We talk a lot these days about neobanks, challenger banks, bank disrupters, bank disintermediation, banks will fail and such like. I have a contrarian view, for a change, and believe that any start-up that challenges a bank will fail.
As I say, it’s a contrarian view. Why would you start-up Monzo, Starling, Chime, NuBank or any other neo or challenger bank if you’re told you’re going to fail from the start. Well, they were all told this. Then they thought about it and thought: you know what, let’s not compete with the banks. And this is the secret sauce of a successful start-up.
The FinTech start-ups that avoid going head-to-head with banks are far more successful than those who try to replace them.
This is because there is so much that banks do badly in the digital space that fixing the issues of banks behaving badly is far more effective than trying to replace the banks. When you look at Stripe, Square, Adyen, Klarna, eToro and their brethren, they aren’t trying to replace banks. They’re trying to fix what banks do badly.
In fact, the same is pretty much true around Monzo, Starling, Chime, NuBank and their brethren. They aren’t copying what banks do. They’re trying to create new ways of banking.
The core of the message is that FinTechs that serve the underserved and the unserved will be far more successful than addressing the needs of those who are already served.
Think about it. Why would I switch my main bank account if all you’re offering is another main bank account? Instead, serve the areas where I’m underserved. Where I get no data analytics of my financial flows, focus on presenting me with data visualisation tools. When I’m a small business owner with no support from the banks, give me support. Why is it that women are served so badly by financial firms, so open banking services for women. How come billions of people around the world couldn’t get access to banking, so open banking for billions of unbanked people. What a start-up needs to do is focus on those of us who are poorly served.
This is clearly what banks like WeBank, backed by Tencent, does. Serving the blue-collar customer that banks cannot serve has been a key part of their strategy. Profitable almost from day one – try and say that about most challengers – they focused upon a basic bank account for unbanked customers across China and built a business that achieved over 200 million customers in just a few years. Oh, and the cost of serving those customers? USD$0.47c a year.
And this is where the real separation lies. Start-ups that understand economics, serving the underserved and the unserved, knowing that technology can reach the unreachable, will always outstrip any bloated incumbent player.
The average cost to administer an account for most banks is $20 or more; the average cost to acquire a customer for most incumbent banks is more than $1500. Most of the companies focused upon serving the underserved are acquiring customers for $1 and administering their accounts for less than that.
Whether it be focusing on one thing banks do badly – online payments, small business loans, low-cost clearing and settlement, data analytics on lifestyle spending … – or focusing on things banks don’t do at all – banking the unbanked, connecting peers for lending, enabling people to trade socially, creating markets in cryptocurrencies … – the bottom-line is:
Start-ups that do what banks don’t do are the ones that will succeed.
Don’t try and do what banks do. Don’t be a ‘challenger bank’. Be your own bank. Do what banks don’t do or do what banks do badly. That’s the secret sauce of the successful start-ups.