Digital Banking - The Fintech Endgame?

Is Digital Banking the ultimate FinTech Endgame?

Personally I was working in FinTech in the last 12 months, and of course given I worked in E-Commerce, I was always checking out the latest developments in the Payment and Payment Service Provider field. I can say that we are living in very exciting times.

Within the last couple of months, a few of the more consumer-focussed FinTech players, namely Revolut and Transferwise came out of the woodworks to broaden their product portfolio with current accounts, credit and other banking products. Both offer their own unique play on said features, strongly emphasising the internationalisation features they already offered, and for example offering a great user experience within a successful mobile App. Both are of course, interesting enough, heavily leaning on the Foreign Exchange API & Payment Provider Currency Cloud, which in itself serves as an amazing example how offering an API and Platform strategy can lead to a great success.

In both instances, a similar pattern can be seen. Both started off with a very narrow and specialised value proposition of foreign exchange served up in it’s very own specific incarnation, and it was addressed to a very specific user group. Having lived in London myself, I can vouch that this works very well in a market where you have a cultural melting pot. People need to send or get money from their home countries all the time, therefore both companies found a rich pasture for their services.

Both executed extremely well on this very narrow group, and understood to reap on one hand the rewards of a very enthusiastic user base to broaden their fundraising and fuel the growth, on the other hand to also successfully monetising their very specific use case even to a widely publicised break even point.

In other countries such as Germany, some startups decided to begin with a relatively broad offering from the very beginning, such as in delivering a more “classic” banking experience, packaged up within a well designed and well executed App, such as N26 and Kontist. Both again chose to serve and optimise for a relatively narrow user group, but N26 already decided to branch out into crediting, overdraft, savings and investment products, therefore already getting out of the niche, into having a broader stance early on.

Here it was very clear that the vision from the beginning was to replace the classic banking experience in a modern approach, so the basic services are grouped around the current account, and a clear added value proposition of having a very simple and painless onboarding / KYC and low fees in contrast to existing banks. I believe that especially the KYC process on N26 lead to it’s great success, and it has become the de-facto bank of expats and new Berliners, who for example don’t want to fill out forms, and can’t be bothered to visit a banking branch at a time they are actually open. However, it is also clear that both companies are still soul searching for a way to profitability. Although for example N26’s war chest is filled up with Venture Capital for the foreseeable future, they recently introduced fees, and it is now up to be seen how they can add more values and features in order to justify them, and make the N26 current account the best deal possible for everyone, not just people who newly came to Germany. Furthermore, in Germany, we also have a very modern example of the platform approach, namely solarisBank. I would argue that this is the most exciting thing coming out of Berlin right now. Previously, Wirecard Bank was trying to offer itself as a platform, and was used by for example N26. However Wirecard has probably much more of the classic banking overhead, and less of a slick, lean, new digital API-first company that solarisBank represents itself. That’s at least my observation from the outside.

Other competition is encroaching onto the established banking wagon fort from other more B2B side of things. The Swedish payment method technology Klarna and Dutch Payment Service Provider Adyen both acquired pan-european banking licenses. One has to differentiate here though - Klarna is trying to establish itself as a payment brand, not too dissimilar to PayPal, and is of course facing huge challenges to do this beyond it’s home market in the Nordics. Their main product is technically a deferred payment method, it was in fact already dishing out very short term loans, and they have been very good at doing this, as the user interaction is superb, and also the vendor integration has been optimised to be as simple as possible. They have been entering other markets like Germany though mergers and acquisitions - however in my humble opinion, the acquired technology of SOFORT is inferior to the core product of Klarna, and it is left to be seen how this is progressing. On the other hand, Klarna has been acquiring Wonga, a company of questionable repute. However there is no doubt, that Klarna is planning to expand it’s credit / loan game on the back of those acquisitions and the newly acquired banking license. I would expect a new heavily data powered deferred payment and instant loan product to be rolled out throughout Europe, maybe with more flexible payment conditions, which will be popping up on e-commerce websites integrated with Klarna. Given that Klarna can monetise on the basis of these loans, I would expect that this could turn into a very compelling offer for merchants offering higher value merchandise, compared to classic payment methods like credit card, or even PayPal, where in both instances the merchant has to cover a fee that varies but is eating away the margins. Maybe home and furniture, travel, electrical appliances and others. Also, hot of the press - it looks like Klarna is also broadening it’s portfolio by offering a P2P Payment Service / Digital Wallet called Wavy - so they also go into the other direction by offering consumer services. This seems like a challenging split, but maybe they are just big enough to be able to manage it.

Adyen is more of a B2B company, and they are exemplary in the Payment Service Provide business, not too dissimilar with Stripe. Adyen’s advantage is it’s spread out in many merging markets, which are of course the fastest growing markets for e-commerce. If they manage to offer those digital B2B banking services in all their different markets - which is of course incredibly hard by itself, they will for sure succeed.

For me it is obvious that a FinTech company needs to position itself as a digital bank, plan acquired by another player to broaden their portfolio, or be forgotten. No matter a PSP, a currency exchange service or a digital wallet. Maybe you can offer a superior technology, or have a specifically strong standing in a certain market - like a PSP might have with locally specific banking integrations, that could be interesting for an Adyen, a Stripe or a PayPal. Given that the competition is heating up, and the technical repeatability is actually increasing, due to the arrival of platforms, the value proposition and strategy must be very clear to realise a long term success.