Nimble Online Banks Go After Brick-and-Mortar Behemoths

By Russ Banham

Dell Perspectives

Legacy United States brick and mortar banks are in the crosshairs of so-called challenger banks—nimble European startups with unusual names like Starling, Revolut, Monzo, and N26, and equally unusual value propositions. The digital-only banks have attracted millions of customers across Europe, carving inroads into traditional financial institutions’ depositor base.

Each challenger bank has developed a mobile application designed to make banking a speedier, frictionless and more enjoyable customer experience. All are said to be mulling U.S. expansion, with N26 and Revolut filling out the necessary paperwork to obtain both federal and state banking charters later this year.

Venture capitalists have taken notice, investing four times as much money into challenger banks in 2018 as they did in 2017 (and 10 times more than in 2015), according to CB Insights’ Managing Analyst Matthew Wong. Traditional legacy banks also are investors, with the venture capital arms of Citigroup, Goldman Sachs, and J.P. Morgan Chase placing bets on FinTech banking startups Square, Circle Internet, and Prosper, among others.

At the same time, another group of startups called NeoBanks are partnering with legacy institutions to offer similarly novel, digital-only (branchless) bank services, among them Cogni, Chime, Varo Money, and Aspiration. Added up, this whirlwind activity is expected to reshape banking into more of a mobile customer experience. Already, more than 9,000 bank branches have closed since 2010, primarily in big metropolitan areas.

More brick-and-mortar banks await the wrecking ball: Wells Fargo, for instance, plans to close 800 branches by next year. The upshot is clear: People have no time to wait in line at a retail bank branch to make a deposit or a withdrawal. In line has been superseded by online. “At the end of the day, this is all about people—their needs, time, and ease,” said Archie Ravishankar, CEO and co-founder of Cogni (short for “cognitive” banking).

From the Ashes of the Financial Crisis

Traditional banks certainly could have seen the onrush in competition coming. The financial crisis in 2008 and the Great Recession that followed resulted in a massive loss of consumer confidence and trust. But consumer anger and anxiety are not the only reasons for the surge in customers opting for alternative banks. Legacy bank infrastructures and antiquated value propositions are other factors.

Although many banks have sizably increased their IT budgets, their reputation for innovation is poor. “Most of us have a ‘love-hate’ relationship with traditional banking,” said Ravishankar. “We need to manage our money; we just hate doing it. … People’s lifestyles have evolved to where they expect personalized experiences.”

Who are these upstart challengers? Here are a handful that have opened for business outside the U.S. and their respective value propositions:

  • Monzo, a digital-only bank that tallies more than one million customers outside the U.S., offers consumers a no-fee, pre-paid mobile Mastercard debit card to manage their savings and spend. Through a partnership, Monzo provides 1 percent interest on money allocated to what it calls “savings pots.”
  • N26 (its name derives from the 26 cubes in a Rubik’s Cube) is another fully-digital mobile bank offering standard savings and checking accounts through the use of an app and a Mastercard for ATM cash withdrawals, albeit free of charge. It takes less than four minutes to open an account, compared to 30 minutes or more at a retail bank. N26 also counts more than one million customers outside the U.S.
  • Starling Bank, another digital-only mobile bank, offers an app for digital bank accounts and online Mastercard debit card, through which users can deposit cash at more than 11,500 post offices across the United Kingdom. The bank’s app connects with Apple Pay, Google Pay, Fitbit Pay, and other digital wallets.
  • While the above banks have obtained bank charters in the European Union, Revolut opted for a different approach, obtaining an e-money license instead. An e-license is quicker to obtain than a federal charter in the E.U. This digital alternative to cash allows users to make cashless payments with money stored in a digital debit card. Like the other challenger banks, Revolut has no hidden costs, like checking account fees (all the challengers pride their transparency). It also allows users to send money through social networks and a multi-currency Mastercard in a mobile app.

A Rewarding Alternative

The above digital banks are going at it alone in competing against traditional banks. Cogni is among the digital-only mobile bank startups collectively lumped together as NeoBanks. Unlike challenger banks that are independent FinTech companies, NeoBanks partner with a traditional financial institution, obviating the frustrations inherent in acquiring a federal and state banking charter.

This approach makes abundant sense, given the protracted process of applying for and receiving a charter. A dozen years have passed since the Federal Deposit Insurance Corporation (FDIC) last issued a new banking license. A key obstacle has been the Community Reinvestment Act’s requirement for U.S. banks to have branches. In 2018, the Office of the Comptroller of the Currency (OCC) for the first time started accepting applications for national bank charters from non-depository FinTech companies engaged in the business of banking.

Cogni, which is owned in part by FDIC-insured Barclays Plc, has been testing its MyCogni app in the U.S. since September 2018, in advance of a projected launch in June of this year. The NeoBank has a very unique value proposition that includes both rewards programs and a digital debit card providing up to 12 percent cash back on purchases at more than 150,000 retailers. Both concepts are aimed at banks’ paltry 1-2 percent interest rates.

One Cogni rewards program effectively gives depositors money toward achieving dream goals, such as a trip to Venice or to the Coachella music festival. Partnering businesses that would benefit from the depositor’s presence at these events—like hotels, restaurants, and assorted merchandisers—donate cash gifts to the account holders’ “savings buckets” to reach the person’s monetary need, say $5,000 for Venice and $500 for Coachella. “Banks should have an emotional relationship with their customers, driven by their lifestyles and life goals,” Ravishankar said.

He’s far from alone in this view. As Monzo’s website states, banks should be focused on “solving problems, rather than selling financial products.”

No More Sticking the Cash Under the Mattress

Obviously, these innovative bank alternatives put the onus on legacy institutions to shape up. As Deloitte’s 2018 Banking Outlook sees things, “Banks face a number of choices: replicate what FinTechs are doing, respond with equally innovative solutions, become more symbiotic and less competitive, or pursue a mix of these strategies that fit their unique capabilities and market positions.”

Challenger banks will undoubtedly take a share of the traditional bank market in the U.S. But as legacy banks learn from the upstarts, partner with other startups, and parlay their enormous capital bases into their own innovative consumer-focused platforms, the resulting free-for-all in competition should benefit all of us with a few dollars to save and spend.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.