The uphill battle for European challengers success in the US
Will the popular Euro challenger banks – N26, Monzo and Revolut – crash and burn on their attempted US entry?
“The past experience of European players going to the US doesn’t have the strongest traction,” says Yann Ranchere, a partner at Anthemis. “Klarna tried a few times. The assumption is that it is a very similar market, but the reality is that it is very different.”
Banking challengers in the UK are competing against high street banks with old technology, while the biggest American banks are spending billions each year on technology. Admittedly, a lot of that spend is to keep legacy spaghetti code running, but they are also investing heavily in mobile. A recent report by Javelin rated Bank of America’s mobile app “Best in Class” overall.
Banks coming to the US have two choices: get a US banking licence, which will take years, or use an American bank insured by the Federal Deposit Insurance Corporation (FDIC) to hold the deposits. N26, for example, is using Axos Bank and Monzo will use Sutton Bank.
That has costs. The partner bank is using legacy technology which has a price for the challenger banks, and it reaps most of the interchange fees from debit cards.
That hasn’t worked out so well for the first domestic challengers – Moven and Simple (now part of BBVA Compass) – they have paid a price for the underlying technology used by their partner bank while not getting great income from debit card interchange fees because users haven’t made them their main bank, and/or the banking partner gets most of those fees. Both firms appear to be coasting with little new information on their websites and neither would respond to questions.
The hot new challenger banks in the US – Varo, Chime and Green Dot, which has a background in reloadable cards in addition to operating GoBank – have built on new technology. A venture capitalist partner says that the cost of legacy core technology like that from FIS, Fiserv and Jack Henry runs about $4 to $6 per month per account, meaning that if Simple gets 1,000 inactive accounts it is out of pocket by $4,000 to $6,000 per month for tech licensing, and if the accounts are inactive and not generating interchange fees, it’ll be losing money. The more accounts it gets, the more it loses.
The venture capitalist adds that Temenos will be a tenth of that cost and Chime’s CIO figures its costs would be similar.
Chime has quadrupled to four million customers in the last year and is on track to quadruple again, says Ryan King, CTO at Chime.
Chime has features common to many challenger banks – no hidden fees, no minimum balances, access to payroll two days early, no overdraft fees, and free access to 38,000 ATMs across the country. An automatic savings feature can transfer 10% of any paycheck over $500 into a savings account.
It targets people living paycheck to paycheck, middle class people – 20 to 50 years old. Chime targets them with every available advertising weapon, from TV to social media to billboards.
Chime can offer free checking to everybody because its proprietary technology takes out most of the usual costs of holding an account.
“Our business model is interchange,” King adds. A customer who uses a Chime Visa debit card and spends $100 generates $1.50 for Chime. The trick is getting them to use the card frequently, 50 transactions a month is the average. Simple has customers who aren’t using their debit cards enough, he said, because a lot of people opened accounts and didn’t use them.
King expects the Europeans to be surprised at how good American banks are, relatively speaking, he hastens to add.
“While as terrible as I like to talk about banks here, I think they are more terrible in the UK and parts of Europe. The incumbent banks have no new technology; it takes weeks to open an account.”
A European enigma
The closest to Chime among the challengers is probably N26, he says, but they want to offer a metal debit card for $10 a month.
Lower FX fees and travel insurance don’t mean much to Chime customers.
If you live in London and take weekend jaunts to Paris and are paying terrible fees to Barclays, the European challengers have definite appeal.
“Our customers rarely travel out of the state in a year,” notes King.
“Monzo is targeting the emerging mass affluent in London” says Ranchere. “A population very much targeted by credit cards in the US. It is going to be quite interesting seeing how the European players will do in the US vs a growing US competition.”
Concerns: as several experts on the challenger banks noted, they have appeared in an economic boom; none has lived through a downturn.
Varo CEO Colin Walsh says: “Varo is building a business that is safe and sustainable across cycles – it is a regulatory requirement to do so.”
Fundraising and valuations
Several of the neo banks have done well at fundraising. Chime ranks as a unicorn with a valuation of $1.5 billion.
Varo raised $100 million in July this year, bringing its total to $178.4 million, and has 750,000 users.
On the European front, N26 is valued at $3.5 billion after a $470 million funding round in July.
Green Dot reports six million active accounts and, as a publicly listed company, has a market cap of $2.5 billion. Revolut, based in the UK, has a valuation of $1.7 billion
Meanwhile, Chase shut down its high-profile entrant into millennial money manager, the short-lived Finn, launched in October 2017. “They start these experimental lines of business with the aim to be relevant and cutting edge,” observers Lane Martin, a partner at Capco, “lipstick on your info tech stack to make it feel new and different.”
By Tom Groendfeldt, contributor, FinTech Futures