Understanding “the new banks”

Chime, the San Francisco-based bank popular with millennials, now has one million customers and has just closed a $70 million financing round overseen by Menlo Ventures taking the company’s value to $500 million. Other new players to the scene like Revolut have joined the ranks of the unicorns by providing banking services to a globetrotting clientele without investing a penny in advertising. Germany’s N26 now has one million customers, with plans to reach five million by 2020, while Estonian outfit TransferWise, in the black for the last year, has more than two million, employing more than nine hundred people.

What these enfant terribles of the banking scene have in common is that they provide an increasingly complete range of banking services, satisfying the needs of the tech savvy and that as soon as they can, become fully fledged banks. You can choose to classify them as fintech or as “new banks”, particularly considering that some of them are actively pursuing banking licenses in several countries. Meanwhile, the traditional banks are worried, unable as they are to compete with these lean, mean, fit machines. Furthermore: for the banks, the choice of classification is critical: as soon as they consider them fintech, a sort of “different animal”, they will not be able to understand them or compete with them properly.

The key to the success of outfits like Chime is the absence of commissions, long a bugbear of traditional banks’ customers. Instead, the new banks make their money by brokering transactions with credit and debit cards, cross-selling products such as insurance, and a growing number of financial services.

Designed for cellphone operability, which traditional banking has been offering for some time, the new banks are much more flexible and amazingly good in terms of usability — much better than traditional banks — making it possible, for instance, to open accounts o split a check in an instant. Why are these apps much better that the ones created by traditional banks, which have been at it for many years? Quite simply: because these new banks see the smartphone as their one and only channel, the place where they need to be extremely good, not “just another option”.

Contrary to what one might think, saving money on commissions per se isn’t what attracts people to these new banks: millennials don’t have any problem paying for services… as soon as they see something reasonable in return. The new banks don’t look to make their money from their customers, and instead mainly from other sources, thus offering a better value proposition for their customers. When the approach is to provide the best possible service, regardless of the commissions paid, the mentality of the company changes, it treats its clients differently, concentrating on providing a good user experience. Traditional banks alienate their clients by charging them a whole range of commissions and that require considerable effort to avoid; instead, the new banks work to constantly improve their services, while looking to make money from other sources.

Knowing that your bank is constantly trying to improve its level and range of services, whether that means more options for international accounts or a virtual wallet to keep the small change from payments, converting them into the cryptocurrency of your choice, for example, offers a completely different user experience to traditional banking, appealing to a different type of customer open to new experiences and proposals about how to manage transactions or what to do with their savings.

In short, we’re talking about rethinking the relationship between bank and client, with the bank taking on the role of an ally, offering a simple-to-use, effective service with no hidden charges: banks that try to understand their clients’ needs and to provide them with the services they need and value, without gouging commissions, because their business model has a completely different basis.

The starting point to understanding this new approach to banking is that it’s not just about money: the dynamic is that of a tech company rather than a financial institution. The traditional banks are going to have to do more than just copy their new rivals: they will have to completely change their business model, their profit structures and their product pipeline, which so far, very few seem willing to do. Either way, fintech or whatever you want to call it, is here to stay, and once word spreads, the FUD strategy is not going to work: more and more people are going to give it a go.

(En español, aquí)

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