BearingPoint: Banks should partner up with telcos

07 May 2015

As the use of mobile is extending beyond calling and texting, opportunities arise for telcos to offer more and more services, including mobile banking. With this phenomenon on the rise, banks can no longer sit back, but should partner up with telcos to avoid losing customers and market share, research by the BearingPoint Institute shows. Especially in the West, where mobile banking is still relatively new, opportunities arise for banks in combining their strengths with those of telcos.

As more and more people have access to a mobile phone and the world is becoming increasingly interconnected via the World Wide Web, using phones for more than just calling and texting is gaining ground. Especially in rural areas of emerging and developing countries where city centres might be several days’ walking away, the number of people using a mobile phone for shopping or to deal with money issues is increasing. For instance, in 2011 only 24% in Sub-Saharan Africa had a bank account and only 33% in South Asia had a bank account, while more than half (57%) of the former had a mobile contract in 2012.

Banks must partner with telcos

This offers opportunities and a new revenue source for telecommunications companies (telcos) globally, with research by Capco indicating that globally 2.5 billion people do not have a bank account and are lacking access to basic financial services, a group labelled the ‘unbanked’. In its most recent BearingPoint Institute report, consultants from BearingPoint address the issue of mobile banking and the opportunities for banks in partnering with telcos, instead challenging them.

The consulting firm underlines that banks have ‘no choice’ but to cooperate with telcos and over-the-top (OTT) service providers* as they start to push deeper into their territory to avoid losing customers and their market share. “Any model for banks to deliver mobile financial services by themselves is difficult to justify if measured against banking criteria such as transaction value alone,” explains Jean-Michel Huet, Partner at BearingPoint. “Working in partnership with telcos, however, offers banks a route to market, and keeps new players out of core banking activities.”

Mobile telecoms-based banking
Huet continues: “Banks may have greater ability to manage financial flows but telcos have a broader reach when it comes to customer engagement and service delivery.” In combining these strengths, profitable relationships can be formed. In Africa already several partnerships have been formed, such as between Orange Money and Equity Bank in Kenya and BICIS in Senegal, transforming the mobile financial landscape.

Mobile Banking

So far, such partnerships have not had much influence on the financial industry in Europe, where using mobile phones for banking is still relatively new and transactions are still almost exclusively done through the traditional banking services. “With the West yet to adopt mobile financial services in any real capacity, a significant opportunity exists to address this latent market need,” says Huet. To profit from the opportunities partnerships offer, market education on mobile banking, such as simplicity of use, security and the customer experience, is an important issue to address by both sides of the partnerships.

BearingPoint concludes: “Companies on both sides can act as pioneers, defining the standards and working at the front lines of development, ready to spring into action once the opportunity arises as early adopters, or simply to follow where others lead.”

* OTT service providers are those that have no stake in the infrastructure involved in either financial services or telecommunications.


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.