BearingPoint: Courting start-ups positive for bank sheet

03 June 2015 Consultancy.uk

With technology start-ups swiftly becoming multi-million and billion dollar businesses, banks that start a relationship early with the nascent businesses have the opportunity to foster a long term profitable client relationship, a recent report from BearingPoint finds. Care may need to be taken however, as the start-up landscape does not necessarily work well with ‘standardised’ products, and may require specialised teams that work with the unique needs of start-ups.

Traditional banks are facing considerable profitability challenges from changes within the regulatory landscape, low interest rates and increased competition. Looking for new revenue streams is thereby one way in which banks may be able to differentiate themselves from their competitors.

In a recent report, titled ‘Start-up revolution: a brave new world of bank business’, BearingPoint considers the place that technology, software, e-commerce, data management and digital platforms start-ups may have within the wider business landscape. The historically marginalised ‘start-up’ by traditional banking, may now, with the rapid proliferation and scalability of new entrants, be a segment worth courting early for banks.

Nurturing start-up relations

Being part of success
Successful start-ups can create significant value from relatively simple and low cost ideas that scale massively on digital platforms. One such example is Uber, which grew to a $40 billion dollar business within a relatively short timeframe. While not every start-up is successful (success ranging between 10-20%), the consulting firm notes that if banks are involved in the wider eco system of start-ups, they may be able to identify potentially high-value ideas early and thereby hunt for long term banking partnerships early in the start-ups’ development process.

If banks are on board early, and successfully deliver simple value adding services, they will be in a good position to remain and become a trusted partner for considerably more complex banking solutions as the start-up scales up.

Banks collaborating with start-ups

Banking on start-ups
Besides supporting start-ups as clients, banks may also move toward creating partnerships with start-ups that are themselves aiming to disrupt the traditional banking environment. Supporting such initiatives has different levels according to the consultancy.

First level engagement sees banks develop workshops and other open collaboration ventures that allows for the development of ideas that could progress into valuable start-ups. Level two involvement consists of wider partnership deals, with the banks’ experience coupled with ideas from start-ups. Level three involves a deeper financial relationship, with banks pumping money into the start-ups that meet the strategic innovation agenda. The final level of involvement would be the development of start-up incubators that seek to develop ecosystem changing business models that are in the hands of the banks involved.

Start-ups with considered requirements

Careful services
The consultancy highlights however that banks need to be careful about their relationships with start-ups. The development of start-ups does not necessarily follow the same trajectory as that of small businesses or medium/large corporates. The standardised ‘off the shelf’ banking solutions offered by banks to its customers may not be well suited to businesses that rapidly scale through different product levels while often needing unique or sophisticated solutions throughout the development process.

To accommodate start-ups, a clear recognition of the kinds of needs that they have in the different stages of development needs to be considers. According to BearingPoint, this would involve developing specialised teams that engage with the start-ups during their development and cater to their specific development needs. Care must be taken however, as the start-up community is well networked, that the reputation of banks in delivering promised services is key to their long term involvement with start-ups, as well as other start-ups being willing – on recommendation – to get into bed with a particular banking service.

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

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.