Accenture: Fintech investment triples to 12.2 billion

14 April 2015

Global fintech investment has seen a big growth last year and tripled from its $4.05 billion level in 2013 to $12.2 billion in 2014, research by Accenture shows. This growth in fintech investment can pose both threats and opportunities to banks, who, according to the consulting firm, should adapt quick and develop a business culture to avoid being left behind and lose out on customers.

Accenture recently released a new report on financial-technology (fintech) investment titled ‘The Future of Fintech and Banking: Digitally disrupted or reimagined?’. For the report, the consulting firm used the fintech investment-data from CB Insights, a global venture-finance data and analytics firm, and conducted a survey of 25 innovation-focused senior banking executives from across the banks that participate in the FinTech Innovation Lab* London and Dublin.

Global Fintech Financing Activity

The research shows a strong growth in fintech investments, with globally the amount of investment in fintech ventures tripling from $4.05 billion in 2013 to $12.2 billion in 2014, of which the majority was made in the US. The highest growth, however, was experienced in Europe, which saw in an increase of 215% to $1.48 billion in 2014.

Global FinTech Financing Activity - Per continent

The UK and Ireland (UKI) dominate Europe’s fintech investment and accounted for more than two-fifths (42%) of the European total in 2014. The region experienced an increase from $264 million in 2013 to $623 million in 2014. Other regions in Europe experiencing high investment levels are the Nordic countries ($345 million), the Netherlands ($306 million) and Germany ($82 million).

Top 5 European Regions for Fintech Investment Activity 2014

According to Julian Skan, Accenture Managing Director overseeing the FinTech Innovation Lab London, the increase in fintech investment presents both threats and opportunities for bank. “Fintech is empowering new competitors and start-ups to move into parts of the banking business but, paradoxically, it is also helping banks to create better, more convenient products and services for their clients. It is also leading to increased cooperation between traditional banks and innovative start-ups and technology businesses in a way that can result in totally new business models and revenue streams,” Skan explains.

Digital revolution
Accenture’s report shows that not all banks are equipped for this digital revolution, with 72% of the respondents feeling their banks have a fragmented or opportunistic approach to dealing with digital innovation. Only 28% say their bank has a comprehensive strategy. Almost half (40%) think the time it takes their bank to deploy new technology is too slow, either “negatively impacting their ability to realise value or providing no net benefit at all.”

Strategy in place for digital and innovation

The biggest challenges for banks associated with the digital revolution, are talent/skills and culture, with 80% of respondents saying their banks are only “somewhat” or “minimally” equipped for the digital age when it comes to skills and culture. Technology challenges make up the third biggest challenge, with 52% of respondents feeling their bank is minimally or somewhat equipped.

Equipped to deal with challenges

Despite the challenges, banks are feeling optimistic about the future and three-fifths believe banks and new competitors will coexist by providing differentiated offerings. Seven out of ten respondents (72%) expect their bank to increase its fintech investment in the coming two years, 56% thinks their bank will explore open innovation, and 32% says their bank will create a corporate venture arm within the next two years.

“Banks are starting to realise the full potential of digital technologies and their potential to disrupt and transform the banking industry. The leaders recognise that digital goes far beyond channel and process innovation - it dissolves industry boundaries and provides opportunities for new business models and competitors, and banks have no choice other than to innovate to remain relevant to their customers,” comments Richard Lumb, Group Chief Executive Financial Services at Accenture, on the results. “But banks need to innovate faster, become more nimble and develop a more entrepreneurial culture if they are going to compete effectively and meet customers' needs.”

* The FinTech Innovation Lab is a collaboration between Accenture and leading financial institutions, set up to nurture early-stage companies from the UK, Europe and elsewhere that are developing new technologies for the financial services sector.


The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.