The beauty of Fidor Bank
Why the call to get a full banking licence has made Fidor the most compelling challenger bank
Fidor Bank is unique in the world of banking. It is a real bank in start-up mode since opening its virtual doors in January 201o. It currently operates with customers in Germany, while taking small steps in Russia.
On the day the Competition and Markets Authority in the UK has confirmed that it is launching a competition inquiry into personal and business banking, and with Fidor being able to swiftly enter the UK later this year using its European banking licence, I thought it is a good time to look into what makes Fidor beautiful.
My interest in Fidor
I’m pretty sure that I first heard of Fidor Bank at a conference in Johannesburg in 2012 — but, I could be wrong as there were quite a few new names mentioned by Singularity University on that late July day to a room of 100 bankers glued to their blackberries.
We were gathered in the name of ‘Unleashing Innovation’ and while nothing of mention came from that hastily-arranged conference theme, Fidor is now the stand-out modern bank, in my opinion and that of plenty of others.
I am a novice (is there a stronger word?) when it comes to tech and APIs yet, through attending enough events this year, including Finextra Future Money where Udayan Goyal (of Anthemis Group*) spoke so emphatically about Fidor, I have come to learn a bit about how it works**.
How Fidor Bank works
In layman’s terms Fidor does not do the plumbing - it has three other banks providing the pipes. If one pipe gets blocked, it still has two good ones left to use. Fidor then has a platform (its own bank), using these three APIs, for its products to be offered and from which third-party developers can help design (code) its customer applications. This is all enabled (or ‘powered’ as the current term seems to be) by another start-up, The Currency Cloud in London.
In this sense, Fidor does not own its platform as banks have traditionally done (and many still think they need to). Instead Fidor has chosen to ‘go to the crowd’ as the modern trend has emphatically become in most consumer industries. As an aside, a couple of major UK banks are said to be employing the US start-up Standard Treasury to accelerate opening up their APIs. They clearly get it.
Fidor has leap-frogged most other so-called ‘challenger’ banks because it is a purely digital entity, whereas other banks are either old-style analogue companies or analogue businesses trying to implement digital processes. Metro Bank would be one in this latter category and it is no surprise its founder Anthony Thompson is moving on to start Atom Bank next year. He gets it too.
The other digital element Fidor is trialling from the outset is the Ripple technology. With the movement of funds between one bank and another being, in essence, no more than a series of accounting entries, Fidor’s internal transfers from its German to its Russian operations are real time, at no cost to itself. Imagine if other banks got it?
The importance of being earnest (being a ‘bank’)
It has been around seven years for Fidor to get to this point and the long lead-in illustrates why Fidor is so far ahead in its design. Fidor began its development just as the credit crunch came to Germany and the financial crisis confirmed the need to build a very different bank using the principles of web 2.0. A banking licence was obtained in May 2009.
Its founders had agonised over whether or not Fidor should be established under a banking licence or the less burdensome e-money permission, which a swathe of FinTech start-ups and Facebook have opted for since. That decision would affect how the company was structured due to the different regulatory requirements and operational complications.
Matthias Kroener, Fidor’s principal founder and now Executive Chairman, recently told Brett King’s Breaking Banks radio show that the decision to obtain a banking licence (0r “own the full stack” as Brett put it) was eventually taken because Fidor realised that banking products were systemically broken. Bankers still don’t seem to get it.
As Matthias pointed out: “If you want to hijack a plane you need to sit in it”. The point here is very important and it’s not about planes: it was (and remains) not simply a matter of creating an attractive look and feel user experience (a digital process) on top of a mediocre banking product (a analogue business). Fidor realised that the DNA of the product itself needed to be re-invented. It was definitely not about setting up a Facebook page.
Without a banking licence it would not be possible to provide credit, choose pricing or change the fundamental product. Or put another way, Fidor would not be able to serve its community of customers properly.
What ‘community’ can mean for an ambitious bank
While Matthias and his founders were trying to work out ‘the how’, they began posting on German social media about their project. Soon people from their former lives as bankers got in touch and said ‘let’s rock it again’ and they were under way with a group of talented people.
They also realised that the ‘handcuffs of capital adequacy’ meant that Fidor needed to be creative in how it got its message across. So all Fidor’s executives got involved in social media with the idea of giving its future customers a means of exchange on financial matters. As Matthias asked Brett: “when was the last time you saw the head of the bank in a branch?”
This resulted in an online marketplace of sorts where ratings and opinions could be shared between potential customers and product ideas could be bounced around with management. Most significantly though, Fidor built up customer profiles before it had begun full development of its technology.
As a by-product of this approach, Fidor has made such strong connections with its community that 10% of its current 100 staff have been attracted from that engagement. When one considers that Munich (Fidor’s home city) has virtually no unemployment and that it is a place of high salaries, this is an astonishing achievement.
Why this ‘investment’ makes so much sense
In my experience banks are typically run by accountants and other folks that love to see spreadsheets and pages of reports with numbers. Well here’s a number that should get their attention: Fidor’s cost of acquisition is below 20% of the industry average! They will get that.
So, how is this possible? Well imagine if a banker was to tell Apple how to design products. And now imagine having to identify yourself each and every time you download a product (app) and having to get a new password because the seller was a different division of the same company with different rules. Bankers get that, even if no one else does.
I labour the point I know but it gives you an idea of poor industry KYC practices that banks willingly accept. Why? Because no one cares enough to do anything about it. Fidor did though.
Instead of lumbering its ‘prospects’ (to use a marketing expression, not that of Matthias) with a mountain of questions, Fidor has a simple, three-stage process of ‘onboarding’ depending on two essential variables: customer behaviour and product complexity. Why don’t banks get it? Regulators should definitely get it.
The entry point is to join the Fidor community, for example by supplying one’s credentials from Facebook. Here the prospect becomes a ‘user’ and it’s a super convenient, KYC-less process with the benefits of being straight into the Fidor community but with no obligation to buy anything.
Step Two is obtaining a pre-funded online ‘wallet’ that can be used to move money within a closed loop as the user graduates to being a ‘customer’ after passing reduced KYC. This allows him or her to test out Fidor, again without any further commitment and while still being part of the community.
The Third and last step is to open a more traditional account after passing full KYC. Now the customer can also trade commodities, FX, and digital currencies.
So, the Fidor Smart Cash Account behaves according to the way the customer registers, not according to a bank-imposed process (and remember Fidor holds a full banking licence!) The use of ‘smart’ is a play on the simplicity of the iPhone, something everyone gets — even bankers.
Speaking of simplicity, on the point of debate on the price BBVA paid for Simple, Matthias argues BBVA was acquiring a culture that was worthy of a number on BBVA’s balance sheet. It makes one wonder when a bid might come in for Fidor Bank, as it ‘gets it’ the best of all.
*Anthemis is an investor in Fidor Bank, Moven Bank, The Currency Cloud and was also an early investor in Simple.
**I am happy to be corrected on any incorrect factual points and all tech matters!
Much of the content is this post was taken from Matthias Kroener’s interview with Brett King mentioned above, recorded on 3 July 2014. It is a great listen if you have a spare hour.