Traditional banks vs neobanks and e-wallets

Read full story in the new issue of Money Of The Future 2016\2017 report

Let us see: What traditional banks have done in fintech sphere in the last year? What allows new mobile players to compete with these giants? Have they succeeded? How expansion of ApplePay and SamsungPay threatens traditional banks and benefits newcomers?

Despite the fact that development of e-wallets industry attracts much attention, more and more questions concerning end-client value and business results arise and it is still too early to be confident that e-wallets industry is going to survive, thrive and compete with banks and payment systems. More so, the direction of main players’ development seems to be more important than their current figures.

If one assesses achievement of real business objections (such as end-user and merchant value, frequency of use, product line diversification, turnover and revenue), only a few companies stand out — historical giant PayPal and Chinese AliPay (and WeChat Pay too). But the latter have their own problem, common for all Chines fintech players — it is hard for them to go abroad and attract users from other countries. Right now they are expanding mostly through Chinese tourists going abroad — as they travel and spend more year by year, local sellers (and banks) open for Chinese payment systems and e-wallets. There is no value for non-Chinese clients so far in using AliPay and WeChat Pay. Thus, there is an opportunity for foreign-born mobile banks (with better local market sense and adaptation to it) to sell themselves out to Chinese giants.

Solutions from Apple (ApplePay), Google (Google Wallet and Android Pay) and Samsung (Samsung Pay) demonstrate crude functionality: they allow users only to add cards and pay. Only geeks and early adopters use these means frequently as they are inclined to either test new solutions or make themselves look fashionable and advanced. Cash-back and discount campaigns boost installs, however, when they are over, the effect subsides. In no country consumer habits are considerably changed because of spread of these solutions.

The only crucial point of competition among these players is geographical coverage (and number of connections from local banks). ApplePay is the most widespread, while Android Pay is available on 9 markets (USA, three countries in Europe — Great Britain, Poland, Ireland, five in Asia-Pacific — Singapore, Australia, Hong Kong, New Zealand and Japan), Samsung Pay and Google Wallet eager to catch up with these players.

Sooner or later the question will rise — what value do these wallets bring for their users — and if they will not have new functions and use cases developed in a manner similar to that of PayPal (after separation from eBay it has diversified its product line and increased speed and quality of new solutions’ introduction), they will only be able to evolve by purchasing mobile banks (which have worse figures, but better solutions), remittance services, mPOS-acquiting start-ups etc… This question will become relevant by the end of 2017 already.

Also, new players appear on the field — smartphone makers Xiaomi and Huawei. Most probably, Oppo, LeEco and other fast-growing makers will join the race in a near future. As client base of every player will dwindle, the issue of differentiation from competitors will soon become the most important one (and this event will mark the beginning of long M&A period for start-ups, which test their products on local markets).

The only country, except for China, where surge in e-wallets’ development and market penetration is observed, is India (while client base is steadily growing, there will not be so much possibilities for monetization, as in China, for another two or three years). There are 10 large players in India. All of them showed formidable growth of client base and investment volume: Paytm (Alipay/Alibaba are among stockholders), with $1B worth of transactions, 177 M users (147M active for the last year, 80M — in December 2016) and 2M merchants, is going to launch its digital bank solution and attract first $60M investment at $4,83B valuation; Mokikwik, with 30M clients and 75K sellers-partners, attracted $90M in investments; Freecharge, with 100K sellers-partners; Ola Money, related to “Indian Uber” Ola, wants to use taxicabs as mobile finance services stations (service also builds a huge Wi-Fi network based on Wi-Fi transmitters installed in cabs). Development of all services depends on seamless and efficient online/offline integration (O2O), which is a characteristic feature of Asian markets. E-commerce growth whips up need for bigger wallet-on-delivery mode payment share (now more than 80% of payments made in form of cash-on-delivery). Taiwanese Mountain Capital (subsidiary of MediaTek) and Japanese holding GMO invest heavile in e-wallet and online acquiring.

All these projects share Chinese companies’ main problem — it is hard for them to expand abroad (foreign agents arrive in India as well as in China, meanwhile, new competitors spring-up). Take Paytm, for example — it has not still integrated its solutions with these of its main stockholder — AliPay — and it doesn’t go abroad. While there are many similar unbanked markets all over the world — Indonesia, Vietnam (local player Momo has attracted 2.5M clients, 1M of which use not only payment solution, but also e-wallet, which enabled Momo to attract $5.7M at first stage, $3M from Goldman Sachs somewhat later and $25M form Standard Chartered Bank), Thailand, Myanmar, Latin American and African countries (African telecom operator Net1 invested $40M in Indian e-wallet Mobikwik).

Traditional and direct banks (like FirstDirect, CapitalOne, MetroBank and SBI bank) are often skeptical about neobanks and challenger banks (like Simple bank) as they claim to be able to copy and introduce “features” and mobile apps of these newcomers without losing functionality of the product. In my opinion, differences are rather drastic in most of the cases — apps and solutions from two parties are as similar as built-for-petrol car fitted with electric engine and Tesla. Firstly, new solutions are built according to mobile-first, not branch-first paradigm, and this approach elevates user experience and product impression to absolutely new level (UX). Secondly, new players are focused on new market clients (not on the whole market, which is always comprised of current/old clients mostly), that influences their brand positioning, language of communication and perception. These clients, as said, were never served by traditional banks — by force of age or geographical position, as developing countries are characterized by low level of banking services penetration). Thirdly, new level of client service and support is characteristic of newcomers — one may ask any question (literally any question in any sort of language) in messenger or via video communication in a manner he asks for advice from a friend — and he will be answered immediately. To consider neobanks as another distribution channel or cost cutting possibility is a fundamental mistake. To be purely online service or traditional company, selling certain product via online channels, are two absolutely different things.

Neobanks and challenger banks raised more than $300M of investments in the last year (at the beginning of it Atom bank in one deal only raised £100M). They complement many other fintech verticals, which creates a lot of opportunities for M&A deals and partnerships with high level of synergy. E-wallets have either a weak functionality (ApplePay, SamsungPay and AndroidPay) and low level of customer retention or bad scalability (AliPaym, Paytm). Direct banks are little outdated technologically now (and they need some shake-up) and have weak geographical coverage. P2P/online-lending platforms show high marginality and growth rates, but their customer acquisition cost grows day by day and they need to obtain information about new clients in advance to lower credit risks, while offering new service for current clients, increasing customer retention. PFM/PFP services don’t attract attention on the same level as neobanks, but they could give the latter better differentiation and better understanding of clients’ long-term plans. As concerns mPOS-acquiring companies (Square, SumUp,iZettle), they own so big an amount of data, not only of merchants, but also of their clients (purchases, card availability, contact details), that doesn’t influence their business and capitalization because they don’t serve clients of their clients in any way (except for raw solution from Square.Cash).

Further, the idea of fintech banks’ arrival is actively circulating now. That is, if earlier, as a rule, fintech company was sold to traditional banks, that embedded it in its product range, corporate processes and old services’ culture, now functionality of fintech companies is strong enough to enable one to construct a fintech bank, consisting only of new services, which would have a client base big enough to compete and earn profit. So, the main question concerning future of fintech bank idea is — what is going to be a core of such bank? It is clear from the technological point of view, that is should be a BaaS platform. However, from client interface point of view neobanks could be a good fit for this role.

And they are actively looking for their place in this process — almost all new players (Tandem, Monzo, Starling, N26) announced that they are going to build a product with open architecture and APIs in order to be able to integrate freely with any external services and allow their clients to interact with these services, using already familiar interface. German mPOS-acquiring service SumUp integrated with such “antibanks” as German Fidor and Finnish Holvi. Youth American Moven — with online lending service for students Commonbond. Neobanks N26 from Germany and Monese from Great Britain — with British online remittance services Transferwise and CurrencyCloud, accordingly.

Another unexpected sensational trend is crowdinvesting (equity crowdfunding). For the last six months two British challenger banks — Tandem and Monzo — raised £1M each from their current and potential clients at Seedrs and Crowdcube platforms, accordingly. These news was positively received by investing community — because to raise £1M from clients is not the same as to raise £1M from professional investors, it means that they were able to plant an idea into their clients’ minds and to inspire them enough clients decided to risk their money to help banks to build it. This case is good example to follow not only for neobanks, but also for other fintech companies.

For the last year two important events occurred, indicative of high level of attention to fintech and growing level of competition in this area. Three deals were closed, Russian Rocketbank, German Fidor and Finnish Holvi were bought by Russian “Otkrytie”, French BPCE and Spanich BBVA, respectively. Several traditional banks launched their digital solutions independently — American Goldman Sachs launched GSbank, Singaporean DBS — Indian digibank and American JP Morgan Chase — its solution for Indonesia (however, it is still early to speak about success or any decisive advantages on the part of these players).

It is interesting to observe a trend of demographically targeted neobank creation, like British Monese for expats in London, Danish Ernit and Singaporean YoloLite — for children and their parents, British Loot and Hong Kong Neat — for students. An idea of online banks, targeting SMB, has a huge potential — besides already mentioned Holvi and Tochka, new players appear in this area (all — in Great Britain, for now): Anna, Tide and Civilized Bank.

There are many innovations in sphere of client communications too: neobanks employ not only call centers with support of messengers and video-calls, but also chat-bots (Russian Tochka and Indian digibank), Siri integration (N26, Monzo) and Alexa integration (CapitalOne).

Looking at dynamics of mobile banking use, one can observe, that most of growth is concentrated in two overlapping segments: youth (18–29 years) and developing markets (notably, unbanked markets). Examining geographic distribution of neobanks, we can observe that most of them located in Europe, with some interesting solutions in USA and Canada, big demand in Brazil and low activity in Asia (which motivates Asian banks and investors look closely at what is created abroad, invest in it and work in collaboration with teams involved on how to bring these solutions to Asian markets). Leadership for the UK: Monese (55K installations of mobile app, £41M worth of transactions), Tandem (raised £22M being valued at £65M), Monzo (35K clients in a waiting list, Starling (raised new round of $70M investments), Atom (bought Grasp development agency and attracts £100M to get into mortgages market), four banks have already got new type of license (Atom, Tandem, Monzo, Starling). There are some interesting solutions from Scandinavia: Danish Lunarway and Ernit, Sweden Tink (raised $10M from SEM Ventures, 300K users, going to enter 10 new European countries), Finnish Holvi, after sale of the company to Spanish BBVA (for a sum of $80M according to gossips), is going to spread to new markets too. German N26 attracted $40M from pool of investors, headed by Hong Kong Horizon Ventures (200K in 8 countries in 1,5 years, just got their own license recently, but are getting to may negative reviews concerning their client support). VaroMoney (raised $27M and is actively engaged in development of PFM functionality) and ZeroFinancial from United States seem attractive. There is a splash of activity in Canada — and among neobanks too (Koho with 7K cleints in a waiting list, EQbank as an alternative to traditional mortgage market players). Asia is represented poorly, by Honk Kong Neat, Singaporean YoloLite, Vietnamese Momo and Timo, Russian Tochka and Rocketbank, new Pakistani startup Finja (e-wallet and microfinance). The most interesting market now Is Brazil, where, after success of NUbank (new $52M round of investments raised with evaluation of $500M after 3 years of existence, 1M people in waiting list — and 300K are now at verification stage), new followers, such as Neon, emerge.

Last year was marked by active “flirting” of traditional banks with fintech. American (Goldman Sachs, Bank of America, JP Morgan, Wells Fargo, BNY Mellon, First National Bank) and European (Unicredit, Barclays, HSBC, BBVA, Deutsche bank, BNP Paribas, Societe Generale, ABN Amro, IdeaBank, ING, Nordea) banks were more proactive in their work with fintech, than Asian (DBS, OCBC, UOB, Mandiri, Maybank, China Bank Savings, Mizuho, Siam Commercial Bank, KBank, BBL, State Bank of India, Airtel bank), Australian (ANZ, KIWI) and African (Africa’s First National bank) banks. West Asian banks are currently just eyeing industry and have not been seen acting.

American banks are past “abruption” and “ignoring” phase — more and more they invest in startups, open APIs and their platforms for third-side developers. European players are still on previous stage of market “probation” and strategy formation — they launch accelerators (“too many innovation labs — too few innovations”) and hackathons and partner with others. Asian banks are more of announcing their grandiose plans, then implementing them — even Australian and African banks seem to be more pragmatic in comparison.

Generally, all large banks are prone to boom initially and bust later: it was an issue with launch of digital bank from Goldman Sachs in the beginning of April, autumn launch of their online-lending platform, R3 banking blockchain consortium (are there any news concerning it besides information on another bank entry into and withdrawal from consortium?) or €200M venture fund from Unicredit, which has not given any updates since launch.

Banks’ area of interest is currently very limited. Most of deals and internal activities focused on investments (online trading, robo-advisory, wealth management, pfm, pfp), online lending and blockchain. In mobile remittance and e-wallet/e-banking area activity is more restrained. Among interesting trends — launch of digital banks by big traditional players — GSbank from Goldman Sachs in USA, digibank (now in India, soon — in Indonesia) from Singaporean DBS, ACCESS OnlineSM (in Indonesia) from JP Morgan (their mobile banking solution has already reached the first place in USA in usage, overtaking platforms of Bank of America and Wells Fargo; they also appointed Alex Sion from Moven a head of mobile business applications). Many segments and niches are not exploited now. Big potential lies in banks’ “openness” to collaboration with startups from any area, ability to engage with them vie open APIs and bank-as-a-service platforms.

Great thanks for Stan Vazhenin and Elena Kondrashkina for their help with this and my other posts.

Read full story in the new issue of Money Of The Future 2016\2017 report