In his second blog on UK challenger banking, Gren Manuel examines the prospects and options for challenger banks outside the top tier.
At a March round table event organised by the London Institute of Banking & Finance and Centre for the Study of Financial Innovation, Tom Blomfield – Cofounder and Chief Executive of Monzo – was gloomy about the prospects for players outside the top tier, in part because of changes to consumer behaviour.
As fintech challengers launched in 2016 and 2017, consumers were prepared to sign up for new services if they excelled in one area, such as cheap foreign spending.
But the top tier of challengers are quickly broadening their offerings, sometimes on their own and sometimes via partnerships.
“After this wave of disaggregation, we’ll get a wave of aggregation,” he reckons. And this is bad news again for second-tier players.
Deborah O’Neill – Partner and UK Head of Digital at consultants Oliver Wyman – said that if second-tier players have proprietary technology they could drop their consumer offering and license their technology to others.
This is a well-worn tactic. Messaging app Slack, now heading for a $17bn IPO, was developed as an internal tool by a video games company whose main product flopped but which realised that it had developed a saleable technology.
“For fintechs that have generated great technology, partnering can get scale much quicker than winning customers one-by-one,” Ms O’Neill says.
They may also find a buyer who would prize the technology, buy the firm outright and shut – or sell for peanuts – their consumer-facing businesses.
Tandem bought a money-management app named Pariti in 2018, in part for its technology. But Mr Knox said that the technology inside many fintechs was often not valuable, as many have done the minimum amount of development to get to market with the expectation that they would build more robust systems later.
“Normally whatever a startup has built is throwaway stuff anyway, unless they have some intellectual property such as algorithms or data,” he cautioned.
Other ways to make money
Another option, however, would be to concede the centre ground, admit that the current account will be dominated by the tier one players, and compete elsewhere.
Atom Bank decided not to compete in current accounts as they are “very expensive to set up and hard to make money out of” according to chairman Bridget Rosewell, speaking at the March LIBF/CSFI round table.
Instead Atom is competing head-to-head with both new players and incumbents with savings, mortgages and business loans.
Other options are to find niche customer group. This is a route taken by Coconut, which targets freelancers and the self-employed by offering services to help them avoid a surprise tax bill.
Another approach is to offer products shunned by traditional players. Aldermore, for example, provides mortgages to retirees – now a growing field.
Neither are easy routes. Coconut took two years to research and build their service, while Aldermore is even less of an overnight success. It was founded in 2009.
Finding a buyer
The other option for second-tier fintechs is to find a buyer who wants them for their customer base – such as a challenger from elsewhere who wants a quick entrance to the UK market.
This makes sense. Indeed both Monzo and Revolut launched using prepaid products before transitioning to their own platforms.
The first, tough, question they are going to be asked by a purchaser, however, is what percentage of their user base are active? The answer may not be high.
Ms O’Neill reckons that many early adopters will have opened trial accounts with many providers and will have little incentive to close the ones they no longer use. As such, a high percentage of the customer base may be inactive or using the service only for special situations such as overseas transfers.
"Some of these fintechs have fabulous ideas but will struggle to monetise them on their own because they won't have the scale or it's too niche,” says Ms O’Neill. Still, she says, new firms and new ideas will keep coming. “I think there will be more new players. Is there space? It depends on what angle they take.”
Centre for Digital Banking and Finance
Gren Manuel has been European editor for Dow Jones Newswires, European executive editor of the Wall Street Journal, and editor of Financial News. He now works as an editorial and media consultant.