In our Challengers series, we interview experts in the challenger banking field, with a focus on the impact of COVID-19. In this installment, we got the chance to speak with Jeroen de Bel, the founder of Fincog.
Name: Jeroen de Bel
Role: Founder and Partner
What does Fincog do, and what's your background?
Fincog is a strategic consulting company specialized in Fintech. Working directly with fintechs and neobanks, we help pave their way towards profitability, focusing on areas including product portfolio and strategy. We answer questions such as: What should the bank's image be? What sort of products should they release? Which clients should they serve? What propositions will they offer? Once the concept is determined, we help develop it with the fintech. Fincog works with companies primarily located in Europe but even beyond. In a single phrase, we help our clients build the banks of the future.
What are your thoughts on the global challenger banking space? Do you think challenger banks have disrupted the banking industry enough to prove a viable threat to incumbent banks?
In the last five years, we’ve seen a significant rise in challenger banks all across the world. Start-ups are challenging incumbent banks by looking to offer a better customer experience, be more efficient, provide a better price, and be more inclusive (by making products available to people that never had access to them before).
In certain aspects, they are a threat to incumbent banks. I see challenger banks as the front-runners of the market, setting the benchmark that incumbents must follow. It does not mean, as is a widespread opinion you may read nowadays, that '80 % of banks will go bust' or 'In X number of years 90% of the population will bank with neobanks'. I do not believe it will be to this extent, but they are capturing a segment of the market.
On the other end of the spectrum, people argue this is a 'big boom,' saying the challenger banking space is a 'hype' that is just there for the moment, but I do not believe this is the case either. Companies like Revolut have indeed created a large amount of traction and media attention. With a valuation of 8 billion, it is undoubtedly high, but I feel that underneath many of these challenger banks, there are viable businesses. Not all of them will survive, even in the case of Revolut, it is unclear if they will succeed, but many will get it right and have a place here to stay.
I compare them to the online banks of 20 years that did the same thing in essence. Nowadays, there are still many online banks, and depending on the market, they hold up to 10% of the market share. I see the same thing happening with challenger banks, gaining a similar market share in the long term.
The market is quite saturated, with several new companies coming up every year. What would you say are the key products/services that would do well in the space?
Besides just the market and company itself, there are a variety of factors to consider. Firstly, I would say you can make money looking at credit, especially in the current interest rate environment. The consumer credit market still has many untapped segments. Western Europe already has several challenger banks heavily competing in this space. However, with the current crisis's impact on the economy, one needs to be very cautious in credit because it is easy to fail if you do not have the right expertise. However, I would still say credit is a good place to look at the long term.
Secondly, what these banks do differently is they rely heavily on the subscription model. For me, the success of this remains a question, as it is a new model. Revolut has over half a million paid subscribers, which is a good number, but I would perhaps consider a different strategy. If you look at the overall market in the UK, only 10-15% of consumers have such subscriptions. So, it is dependent on how the market receives the subscription model.
Impact of COVID-19
What do you expect to be COVID-19's impact on the Challenger Banking space? What are the current actions that challenger banks are/or should be taking?
To understand the immediate effect on the business, we would need to look at the business continuity. In this regard, I would say most challengers are in a great position. They are primarily digital and set up to work remotely. It speaks to their favor as opposed to incumbents. As an example, customer onboarding can be completed remotely and often automatically. Another aspect important in the short-term is customer centricity, which is a crucial strength of challenger banks. They can easily and quickly provide additional services and information around COVID-19 to help their customers manage their situation better. Their connectivity puts them in a good position.
On the other side, you begin to see some issues. As was the case for most industries, challenger banks were not adequately prepared for this crisis. Robinhood, in the US, has faced some technical issues as systems got locked down. And you hear similar stories of other vital processes being interrupted for other challenger banks. Looking at customer acquisition, they can no longer take the same marketing approach. With half the population in lockdown, marketing on billboards and the tube in London is unlikely to yield results. Other questions come up too; for instance, do customers still go for challenger banks, or do they go back to their trusted brand?
In the long term, the most crucial impact will be to the funding market. As discussed earlier, most challengers are not yet profitable for various reasons and need capital to reach that break-even point. Getting funding will now become a lot more challenging. Also, if you look into the business models, they have significant work to do. Challenger banks should shift their focus on becoming more profitable in the short term instead of going for world domination at all costs, which is the traditional way.
How has COVID-19 impacted your business model at Fincog?
Many projects are being put on hold. On the challenger banks' side, we are helping them strengthen their business model and update their product portfolio or growth strategy. We have shifted our focus on existing businesses, moving forward product launches for profitable products and delaying for products that are nice add-ons but only add costs.
Fincog provides some great insights into the specifics of challenger banks through their market research.
The Future Outlook
One concern is that despite positive signs of growth, the revenue and profitability of challenger banks have generally not yet matched expectations. What would you say are the critical reasons for this?
There are a few fundamental reasons. Firstly, they are all early-stage companies, and it takes both time and skill to be profitable. You cannot compare them to a bank that is 10x bigger and been around much longer. Second, we need to consider how they have entered the market. It is usually with a limited product portfolio typically centered around payments accounts. While this is a great way to get customers to make a profit, you need more. The companies will need a broader product portfolio, exploring more profitable products such as lending, insurance, investments. The third is pricing; typically, these banks are coming into the market as a price challenger, often giving the product for free or at a low margin, which further limits the options banks have to generate profit.
To become profitable, they need to address those issues. They need to take more time to create a solid business plan and also require the funding to survive until they can break even. It is all about growing, growing their scale, growing their customer base, growing their product segments, growing internationally. And of course, pricing.
Should this be a cause for concern?
I think this depends on the market. If you look at the UK, there is an oversupply of challenger banks. There is this running joke; if you take the metro from London City airport into Bank station, you come across seven fintechs all running marketing ads in the subway – whether its TransferWise, Monzo, Starling Bank or Revolut. All these banks are competing for the same micro-segment customers: professional working Londoners. But if you look at the market size, it can never work. There is too much competition in the market, and the only option to expand is exporting services internationally. It is essential to look at each market separately; in Western Europe, there is also substantial competition, while in Eastern Europe, it is not as much. It is also important to consider the product segment. If we take mortgages as an example, the primary mortgages prices can be very aggressive, but if you look into niches, there are high margins to be made.
Incumbent banks have been around for years providing their products/services when suddenly this new wave of challenger banks have entered. How have incumbent banks been responding to this marketspace opening up?
In general, for years, incumbents have been hearing that the fin-techs are coming. And internally, they too have been looking into the area. You see varying situations across different regions. Incumbents in Western Europe are generally more ahead than other parts of the world with embracing and implementing new fin-tech. Even globally, you see banks that are innovative and can compete at the front-end with the challengers. All banks have a digital transformation of some form; however, interestingly, in the short term, as a result of the crisis, their response has been to put all new investments and innovation on hold. In the long-term, it drives the need for digitalization.
Thank you for your time and great insights!