Deloitte: FinTech to grow in Ireland with GOV support

31 July 2015 Consultancy.uk

FinTech has the potential to create massive gains, for investors and for consumers. To take advantage of this potential, the Irish Government is fostering growth in the sector by supporting FinTech hubs and other initiatives. In a report, Deloitte highlights the potential for Ireland, with 5,000 new jobs to be created in the sector by 2020. The firm notes however, that there are a number of aspects inhibiting full speed growth, citing among others legacy computer systems and the desire to develop talent.

The Irish economy has seen strong growth in recent years, which after the painful consequence of the financial crisis, now has many CEOs praising its bright future. To further improve on its outlook, the Minister of Finance Simon Harris announced a programme, entitled ‘Vision and Targets for International Financial Services (IFS) 2020’, which lays out investment in fostering the IFS industry in coming years. Where one aim of the programme is to create an additional 10,000 financial services jobs in Ireland in the coming five years. 

Working in Financial Services

To reach this target, one element of focus for the Irish Government is the development of financial technology (FinTech) companies by encouraging collaboration between Ireland’s IT and Financial Services (FS) sectors and by supporting the development of FinTech hubs and incubators in Ireland.

FinTech has been doing well in the UK and Ireland in recent years. According to the IFS 2020 report, Ireland and the UK have seen the volume of FinTech deals triple since 2011, with a five-year compound growth rate for FinTech financing twice the global average and twice that of Silicon Valley. Since 2013, the UK and Ireland together accounted for more than half of Europe’s FinTech deals (53%) and more than two-thirds of its total financing.

This activity has in turn boosted the ICT industry in Ireland, which now employs 37,000 people and generates €35 billion in exports annually. Part of this success is due to the past 8-10 years of development in FinTech as around 5,000 are currently employed directly in the sector.

Technology in Financial Services

While business development for FinTech in Ireland is good, there is room for improvement. Professional services firm Deloitte notes that there are a number of things holding back strong growth in the sector. One of the issues is that FS firms often still use legacy platforms and IT architectures, which makes the development and implementation of new generation technology difficult. According to Deloitte, this will change: “Gartner’s Worldwide IT Spending forecast recently suggested that IT spending will increase from $3.5 trillion to $4.5 trillion by 2018. This represents a huge opportunity for FinTech companies in Ireland.”

Besides technological bottlenecks, FS growth also faces difficulty in bringing together disruptors and innovators looking to capture FS market share and the old guard that have reigned in the industry. According to Deloitte, “The key challenge for FinTech in Ireland will be to support both disruptors and optimisers whilst guiding FS institutions to transform their business models and leverage the benefits of both.”

Deloitte - Financial Services

Other factors preventing further rapid growth to the FinTech industry, for which government policy may be effective, are the short supply of highly talented IT specialists and graduates;  poor communication between large and new entrants; imitating best practice, with Ireland emulating the success of the top FinTech global hubs: London, New York and Berlin; stimulating investment in the FinTech industry, while high-tech companies attract 90% of all venture capital in Ireland, only around 3-10% has been invested in FinTech companies over the last 3 years; developing a cyber-security speciality; and marketing itself better – being well positioned in, language, location, time zone, cost and in the Eurozone.

Deloitte concludes that irrespective of the bottlenecks, there will be strong future development of Irish FinTech, with an increase of another 5,000 jobs in the coming five years.

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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.