2

Payment transactions have certainly been a winner for the neobanks, thanks to their speed and lower fees, as I mentioned in my previous article. One of the other ways in which these challenger banks are stealing a march on the traditional banks is in the area of lending and credit products. For starters, the neobanks are able to provide their credit products with lower charges and interest rates, and in the Medici report “Neobanks: A global deep dive,” the authors use Brazil’s Nubank as an example of this advantage.

Nubank does not charge fees for using its credit card. It allows its customers to lock and unlock the card, ask for an increase in their credit limit, as well as change the due date for repayments, and all this can be done from the Nubank app. That makes the customer’s life a lot easier. You may wonder how Nubank makes money. The report says that it does this in two ways: first through customer transactions, and second, through financing a part of, or the total amount of, consumer invoices. It relies on a public database for all its customer data and groups customers into hundreds of different profiles. This is its way of screening out unqualified customers. Furthermore, unlike many other credit card providers in Brazil, it does not charge any fees as long as the customer makes their payments on time. And now it has added a current account and a rewards programme to its product offering.

What’s happening with neobanks worldwide?

Another of the things that the Medici report highlights is the geographical location of neobank startups. Where would you guess that most of these challenger banks start their journey? Perhaps you think it might be Silicon Valley, or Seoul.

Actually the highest concentration of neobanks is in Europe, and within Europe, the United Kingdom is home to the greatest number of them. Why and how has this happened, especially since neobanks have shown the most rapid growth since 2016, and the UK has been in political turmoil since that year over the vote to leave the European Union, which it is due to leave at the end of October. Medici explains the situation: “the UK has a high concentration of challenger and neobanks owing to two factors, chiefly.

One: compared to the US, which has very high numbers of large banks, the UK has far fewer. Two: when it comes to digital banking, the UK can be considered an early adopter, going back to the dotcom boom between the late ’90s and early ’00s. This provided it a ‘prime-mover’ advantage, through which the UK came to be at the forefront of challenger/neobanks and alternative models. Another factor providing the

UK with an edge in this space is the EU’s common standards being introduced, which has aided neobanks rapidly expand their customer base while remaining in compliance with regulations.”

The last reason will seem ironic to those in the UK who are against leaving the EU, and if the country is to retain its advantages for neobanks, it will need to retain those EU regulations.

The banks that have led the European ‘Charge of the Neobank Brigade’ are Atom Bank, Tandem Bank, Monzo, Starling Bank, Revolut, and N26.

For full details of all the neobanks worldwide and an overview of their services, I recommend you read Medici report for a fuller understanding of how neobanks are changing the banking sector, especially for the retail customer.

The rise of the neobanks Part 1

Who is controlling your financial data?

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A decade ago, and even further back, none of us were aware that our personal data was so valuable. Now, we’ve certainly been made aware that companies are busy collecting as much data about each of us as they can, because the more they know about us, the more power they have over our decision making.

We know that social media channels like Facebook re focused on collecting data about our shopping habits and our political views amongst other things, and that has frightened not a few people, and angered them when they discovered the data was being sold to dark actors behind political lobbying. And while the majority of the public may be being guided by the media towards focusing on social media giants, the banks are busy collecting data about each of us as well.

And, like the social media guys, the banks want to hold on to our data; they don’t want to share it with fintech startups. Because these startups are better positioned to use the data and respond to consumer wants in a faster more flexible way. To that end, there is a battle going on by some of the biggest banks, such as JP Morgan Chase and the Silicon Valley fintechs for possession of data.

Big banks plan to stifle fintech access to data

Nizan Geslevich Packin at Forbes suggests that JP Morgan and Capital One actually have a campaign strategy to control, Silicon Valley fintech startups’ access to consumer financial data. She claims that there is a rising behind-the-scenes tension and “some banks have threatened to block fintech companies’ servers from accessing customer data, in order to improve their customer accounts’ safety and increase consumer protection.” The banks claim that this is in the consumer’s best interests because fintechs “often collect more data than they need, store it insecurely, sell it to third parties, and sometimes also get hacked, exposing account numbers and passwords.” It sounds a lot like political arguments these days, especially in countries with a two-party system, like the USA and UK.

Of course regulation and consumer protection are important; they are two of the cornerstone elements of the financial industry. And yes, cybersecurity is an issue these days, and we should be wary of sharing data with third-parties, but if anyone thinks the banks are occupying the higher moral ground and acting entirely for the benefit of the consumer, then they don’t know banks and bankers that well.

Banks claim to act for the consumer

Banks are acting in their own interest: they are afraid of the fintech newcomers who are currently taking a trickle of their customers, but that could become a major flow.

Not if the banks have their way and find a way to stop the sharing of data. As Nizan says, there are companies like Mint that provide consumers with an aggregated snapshot of their accounts from multiple financial institutions. Without access to the bank data, Mint’s business would collapse. Indeed, most fintechs are reliant on gathering traditional bank data; without it they will not be able to innovate.

The fintechs are not leaving things to chance. They are not waiting for the banks to reduces their access to APIs or stop access altogether. They are looking at technological ways to combat the banks’ blocking technology. And they are lobbying for open banking. This works by allowing fintech companies’ apps to ask consumers for permission to access their accounts, and then requiring that banks abide by that consent.

The battle between the banks and the fintechs is not confined to the USA. In Europe Payment Services Directive II encourages technological developments that disrupt existing businesses by collecting data on savings, spending, wealth management and more.

The struggle continues for control of our data, but has anyone ever asked you what you’d like to do with your financial information and who you are prepared to share it with?

Who made it into the Forbes Fintech 50?

The Forbes Fintech 50 2019 reveals that although the crypto markets may be going through a frosty period, investment in the growth of fintech businesses surged in 2018. As Forbes reports, total investment reached $55 billion in 2018, double that of the previous year. The Forbes list of the top 50 finteches also shows that the businesses themselves are getting bigger, with 19 of the 50 firms valued at, or in excess of, $1 billion.

This is only the fourth time that Forbes has published this list and it’s pleasing to see that there are 20 startups that have made the cut for the first time. It is also interesting to see that the sector showing a strong growth in startups is that of payments services, particularly those focused on providing a service to the unbanked. In the case of the USA these people are typically migrants without a US credit history, or people who live hand to mouth on a wage paid weekly. The lack of access to banking and payment facilities is a greater problem in developing countries, but let’s not forget it happens in the first world as well.

Exchanges dominate

There are few surprises at the top of the list, as many of the names are familiar: Axoni, Bitfury, Circle, Coinbase, Gemini and Ripple are all headline makers. Bitfury is the only non-US based of this top six: it is based in Amsterdam. It started off as a bitcoin mining outfit, but then launched its own blockchain plus software designed to help U.S. law-enforcement and others investigate illicit activity using bitcoin. It has a valuation of $1 billion plus and received more than $150 million from Korelya Capital, Macquarie Capital, Dentsu & others.

Axoni may be less famliar than say Coinbase, Circle or Ripple. It uses blockchain-based smart contracts to overhaul the back office of the world’s biggest derivative markets. It received funding from Goldman Sachs, JP Morgan and others to the tune of $59 million.

Circle, with a valuation of $3 billion and Coinbase with a valuation of $8 billion are big hitters; they even sometimes work together. Last year they partnered to launch a stablecoin USDC — a crypto asset using the ethereum blockchain and backed by US dollars.

Payments services present in big numbers

Payments services make up 25% of the Top 50 list. The Forbes list is skewed towards US companies, but it is notable that in the payments sector, it includes Transferwise, a UK registered company, widely used by Europeans when they need to transfer large sums of money across borders. Other payments services listed include Bolt, which is the ‘smallest’ with a valuation of only $20 million, whereas Stripe is one of the largest with a valuation of $685 million.

Forbes predicts that the leaders in the blockchain sphere will stop trying to outrun each other in 2019 and will instead start seeking partnerships within the mainstream world of finance.