Digital nativesvs.
digitally transformed incumbents
fighting (?) in the battlefield of open banking
Sotiris Syrmakezis30 January 2019
Digital-only and
Challenger Banks
Sotiris Syrmakezis
Case Study: The UK Challenger Bank Precedent• Low customer satisfaction
• Worsening client relationships with SMEs
• Lack of investment in technology
• High regulatory requirements limit banks’ operations
UK Bank Consolidation Over 60 Years
Sources: PwC, Deloitte, Greek press.
Note: (1) Stands for Cheltenham and Gloucester.
12
BarclaysMartins
Woolwich
LloydsC&G(1)
TSB
Bank of Scotland
Halifax
Leeds Permanent
RBSNational Provincial
Isle of Man
District
Westminster
Lombard
National Commercial
National
MidlandAbbey National
Provincial
Burnley
Alliance
Leicester
Bradford
Bingley
Southern CoopNorthants
Leicestershire
Portman
Derbyshire
Cheshire
Dunfermline
Barclays
Lloyds
RBS
HSBC
Santander
Nationwide
1957 1964 1971 1978 1985 1992 1999 2006 2013
Based on “Who are you calling a ‘challenger’?”, PWC, 2017
Sotiris Syrmakezis
2017201620152014201320122010 2011 2018
New banks enter the market: the Challenger Banks
Sotiris Syrmakezis
What are challenger banks?
• Digital distribution channels, typically mobile, instead of physical locations
• Competitive retail banking services such as current accounts, savings accounts, loans, insurance, and credit cards
• Underserved and unserved demographics
• Improved user experience
• Launch new products via API integrations with other Fintechs
• Expand into new markets
Fintech companies leveraging technology and software
to digitize and streamline retail banking
Sotiris Syrmakezis“Financial Services Analysis”, CapGemini, 2016
A perfect storm enables the emergence of challengers
5 Raisons d’ être
Sotiris Syrmakezis
Challenger banks: Raison d’être
A shift in demographics: the Millennials
• US: 92M compared to 77M of baby boomers (UK: 13.8M)
• Digital natives, socially hyperconnected
• Increasingly concerned about financial stability
• More comfortable with on-demand services like AirBnBand Uber and simplified experiences like Google
• Economic drivers like low interest rates
• Desire for a simplified, intuitive, on-demand and mostly free customer service
1
“Challenger Banks”, Burnmark, Oct 2016
Sotiris Syrmakezis
Challenger banks: Raison d’être
Smartphone penetration Singapore – 92%South Korea – 82%UK – 75%USA – 70%Germany – 65%
Hong Kong – 63%China – 58%Israel – 57%.
3%
28%
56%
13%
Telephone Internet Mobile Branch
Mobile Banking penetration
2
“Challenger Banks”, Burnmark, Oct 2016
Sotiris Syrmakezis
Challenger banks: Raison d’être
Customer confidence in banking
Western Europe and USUK 33%France 33%Germany 40%Italy 24%USA 37%
Asian countriesThailand 89%Malaysia 86%Philippines 77%China 72%India 70%
Other European countriesMalta 72%Luxembourg 66%Estonia 55%Czech Republic 50%
3
“Challenger Banks”, Burnmark, Oct 2016
Sotiris Syrmakezis
Challenger banks: Raison d’être
Geographical region
Emerging markets
Accelerate banking innovation
Financial inclusion and wellness through digital and mobile to onboard, engage and serve customers
Developed markets
Underlying inefficiencies of incumbents in serving the customer in the best possible and transparent manner
Trust and confidence seriously eroded post the financial crisis
Space for competitors to enter or to gain market share by offering a superior service, or by simply being available to customers
4
“Challenger Banks”, Burnmark, Oct 2016
Sotiris Syrmakezis
A big opportunity to plug into traditional banksand build new services for consumers
New regulations help challengers expand services
5
Challenger banks: Raison d’être
“Challenger Banks”, Burnmark, Oct 2016
A glimpse into digital banks
Sotiris Syrmakezis
• Founded 2015
• The “quickest crowdfunding campaign in history”: raised £1 million in 96 seconds via the Crowdcube investment platform
• Raised £85m @ valuation of over £1bn
• Loss £33.1m for the year ending Feb 2018
• Loss £7.9m in the previous 12 months
• Just £1.8m in operating income.
• Recently passing the 1 million user mark
• Less than £150 per account
• Recruiting 20,000 new customers a week
Monzo raises £85m to become UK's latest tech 'unicorn’ 31 Oct 2018
Company announcements in the press
Sotiris Syrmakezis
• Founded 2013
• Raised $300M in a major funding round
• Customer base 2.3M, tripling it in the last 12 months
• Deposits €1B
• Planning to launch in the US in H1 2019
• N26's total raised: $500M
• Investments from Facebook board member Peter Thiel's Valar Ventures, insurer Allianz and Chinese technology giant Tencent.
N26 becomes Europe’s leading digital bank with $2.7bn valuation 10 Jan 2019
Company announcements in the press
Sotiris Syrmakezis
• Raised $250m @ valuation $1.7B
• February 2018: break even
• Has received $336M in funding
• Latest round: April 2018, $250M
• 1.25M customers in UK, 30% over 40
• Actively planning a U.S. launch in the near future
• Waiting list: 60,000 U.S. customers
Banking app Revolut becomes UK's latest unicorn 26 Apr 2018
Company announcements in the press
Sotiris Syrmakezis
• Founded 2014
• Loss £11M in its first year of operations
• End 2017:
43,000 account holdersAverage account balance £420
• Aug 2018:
210,000 usersAverage account balance £900 by Aug 2018
• $190M in funding to date
Starling looks for further funding as users grow fivefold 27/8/2018
Company announcements in the press
Sotiris Syrmakezis“The state of the financial services industry 2017”, Oliver Wyman, 2017
COMBINED VALUATION OF TOP GLOBAL FIRMS IN EACH CATEGORY
Digital disruptors grow much faster than incumbents
Sotiris Syrmakezis
• Culture
• In-house vs. outsourced
• Modern core banking systems
• Methodologies: design thinking, service design, journeys and agile
Operations & technology as an advantage
• Emphasis on digital offering, mobile-1st
• Cloud-based operation
• Advanced APIs
• Open banking expertise
• Marketplaces & partnerships
Sotiris Syrmakezis
Partnerships: disrupting the notion of competition itself
28 more banks
1 international money exchange app)2 energy comparison platform3 home insurance
1
2
3
Fintechs cooperate to create larger challenges
Sotiris Syrmakezis
Digital customer onboarding
Sotiris Syrmakezis
Personal Finance Management
Sotiris Syrmakezis
Card lock/unlock & notifications
Sotiris Syrmakezis
Control, savings, P2P payments, …
Agility and new technology as a weapon against incumbents
Sotiris Syrmakezis
More money spent pursuing a bank charter
18,58 18,87
2,881,57
8,3
2016 Operating Cash from the Statement of Cash Flows ($M)
Atom & Tandem spent 2x more cash than Revolut
“The Challenger Bank Playbook: How 6 Digital Banking Startups Are Taking On Retail Banking”, CBInsights, Mar 2018
Sotiris Syrmakezis
Products more important than bank charter
17.000 20.000 15.000
500.000 500.000
1.500.000Customers Acquired Since Respective Launch Date
Revolut added more customers without a charter
“The Challenger Bank Playbook: How 6 Digital Banking Startups Are Taking On Retail Banking”, CBInsights, Mar 2018
Are challenger bankschallenging enough?
Sotiris Syrmakezis
“App-only newcomers Starling Bank and Monzo took the top spots in Smart Money
People's 'Best British Bank' awards, bringing an end to First Direct's three-year reign and leaving traditional incumbents trailing in their wake.”
“OakNorth becomes first UK digital bank to report annual profit”
“Challenger banks have issued 32% of the UK’s business mortgages and charges in the first half of 2016.”
“In 2015, Aldermore reported an impressive growth in
Asset Finance (+29%); SME Commercial Mortgages (+50%); Buy-to-Let (+18%); Residential Mortgages (+42%).”
“OneSavings Bank leads the field,
reporting a CTI ratio of 26% in 2015 with the bank’s efficient and scalable low cost offshore back office.”
Good news in the News
Company announcements in the news
Sotiris Syrmakezis
Margins are very thin• Fees keep getting reduced: are people willing to pay for basic banking?
• How long will it take for a new bank to• Gather substantial deposits? Average account balance around €500• Build a profitable portfolio of loans?
• How easy is to build brand recognition and momentum behind growth?
• Isn’t making any significant revenues from acquired customers a lot harder?
• How and when will they start breaking even and making money?“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019
Sotiris Syrmakezis
Banking is boring
People stay with their bank for 17 years but stay married for 11 (UK stats)
Why would you switch banks? Just because of easy onboarding?
Even if your new banking app gives you some nice features, can you really be terribly excited with it?
How long can you keep being excited?
Every new player receives much less attention than the previous ones
Account switching is very important
“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019
Sotiris Syrmakezis
The firepower of traditional banks
Huge marketing departments
Plenty of cash to spend
If customers start defecting to the newer banks in any significant numbers, they will hit back hard
Advertising budgets will be stepped up and money will be thrown at keeping customers on board
What about a monthly bonus for remaining loyal?
“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019
Sotiris Syrmakezis
GAFA: potential formidable competitors
Established internet giants targeting finance as next big area for expansion
Amazon planning basic current account in US
Google, Apple, Facebook, Alibaba investing in financial applications
Google & Alipay recently licensed in Luxembourg
Data, brands and expertise to make a success of
“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019
Sotiris Syrmakezis
Main drivers for investors
New business model: old banking is dead
Worldwide expansion
Traction: new customer onboarding
Engagement: usage of new features
+
–Exit: next fund raising round, IPO, M&A
Revenues and profitability in first years
Deposits & Loans in first years
Sotiris Syrmakezis
The online banking bubble is ready to burst 20 Jan 2019
One or two powerful brands in most technology sectors
One bigger winner will make a ton of money from app-based financeOne of the start-ups?One of the traditional banks?One of the existing internet giants?
A lot of the investment pouring into the finance start-ups right now will inevitably be lost.
A bubble about to burst?
“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019
Are incumbentsjust standing and watching?
Sotiris Syrmakezis
Digital disruptors vs. Incumbents
Disruption is always dangerous, but digital disruptions are happening faster than ever.
“Why digital strategies fail”, McKinsey & Co., Jan 2018
Sotiris Syrmakezis
Growth rates will plummet. To survive, companies must be first movers.
Incumbents have to move fast
“Why digital strategies fail”, McKinsey & Co., Jan 2018
Sotiris Syrmakezis
Trust
Brand recognition
Large customer base
Wealth of data
Sizeable branch networks
Digitized incumbent banks are dangerous
Self-cannibalizing
Disrupting status quo
Control lion’s share
Multiple reaches of value chain (digital natives: one segment)
Growing importance of digital in B2B
“Why digital strategies fail”, McKinsey & Co., Jan 2018
Sotiris Syrmakezis
• They get 20% share of digitizing markets. Digital natives command a 5%
• They create as much risk to the revenues of traditional players as digital attackers do
• Their moves push an industry to the tipping point
• Slow movers get exposed to life-threatening competition
Bold, fast moving incumbents are even more dangerous
“Why digital strategies fail”, McKinsey & Co., Jan 2018
Incumbents vs. digital nativesa marketing-based comparison
Sotiris Syrmakezis
* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018
Brand awareness
Sotiris Syrmakezis
Brand usage
* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018
Sotiris Syrmakezis
Ad awareness
* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018
Sotiris Syrmakezis
Purchase IntentBrand consideration
* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018
Sotiris Syrmakezis
PerceptionsBrand perception
* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018
Sotiris Syrmakezis
Though in the UK these digital-only banking apps have taken off like wildfire, their
popularity may be on the wane. One survey found a marked decline in
appetite for mobile-only banking among UK consumers, falling from 78 percent to
54 percent from the beginning of 2017 until the end of that year. However, the same RFI
report found that globally, the proportion of people using digital banking
rose from 58 to 68 percent through 2017. RFI Group said consumers
appear to prefer digital offerings from existing banks
to making the bigger leap to mobile-only startups.
“View From the UK: Fintech Startups Are Eating Banks’ Lunch”, Martijn Moerbeek, Banking Exchange, Jan 2019
Are people buying it?
“
”
my take
Thank you!
[email protected] @sotiris11
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