It was 10 years ago that a scrappy challenger appeared on the banking scene to shake up the sector and confront its corpulent, lethargic multinational rivals.
In 2010, the UK’s Metro Bank was the first in 100 years to win one of the country’s coveted banking licences.
In some ways Metro was both ahead of and behind the times. As a high street bank with physical branches, it muscled its way into the sector a few years too soon. Its image and architecture are certainly far removed from the mobile or app-first digital banks that are taking over the world today.
The FTSE 250-listed Metro, for its part, has struggled to compete with its privately-held, online-first rivals. The company’s share price has declined by 97.2% since its 2018 peak, from 4,018p to 112p.
Look to the fastest-moving disruptors today. Chime. Current. Varo. Revolut. If you don’t know these names yet, you soon will. These digital banks, also called challenger banks or neobanks, have seen a stunning rise over the last few years.
British neobanks Monzo, Starling and Revolut all launched their services in the US in 2020 and are seeing rapid growth and multi-billion dollar valuations of their own.
Even Germany’s mobile-only bank N26, which has been running since 2015, recently surpassed 5 million customers worldwide.
Snatching up a huge market share from traditional legacy banks and growing their user base by hundreds of percent a year are just one part of this equation.
As neobanks have grown, so too have their innovative financial cousins in the cryptocurrency and blockchain sector.
The way that these two disruptive economies are intertwined is made most clear in the way that funding from venture capital giants floods into and connects them.
The $10bn-valued Nubank challenger bank in Brazil is the second most-highly funded Latin American startup. It has raised over $820m including from Sequoia Capital, a prominent private equity fund that has invested heavily in cryptocurrency and blockchain startups.
Currently Sequoia-backed companies like Apple, Google, PayPal, LinkedIn, YouTube, Instagram and WhatsApp account for more than 22% of the total value of the NASDAQ.
Most recently, according to Reuters, Sequoia participated in a $323m Series E funding round for zero-fee stock and crypto trading app Robinhood, giving the disruptive business a $7.6bn valuation.
Even the slow-to-start US neobank market is now hotting up. The launches keep coming. Point is the latest.
How neobanks work
To some degree the success of the neobank model lies in its nimble ability to grow outside the standard banking system, unburdened by huge and costly legacy operations like worldwide physical offices in some of the most expensive capital city locations on the planet, free of multi-million pound annual pension obligations for tens of thousands of staff, and with a management, IT and app infrastructure that is cost-effective, easy to use and simple, rather than Kafkaesque in its complexity.
In the same way, the decentralised operations of the classic cryptocompany mirror this structure closely. Distributed teams, working remotely. Operations spread across the globe.
Attempts by legacy banking institutions to stem the customer bleed, and to innovate and capture some of this rise have not fared well.
The Royal Bank of Scotland gives us perhaps the most prominent example. It dedicated 170 staff members and £100m to launch Bó, a cloud-based standalone banking offshoot of its £14bn-a-year business. (The acute accent over the ‘o’ is not an error, by the way, just a rather unusual branding effort).
Funnily enough, the Bó launch came just a month after RBS approached Monzo with the aim of buying it out, but senior executives had reportedly baulked at the price tag.
The failed takeover was “the first time a large [UK] high-street bank is known to have made a move for a challenger firm,” wrote Telegraph banking editor Lucy Burton.
This move “highlights how seriously RBS and other major rivals take the threat posed by Monzo and fellow startups such as Revolut,” Burton added.
Bó opened in November 2019 to no little fanfare. Three months later, its CEO, former RBS COO Mark Bailie, quit in unceremonious fashion. By May 2020 the ill-fated experiment was over. As RBS reported disappointing full year results, including a 50% drop in profits, Bó was shuttered.
A terse statement on the Bó website confirmed the news.
What the future holds
Despite early and rapid success, 2020 has not been a standout year for neobanks so far. The coronavirus lockdown has hurt downloads, for one.
Of the European crop, Revolut, Monzo, N26 and Starling each saw their growth rates fall by between 18% and 36% in their home markets, according to research by Priori Data, commissioned by Sifted.
Analytics firm Apptopia too has revealed more challenging conditions in US markets for digital banks.
According to their May 2020 research, “traditional banks in the US are adding an average of 180% more new mobile app users per month than digital banks are, over the past six months.”
N26 too has attracted the ire of the German banking regulator BaFin, which ordered it to fix persistent issues with staffing, engineering and customer service problems.
There may be a greater market to be had in pivoting these services towards cryptocurrency.
Certainly, much is expected of Revolut’s rollout of crypto trading following the success of Robinhood in this area. Revolut’s offering had been significantly delayed, and unlike for its UK and European customers the feature was not live in its March 2020 US launch.
But on 15 July 2020 the neobank announced that Bitcoin and Etherum trading was now available to all customers across 49 states.
As we approach Q3 2020, the cross-pollination of neobanking and cryptocurrency is taking another step forward. This time, from the opposite side of the market, as traditionally crypto-first players are making moves into the neobanking space.
Consider Berlin’s Bitwala. It now combines mobile banking with crypto trading in a single app, with a Mastercard debit card included. All the same benefits of neobanking, like zero fees and free cash withdrawals in Euro are added to recent DeFi (decentralised finance) cryptocurrency developments, like interest-yielding accounts. Bitwala’s Interest Income Account offers users a 4.3% per annum payment on any Bitcoin held on account.
The banking side is handled by Solarisbank AG, the German fintech that holds a banking license from BaFin. A recent $67.5m fundraise from June 2020 gives Solarisbank at $360m valuation.
This kind of service helps to normalise cryptocurrency, making it part of the standard everyday experience.
As newer players start to emerge, closer integration is expected between neobanking, DeFi and crypto. London’s multi-currency banking platform Ziglu is one company that could spearhead this change.
The brainchild of ex-Barclays technology chief and former Starling neobank CTO Mark Hipperson, Ziglu received £5.25m in seed funding in June 2020 to develop its services. These include a programme to insure users against theft of crypto funds of up to £50,000 from cybercrime. This kind of innovation mirrors the UK’s Financial Services Compensation Scheme, a cornerstone of regulated banking that protects users' funds of up to £85,000 in losses if providers go bust.
So, while neobanks and cryptocurrency businesses at one time kept one another at arm's length, it appears the future will hold more and greater integration which will blend these sectors together.