Investment banking, Corporate banking, Commercial banking, Private banking and Retail banking are all very different. Too often, commentators just talk about ‘banking’. It’s not all the same. In fact, an awful lot of retail banking is propped up by investment and commercial banking. That’s where the money is made. Banks don’t make money out of servicing a $30,000 a year hard worker. They make their money out of a million $30,000 a year hard workers’ pensions.
I’m just setting context, as most of us talk about banking as one homogenous thing. It’s not. We also talk about banking as something that technology can tear apart. One reason why this is wrong is that banking is not about you and me and the general consumer. It’s about business and trade and finance. It’s about global corporations doing global business. It’s about governments and inter-governmental economic connections. It is not the simple thing portrayed by most FinTech enthusiasts.
Having said all that and made that caveat, when it comes to you and me and the general great unwashed, banks are missing tricks. They think we are all happy with their service and won’t switch, but some of us are more clued up than that. By way of example, I’ve had an account with one bank for the last decade and never made a transaction. I just left it there, knowing that it costs them something to keep it open. It’s a bank that annoyed me, so I enjoy adding an overhead to their operations that is completely unnecessary. Oh and no, as if I would hold a grudge! (Moi?)
What prompted this discussion is partly due to a debate online about the cost of acquiring a new customer. The average cost for a challenger or neobank is under $50; the average cost for a traditional bank is more than $200.
Traditional banks push traditional products through traditional media using traditional structures (a branch, fill in forms, sign them, wait); a digital bank connects via digital media offering digital services with digital structures (an app, take a selfie, account opened).
This is where we find the great divide in costs and overheads. Equally, some digital banks are growing at a fraction of that onboarding cost, for this reason. If you can onboard a customer digitally with zero interaction, the cost is zero. Most banks have issues onboarding because they have to verify the customer’s identity. They have to check their passport or driving licence, utility bills, inside leg measurement, blood type and DNA.
This results in neobanks and challenger banks being able to perform processes at a tenth of the cost of traditional banks or, if you prefer, ten times better. 10x. There's a company called that, and it is the heart of the adaptation from physical banking to digital banking. Digital banking is 10x more productive at 10x lower cost.
Maybe not as there’s another issue. Because digital banks don’t do such extensive verification, they get into trouble. N26 has fallen foul of Spanish regulators around their onboarding processes, as has Monzo in the UK. It may be cheap to acquire a customer, but to comply with the rules around customers is another matter. It may be easy to reach people these days, connect with them and acquire them as a customer. It’s much harder to prove you did that in the right way, at the right time, within all of the rules and can prove it.
Some new banks proudly spoke at conferences about the fact that their cost of customer acquisition was less than one dollar. Those banks don’t exist anymore. I’ve also been intrigued that, in recent times, some of the neobanks and challenger banks are closing accounts big time with no explanation.
I have the explanation. It’s because they opened those customer accounts without the right onboarding information. They don’t have the compliance documents and identity checks needed to run accounts for those customers.
This is causing some issues, e.g. I have a huge twitter stream asking why this cool, new bank, closed my account with no explanation.
Explanation? They can’t prove that you are you.
Anyway, as I said at the start, retail, corporate banking, commercial banking, private banking and investment banking are very different things. However, the one thing about retail banking is that you do need to check the customer is who they say they are. This is proving to be a big weakness in the new banks. Maybe they should check-in with the old banks to find out why.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...