Are challenger banks doing anything different?

After the last two blogs, various comments highlight other questions, with the commonest one being: will any of these new banks make a profit?

The answer to that is yes. Some already are, such as Shawbrook, OakNorth, Aldermore … the ones you hear less about.

Monzo, Revolut, N26 and others are more sexy because they’re digital-first, young and more noisy. Yet, as this chart from 2019 demonstrates:

Pre-tax losses

 

… they still have a long way to go on loans-to-deposits and reliable income streams, not just interchange fees, to get to being a viable long-term entity and investment.*

The thing for me is that we are asking the wrong questions.

I get asked when they will be profitable? What’s their lending profile? Are they expanding into mortgages and insurance? Are they expanding across Europe? Are they going into the US markets? How do they use technology? Who are their tech providers? Do they use Open Banking? and so forth and so on.

These are interesting questions, but the wrong questions.

I only have one question: are they changing the game?

The question is about their products, services, structures and offers. Are they actually any different to what was there before? Sure, they’re digital-first, come with some extra bells and whistles, provide colourful cards and cool apps, but are the underlying financial products different?

Answer: no.

Where’s the fundamental rethinking of finance with technology in the UK challenger banks? Answer: not much there so far. Just more attractive services, apps, fees and marketing.

This is why I get far more excited when I write about the big Chinese firms offering Alipay and Ant Forest, WeChat Pay and WeBank. The products are fundamentally and completely different. For example, WeBank is basic banking services that costs Tencent less than half a dollar a year to operate. Alipay offers superapps that include investment, savings and insurance products fully integrated in a swipe and transferable between accounts seamlessly.

Equally, I love innovators like the US insurance firm Trōv, who have fundamentally rethought insurance to be real-time.

It’s also why, when I look overseas, my interest is piqued by banks like NuBank.

NuBank began by attacking the formal structure of the Brazilian banking system. In fact, the inspiration for the bank launch came from the way in which old banks operated:

“I remember getting locked in those bulletproof doors a couple of times because I had my cell phone in my pocket and had guards looking suspiciously at me with guns,” [David Vélez, founder] says about what is a regular occurrence for those who fail to fully empty their pockets before entering a Brazilian bank.

But now sees banking the unbanked as a major future potential.

While millennials were Nubank’s original target clientele, about 10 per cent of its customers earn less than the minimum wage and another 7 per cent are over 60 years old. This has become a financial revolution in Brazil, a country of 210 million people where the potential for growth is massive but where 45 million adults are still outside the banking system.

There are similar opportunities across Latin America which is why Nubank has expanded into Mexico and is looking further afield at Argentina and related markets.

It is why Nubank celebrates its seventh birthday with over 25 million users – of which ten million were added between October 2019 and June 2020 – with 20 per cent of those customers never before owning a credit card and 80 per cent of signing up via unpaid referrals.

But is it just about financial inclusion, lower costs, lower fees?

No. It's about clever use of technology to avoid the overheads that traditional banks are happy to pay ... and pass the cost or, in this case, savings to the consumer.

New customers apply for a card through their mobiles, with Nubank checking creditworthiness online using its own algorithms. Nubank charges no fees — it estimates this has saved $1.5 billion in fees clients would have otherwise paid to traditional banks.

Now that’s a bank that’s changing the game.

 

* Note: Atom Bank is pushing for a new shareholder injection and, in their latest update, noted that it had taken £1.8 billion in customer deposits and lent £2.4 billion and aims for an IPO in 2022