Finding a Business Model for Challenger Banks

Tomáš Vyšný
Mar 2, 2017 · 6 min read
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Source of quote: ‘Very questionable models’: The cofounder of a fintech startup addresses the elephant in the room
http://uk.businessinsider.com/currency-clouds-stephen-lemon-questions-fintech-business-models-2016-6

Challenger banks are a fascinating bunch. As varied as they are — Monzo, Atom, Tandem, Starling and other UK market newcomers — they have one thing in common: obsession with amazing customer experience, customer-centric propositions and fee transparency.

I love these amazing propositions as much as anyone — however, I had a chance to work on a project with one of the UK challenger banks recently which included deep diving on a business model for one of the considered products in the bank’s pipeline.

The project (along with Stephen Lemon’s quote — even though I don’t think he was addressing the challenger banks at all) got me thinking about what comes next after the amazing customer experience and value propositions? Will the challengers be able to sustain these experiences under financing and profitability pressures?

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The Usual Suspects (source: https://letstalkpayments.com)

Consider the following example — Monzo is trying to make itself useful for traveling card holders as it informs on its blog:

“At Mondo [sic], we love to travel and hate to play games with our banks while we are away. You’ll be pleased to hear we don’t charge any fees for using your card abroad, neither at points of sale nor at ATMs. 🎉…We pass the MasterCard exchange rate directly onto you”1

Or another one — Atom Bank has recently (February 2017) announced the best fixed term saving accounts proposition in the market which “annihilates” the rest of the competition as reported by This Is Money:

Put-upon British savers have been thrown a lifeline with the surprise launch of a one-year account paying 2 per cent today…Beating the current top-paying one-year bond by 0.4 percentage points, Atom Bank has sent ripples through the savings market and provided an account which currently beats inflation.2

We see similar amazing customer value deals emerge across challengers. What’s next for the challengers then from a business model perspective?

Case In Point: A Failed ‘Challenger’ Bank in CEE

A graphic example of business model failure: Zuno is (or rather was) an all-digital bank that was launched in Central Europe (Slovakia and Czech Republic) back in 2010 as a project of Raiffeisen Bank International.

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I admit that the comparison to current UK challengers is a bit stretched.

After all, these are different markets and admittedly Zuno was not up to par in level of innovation and customer centric approach as its UK peers are (in the end, Zuno was an outpost of an incumbent bank).

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Some of Zuno’s assets: mobile application, premium credit and debit cards (source: www.zuno.sk)

Before disregarding my comparison, consider the many similarities between Zuno and its UK counterparts:

  • “Less bank, more life” was to be Zuno’s main tagline; reflecting its desired appeal to a young, dynamic and active population
  • Main propositions at launch were “customer transparency, online finance management, free current accounts and favourable saving rates”
  • Purely digital distribution (web & mobile) with no bank branches
  • 266,000 KYC-ed clients in Czech Republic and Slovakia200 employees as of March 2016
  • Approximately 800 million euros in deposits and 80 million in loans

Ultimately, Zuno did not achieve profitability and in total lost approximately 130 million euros over its lifetime. Eventually, Zuno was shut down:, its banking license voluntarily revoked and its customer assets transferred to other banks within the Raiffeisen Group.

What is the main takeaway from Zuno’s failure? It is not rooted in a market maturity issue or misalignment of the value proposition (in fact, the 266,000 accounts in Zuno’s markets would translate to somewhere around 1.1 million accounts in the United Kingdom).

The failure was purely on the business model side and inability to monetize its customer base on the credit side. As Zuno’s CEO at the time pointed out, the only mistake [they made] was that the bank had not started building its credit product portfolio from the get-go, which, in turn, led to their inability to generate revenues in a low interest rate environment.6

Simply put, the business model grounding of the bank’s market operation was amiss.

Challenger Banks Are In Customer/Deposit Acquisition Phase

I would wager all challengers are in a net loss-generating phase of their existence. They make big positioning and product bets to scale their customer and deposit bases which will be monetized in the mid- to long-term timeframe.

On one hand, this is nothing unfamiliar in the startup universum. Snap, for example, has recently reported in its IPO filing losses of $514.6 million in 2016 and “may never achieve or maintain profitability”.

For various reasons I don’t think the challenger banks will be able to afford such liberty with their bottom-line results. The question then remains — how will challengers banks generate enough money to satisfy venture capital expectations, cover their operating costs and create meaningful profit?

Early Monetization Is Materializing

In the short term, the evidence of this can be seen with one of the earliest market entrants to the neo-bank space, Berlin-based N26. The now fully licensed bank has moved on from its previous modus operandi with Wirecard and free of charge service offering.

N26 is now starting to monetise on new users on card issuing, ATM withdrawals and introduction of first paid products such as premium current account with an insurance bundled in.

As we also know N26 has introduced its partnership strategy which will presumably generate incremental revenues for the bank as well. N26 now distributes the likes of Transferwise and vaamo, a German robo-advisor — “N26 is using vaamo’s API to offer clients N26 Invest, a co-branded solution that lets users select from three investment strategies depending on their risk tolerance.”4

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Current N26 Pricing — Early Monetization (source: https://n26.com)

However, I would argue that monetization efforts as seen with N26 are only the very first step in a long way to profitability for the neo-banks.

Let’s take a step back and see what lessons are there to be learned on profitability and revenue streams from traditional players in the banking market.

Taking a Step Back: 6 Lessons on Profitability from Incumbents

Note: Profitability of retail banks is a complex and complicated area of study — full academic studies and white papers by consulting firms are devoted solely to discussing its intricacies. For purposes of this article, I will try to keep it simple and put forward a couple of highlights I personally find important in context of implications for the challenger banks.

1. How Do Retail Banks Actually Make Money? (a.k.a the boring part)

Interested in more? Finish reading the full article here https://www.tomasvysny.com/blog/finding-a-business-model-for-challenger-banks

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