It sounds like the plan for a lot of these newer banks is to grow customer base selling services at a loss, then cross sell once they have a profitable offering (home loans etc).
I wonder how plausible it is that some of these mobile only new banks will never be profitable before they are acquired by existing legacy banks.
In practice there's the same effect (the first £X of an individual's credit balance will be refunded by the government if the bank fails, I think it's currently a hundred grand or something and in practice so far the government always pays everybody their full balance) but the mechanism is different.
Rather than an insurance fund the law just says if you're a bank and you didn't fail you're now on the hook to pay back the government. This is called "Last Man Standing". One intended benefit over FDIC is that there's an incentive to rat on a competitor taking undue risks, because if they fail you're eating that cost.
> While these challengers are successful in attracting large number of customers, many of them haven't quite yet made profit. Simultaneously, the larger the size, the more the losses.
I have seen this story okay out before. Startup basically grows base by losing money. Eventually they need to actually make a profit. Then come out all the dark patterns, selling of customer data, and other scummy behavior. If you are a customer of these banks be extra vigilant.
I am using Starling Bank. As far as I know they are profitable - they offer enterprise services (payment processing, etc) and use that to subsidise free consumer-facing services.
What I don’t understand however is how the other challenger banks didn’t see this coming. Like how do you decide to build a bank and take millions of VC funding without a reasonable path to profitability? Also I think Monzo could’ve done well had they not taken VC money and spent it all - they do have a good product, they could’ve charged a token amount for it (1£/month?) and at scale it would’ve been decent revenue (they’re at 3 million customers now).
I think the challenge goes beyond just profitability.
I’m currently locked out of my Revolut account due to a bug on their end.
There is no telephone support and no in app support until after you are logged in. Apparently you have to contact them via Facebook or Twitter for assistance.
They are forever destined to be a toy with this kind of approach to people’s money.
Interesting anecdote, thanks for sharing. In contrast legacy banks would likely offer both mobile & internet banking (if you're locked out of one the other might still work) & phone support & perhaps nearby physical branches, depending on where you are.
I was locked out of my Revolut account too, for about a day.
I was able to chat via messages in-app. But each time I did, the support person asked me to upload photos of supporting documentation to prove my own other bank cards were in my possession, that sort of thing. I duly did so, and then there would be acknowledgement followed by silence at the other end for hours. Eventually the person would log off (their status is visible) and the system would show that it was "waiting" for someone to become available to handle my query.
That "waiting for someone to become available" would typically last some 6 hours or so.
Then I'd get someone, and we'd go through another loop, going nowhere, and them going silent on me.
I read somewhere that this can go on for a week or more, which had me really worried because I'd put in about £1000 just before they locked the account, which I needed sooner than that.
I also read that their Twitter and Facebook teams are much more responsive than their Customer Service.
So I reached out on Facebook. Someone replied quickly that they'd asked somone in Customer Service to deal with my query, and... my account was unlocked about 15 minutes later.
This is common where the issue is something "hard" to fix, so the original employee punts it to the back of the queue and hopes someone else more knowledge takes it on.
> There is no telephone support and no in app support until after you are logged in. Apparently you have to contact them via Facebook or Twitter for assistance.
The legacy banks all seem to be moving to voice-recognition IVR systems which primarily exist to provide the same service as the website/app, but in a more frustrating manner.
If I had a problem that could be solved on the website, I wouldn't be calling in the first place...
I worked as a VC and saw the cohorts of (non superstar) challenger bank... and omg: the more customers you have the more you lose, the more they use your product the more you lose.
They all charge almost no fees and there is almost no money to invest for interest. Monzo is very transparent with their financials and when I checked in mid 2018 their account balances totalled a mere 150 million USD. A single rich person might have that in an older bank.
> - the margins for retail banking were wiped out a long time ago
In the US retail banking is a cash cow: most of the country does not have enough money in the bank which means customers periodically pay overdraft fees.
> - consumers have been used to free banking for decades (at least in the UK)
In the US most of consumer banks have a service fee, some as high as $15/mo.
> - the "legacy" competition are some of the most well captialised entities on the planet
Legacy competitors are carrying branches in the most expensive real estate markets in the world.
The problem of the upstarts is that they do not want to attack one issue and do what MCI did to AT&T ( pick one - lower overdraft fees/lower service charges/do not waste money on stuff (real estate), instead they want to completely destroy the business model by making banking free, wiping out overdraft fees and still wasting money on real estate ( headquarters/staff in the most overpriced cities etc ) and after that they wonder why they don't make money.
Here, a brilliant idea: take BoA fees, cut them in half, don't put everyone in San Francisco, issue debit cards and hire a pile of people in Ohio to do customer service a-la Discover. You will make money hand over fist and every time BOA matches your fees you make yours $0.05 less - MCI did it to AT&T and it cleaned Death Star's clock as long as it continued to do that non-sexy stuff.
I'm actually thinking in next 5-10 years we will have the likes of Capital One, Discover and Amex clean up on the banking side.
A lot of banks charge here in Germany. My previously free bank has started charging, presumably because of the low interest rates which make it hard to be profitable. A couple of online only banks are still free if you have enough turnover, however. Germany has a crazy number of small banks, compared to the likes of he UK.
It certainly takes time, and nothing really new. 'Building Societies', 'Coops' & 'Credit Unions' have grown over time, add features and get regulated to the point we think of them as Banks. Not all will survive of course.
The EU’s PSD2 (second Payment Services Directive) specifically introduces the concept of Third Party Providers (TPPs) that are allowed to interact with your bank account on your behalf either to collect/aggregate information or to initiate payments. These of course require an API to do so, but unfortunately, within the same piece of legislation, the TLA ‘API’ unfortunately suffers a namespace collision with “Authorised Payment Institution”, a lesser kind of online banking institution a step below the full EMI (Electronic Money Institution).
I’m currently heading a project to set up such an institution so I’m into this stuff up to my neck.
Unfortunately, I think you need to be licensed under the PSD2 even to send money from your own account - you can do things like attaching receipts to transactions to view in the app, or pulling transaction data in real time, though.
Yea, I have been following Monzo for some time. My understanding is that they originally had big plans for their API, but pulled back on development of it as they got more popular. It looks like it still has a lot of restrictions.
Well, I know for a fact that all of the banks in UK must support open banking. Granted, the functionality is mostly reserved for B2B communications, so in practice you will need to go through a OB provider. These providers [try to] abstract away the differences between individual banks and provide coherent APIs to their customers.
(I deliberately avoid the word "stable" because everything in this space is still in flux.)
Semantically OB is a bit like OAuth. The end user authorises an OB provider to conduct [some] operations on their bank account, and the OB provider exposes their chosen functionality to the user. Due to the unit economics[ß] it will likely be quite some time before OB for retail customers can take flight.
I would have personally expected that the first uses of OB for retail customers would have been personal accounting services, because those could do with read-only authorisations. But the challenger banks exposed this natively in their apps, adding sufficient friction for third-party services to take hold, and in fact made it such an attractive feature that legacy banks have had to race to implement similar functionality.
ß: Businesses do a lot more transactions than individuals, so the overhead per retail customer remains high.
These are just payment systems, like Zelle, Paypal, Stripe, etc., but running as standalone banks. The numbers indicate that's not a viable business model.
There’s a catch 22 problem here I think. As least for me, a large part of the reason I’m not willing to commit to any of these banks as a primary account is precisely because they are unprofitable. Most people know what happened to banks when they ran out of money to fund their losses in 2008/9 and how that worked out for their customers (took months for people to get their money back).
It’s not like eg Uber where I take very little financial risk as a customer because I only pay them once the transaction is complete so as a consumer I don’t need to care about whether they’re sustainable as a business.
Add in their treatment of web and telephone as second class citizens at best (I don’t need a branch but I do need the website to be capable of being used as a primary access method and I do need decent telephone support), and I’m not surprised that most people won’t trust them.
Does the UK or EU not have deposit insurance? In the US, as long as the FDIC insures it I wouldn‘t blink an eye. (They cover $250K at a single institution.)
(It‘s also why Robinhood in the US initially got in trouble for its checking & savings account, because as an investment broker it is not subject to the FDIC but the SIPC, which does not have the same exact guarantees.)
It does but (i) I’m not sure how many people actually trust it, (ii) it’s limited to GBP100k per customer per institution I think, assuming they are UK regulated banks, so they may struggle to get big deposits and (iii) the time and administrative hassle of getting your money back may be a problem. The experience during the crisis was that it took months for some people to regain access to their money in some instances, even though it was covered by one scheme or another. That is supposed to have been improved upon since, but it hasn’t been tested with a large scale bank failure and it’s not clear if a mass migration of accounts could even be done seamlessly. Eg see the catastrophe of TSB trying to change their own backend in an operation which had been planned for years. In the mean time, people might miss mortgage and other critical payments for example, and for most people I suspect it just isn’t worth the risk. I certainly wouldn’t risk it with my own money.
44 comments
[ 4.2 ms ] story [ 100 ms ] threadI wonder how plausible it is that some of these mobile only new banks will never be profitable before they are acquired by existing legacy banks.
I guess better cash the paycheck somewhere else before they're the next MoviePass.
Northern Rock went pop ~8 years ago and the public did not lose money - the government did though.
Either way, it can't be a good experience to be stranded with no card, no bank account, and the bit of money you had all frozen indefinitely.
Rather than an insurance fund the law just says if you're a bank and you didn't fail you're now on the hook to pay back the government. This is called "Last Man Standing". One intended benefit over FDIC is that there's an incentive to rat on a competitor taking undue risks, because if they fail you're eating that cost.
Monzo - yes;
Revolut - no
I have seen this story okay out before. Startup basically grows base by losing money. Eventually they need to actually make a profit. Then come out all the dark patterns, selling of customer data, and other scummy behavior. If you are a customer of these banks be extra vigilant.
What I don’t understand however is how the other challenger banks didn’t see this coming. Like how do you decide to build a bank and take millions of VC funding without a reasonable path to profitability? Also I think Monzo could’ve done well had they not taken VC money and spent it all - they do have a good product, they could’ve charged a token amount for it (1£/month?) and at scale it would’ve been decent revenue (they’re at 3 million customers now).
I’m currently locked out of my Revolut account due to a bug on their end.
There is no telephone support and no in app support until after you are logged in. Apparently you have to contact them via Facebook or Twitter for assistance.
They are forever destined to be a toy with this kind of approach to people’s money.
I was able to chat via messages in-app. But each time I did, the support person asked me to upload photos of supporting documentation to prove my own other bank cards were in my possession, that sort of thing. I duly did so, and then there would be acknowledgement followed by silence at the other end for hours. Eventually the person would log off (their status is visible) and the system would show that it was "waiting" for someone to become available to handle my query.
That "waiting for someone to become available" would typically last some 6 hours or so.
Then I'd get someone, and we'd go through another loop, going nowhere, and them going silent on me.
I read somewhere that this can go on for a week or more, which had me really worried because I'd put in about £1000 just before they locked the account, which I needed sooner than that.
I also read that their Twitter and Facebook teams are much more responsive than their Customer Service.
So I reached out on Facebook. Someone replied quickly that they'd asked somone in Customer Service to deal with my query, and... my account was unlocked about 15 minutes later.
So, all credit to Revolut's Facebook team....
The legacy banks all seem to be moving to voice-recognition IVR systems which primarily exist to provide the same service as the website/app, but in a more frustrating manner.
If I had a problem that could be solved on the website, I wouldn't be calling in the first place...
- the margins for retail banking were wiped out a long time ago
- consumers have been used to free banking for decades (at least in the UK)
- near-or-even-below zero interest rates for the last decade (with no signs of this ending)
- the "legacy" competition are some of the most well captialised entities on the planet
is a "legacy" bank going to pay several billion dollars to acquire a nice app with an unprofitable business behind it? I doubt it
In the US retail banking is a cash cow: most of the country does not have enough money in the bank which means customers periodically pay overdraft fees.
> - consumers have been used to free banking for decades (at least in the UK)
In the US most of consumer banks have a service fee, some as high as $15/mo.
> - the "legacy" competition are some of the most well captialised entities on the planet
Legacy competitors are carrying branches in the most expensive real estate markets in the world.
The problem of the upstarts is that they do not want to attack one issue and do what MCI did to AT&T ( pick one - lower overdraft fees/lower service charges/do not waste money on stuff (real estate), instead they want to completely destroy the business model by making banking free, wiping out overdraft fees and still wasting money on real estate ( headquarters/staff in the most overpriced cities etc ) and after that they wonder why they don't make money.
Here, a brilliant idea: take BoA fees, cut them in half, don't put everyone in San Francisco, issue debit cards and hire a pile of people in Ohio to do customer service a-la Discover. You will make money hand over fist and every time BOA matches your fees you make yours $0.05 less - MCI did it to AT&T and it cleaned Death Star's clock as long as it continued to do that non-sexy stuff.
I'm actually thinking in next 5-10 years we will have the likes of Capital One, Discover and Amex clean up on the banking side.
maybe they'll have more luck there
You’re not buying that though. You’re buying the customer base. Getting another couple of million customers isn’t something to sniff at.
With valuations >billion even for millions of users the acquiror is paying hundreds per customer. I'd be surprised if the economics of that stack up.
I’m currently heading a project to set up such an institution so I’m into this stuff up to my neck.
What's the project? Any links?
Unfortunately, I think you need to be licensed under the PSD2 even to send money from your own account - you can do things like attaching receipts to transactions to view in the app, or pulling transaction data in real time, though.
(I deliberately avoid the word "stable" because everything in this space is still in flux.)
Semantically OB is a bit like OAuth. The end user authorises an OB provider to conduct [some] operations on their bank account, and the OB provider exposes their chosen functionality to the user. Due to the unit economics[ß] it will likely be quite some time before OB for retail customers can take flight.
I would have personally expected that the first uses of OB for retail customers would have been personal accounting services, because those could do with read-only authorisations. But the challenger banks exposed this natively in their apps, adding sufficient friction for third-party services to take hold, and in fact made it such an attractive feature that legacy banks have had to race to implement similar functionality.
ß: Businesses do a lot more transactions than individuals, so the overhead per retail customer remains high.
It's more of a read-only way to share your account statement.
But they cost 9 eur a month, they don't have a serious free tier. Still, I use them because I think their offering is worth what I pay for it.
https://www.revk.uk/2019/03/what-are-n26-bank-up-to.html
It’s not like eg Uber where I take very little financial risk as a customer because I only pay them once the transaction is complete so as a consumer I don’t need to care about whether they’re sustainable as a business.
Add in their treatment of web and telephone as second class citizens at best (I don’t need a branch but I do need the website to be capable of being used as a primary access method and I do need decent telephone support), and I’m not surprised that most people won’t trust them.
(It‘s also why Robinhood in the US initially got in trouble for its checking & savings account, because as an investment broker it is not subject to the FDIC but the SIPC, which does not have the same exact guarantees.)