The most interesting digital-only banks don't get enough attention
Digital-only banks have been all the rage for some time now. Who hasn't heard of Monzo and Starling or, if your gaze is stateside, Chime?
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These brands are the most widely known because:
- They've been around for a while, and
- They've successfully acquired millions of customers.
They are subject to serious media scrutiny - national as well as industry-specific - with their every success and misstep examined in great detail.
Often, stories about these digital challengers focus on the financial state of their businesses. Mainly, are they profitable? This question arises so frequently partly because of the sheer volume of funding they have received, and the market wants to know if the banks are worth it.
For context:
- Monzo has raised around £400 million and was last valued at £1.2 billion with nearly 5 million customer accounts.
- Starling has raised around £300 million with about 1.5 million accounts.
- Chime, as one might expect from a US brand, leaves its UK peers in the dust with £1.5 billion raised, a valuation of around £10.6 billion and 10 million accounts.
The answer to this question depends on the measure you use. Some banks have been profitable for short periods but not reliably; some have never reached profitability and others are only profitable if you use a very specific measure.
But there’s a more interesting narrative 🔍
Focusing on the finances of UK and US digital-only banks misses the point. These brands' founders had ambitions of changing the fundamentals of banking.
Being a sustainable business is necessary in order to do that, but sustainable doesn't necessarily mean profitable.
With that in mind, I think we should be focusing on the achievements of these brands and examining whether they will prove industry-changing or be just another bank.
1. They are digital-only. Eliminating the option for a customer to have a voice conversation with their provider was risky, but it doesn't seem to have put off the millions of customers using these brands.
That said, the pandemic has made this point of difference negligible to many people, as high street banks' branches remain closed or with restricted access. This raises the question: will banking become predominantly digital for good?
2. They are more agile. The speed at which new players can adapt their propositions is industry-changing. They can react faster — take how quickly Chime and US peer Current managed to get stimulus payments into customers' hands in December. They distributed money faster than the country's largest institutions and reaped the rewards in the form of evangelising happy customers.
Incumbents are catching up here, but legacy systems are still an issue — will we ever have a financial industry that can keep up with the pace of modern life?
3. They are meeting previously unmet needs. On the one hand, digital banks have simplified many elements of banking, from onboarding to customer support. They have made it easier to track spending or get a loan — but this is improving upon existing processes, rather than fundamentally changing the way things are done.
As of today, it would be hard to argue that the biggest digital-only brands in Europe and the US are solving fundamental issues with their banking systems. This is the strand of the narrative that’s most interesting, because it is possible to use technology to do this, to change what "financial services" actually are, and there are examples out there.
Don't forget about Nubank 🇧🇷
The Brazilian bank has reached similar lofty heights as Chime when you look at its vital financial statistics. It has raised £900 million at a valuation of £18 billion to date, most recently closing a $400 million round in January 2021. But the stand out data point for this brand has to be its 34 million customers.
These two data points combined are the flashing signal that we should be looking more closely at Nubank.
Its success acquiring customers is due to its ability to use technology and new processes to solve problems in a country where banking was more fundamentally broken than those in the US and Europe can imagine.
When Nubank was founded in 2013, banking fees were so high many people couldn't afford a bank account, not to mention that opening and managing an account was done in branches — and branches were only present in around 80% of municipalities. 99% of the UK and 94% of the US populations had bank accounts in 2017, but the figure was just 68% in Brazil.
This meant Nubank's digital-only, fee-free offering had much more impact than comparable products and services offered in Europe and the US. It started by offering credit cards with interest rates that, even at their highest, were still lower than the lowest end of the average range calculated by Brazil's national bank. Consequently, customer acquisition began to ramp up.
Today it offers interest bearing accounts, a debit card product and a credit card that enables customers to increase their credit if they pay on time. Superficially, not that different to a European or US peer, but the uniqueness of Nubank's services in the Brazilian market dramatically boosts their impact and importance. It has also expanded to Mexico, Argentina and Columbia — markets that are similarly dysfunctional to Brazil's 6 years ago.
My unfiltered opinion
It’s time to focus on the brands that are truly revolutionising financial services.
The situation in which Nubank originated is worlds away from those of Monzo, Starling and Chime — arguably if the situation in the UK was similar then Monzo might have similar achievements under its belt (albeit the addressable population is much smaller).
That's not any of these brands' fault, and that's not my point.
My point is this:
Nubank is changing customers' lives, an argument that would be hard to apply to the other banks mentioned here. To me, that indicates that we need to broaden our horizons, and make more of an effort to apply context to fintech companies' achievements — and stop focusing on blinking profitability.