Innopay: Cryptocurrencies potential market disruptor

05 August 2014

Despite the current skepticism that surrounds cryptocurrencies like Bitcoin and Litecoin, the technology and ideas behind virtual currencies have a bright future and even have the potential to disrupt the financial sector and other transaction-driven eco-systems, claims a new white paper from consulting firm Innopay.

Digital currencies have been around for more than two decades now, ever since the launch of Digicash in the early ‘90’s. Since then the alternative currency market has evolved to virtual currencies (e.g. Facebook credits, Amazon coins) and Cryptocurrencies – a virtual currency system based on the principles of cryptography. Since the launch of the first cryptocurrency in 2009 (Bitcoin) the transfer and payment method has been surrounded by mystique and uncertainty – some calling the approach a revolutionary breakthrough in payments, others referring to it as a system doomed to fail.

To understand the implications of cryptocurrencies for the markets that drive on high-volume transactions (e.g. financials, telecom, retail, etc), Innopay decided to conduct a research on its potential. The end result – the white paper ‘Cryptocurrencies: Exploring a revolutionary technology’ – bundles Innopay’s own lessons learned on the topic combined with desk research and key findings from interviews with eleven leading payments and cryptocurrency experts in the field.

Cryptocurrencies - Exploring a revulutionary technology

Blockchain technology
The research report concludes that cryptocurrencies have the potential to become a breakthrough innovation. Currently cryptocurrencies are perceived as an alternative payments method, a currency. Yet its real value lies in the technology behind cryptocurrency, the so-called ‘blockchain technology’, a ledger of transactions that through a cryptographic algorithm keeps cryptocurrencies secure and allows all users to agree on exactly who owns how many units. The approach in essence makes transactions more reliable (as faking a transaction is nearly impossible) and boosts transparency within the entire system (as the entire history of transactions is stored within the blockchain network).

Although the ‘blockchain technology’ was first applied in Bitcoins by its founder Satoshi Nakamoto, the underlying building blocks of the principle can be applied to any situation where assets, information or resources need to securely change hands. This will lead to applications of cryptocurrency technology beyond the financial services domain, such as for loyalty schemes, digital invoices, digital identity processes or authorization of connected devices in the Internet of Things.

Similar to other technological-driven innovations, cryptocurrencies and the underlying blockchain technology is based on an open-source approach to business. The system is therefore transparent and open to continuous innovation, making it comparable to the Internet, which has used the principles of open-source to evolve from an innovation with major bugs to an indispensible part of society.


“By leveraging its unique advantages, cryptocurrency can become an innovation on par with the Internet itself, and can enable a myriad of services that will revolutionize the way we do business online,” says Gijs Burgers, consultant at Innopay.

Tipping point
Despite that massive potential, the success of cryptocurrencies is not guaranteed, warn the Innopay consultants behind the research report. The main challenge lies in reaching the tipping point – the point after which mass adoption starts. If all stays the way it is, cryptocurrencies risk remaining in a deadlock situation. “Regulators are waiting to see how the market develops before issuing regulations, banks are waiting for the regulators to come up with clear guidelines and entrepreneurs are waiting for acceptance by the banks and the regulators,” says Burgers. “ This early market stage calls for pioneers within each stakeholder group, who dare to move forward and show confidence that challenges can be solved as they appear.”

Jacob Boersma - Gijs Burgers - Jacqueline van Huijstee - Maarten Rood

The consulting firm sees three areas that will be instrumental in the success of cryptocurrencies. A clear governance around the system will have to be erected, one which involves cryptocurrency initiators, governing bodies and (financial) players in the eco-system. Secondly, regulation will have to come in place to ensure that confidence in the technology and existing systems rises and to facilitate the learning curve the system will have to go through. Lastly, education is needed, on “both the good and bad sides of cryptocurrencies” says Burgers. Through objective learning, testimonials and case studies the concept of cryptocurrencies and blockchain technology will have to reposition itself from its current ‘mystique and dark’ image to a more positive and sustainable image.


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.