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Why the bank of the future will not be a bank

Britain’s next generation challenger bank has just received a banking license. Atom aims to take 8 million of the 64 million accounts in the UK, for which purpose it has secured £25 million of investments with an additional £75 million in line to be raised later this year*.

More interestingly, Atom will start with mobile banking only, adding on-line capabilities (internet banking) later. This is similar to the customer acquisition and servicing strategy already used by existing players like Moven and Simple. However, these are not banks as such as they use a third-party bank as their back-office and for the regulatory cover. Unlike Atom, Moven is already fully operational, with $12.4 million (£7.9 million) of investments so far and the ambition to reach a client base of 25 million customers globally. By comparing Atom and Moven, we can clearly see that opening even a “mobile only” bank is at least 10x more expensive than a non-bank player. The key question is whether a digital bank can offer their clients more than Moven-like companies? Will the bank of the future be a bank at all?

Geographical boundaries of banks

Banks need a banking licence to operate in a given territory. Only a handful of banks operate truly globally, due to licensing, different legislation and banking supervision rules. Even in the case of global banks, you cannot just walk into a branch in a foreign country and top-up your balance. On the other hand, payment card schemes, digital wallet services and blockchain are truly global financial instruments. For instance, sending money overseas with your digital wallet is instant and often free. It is so simple because, unlike in the banking world, there are no geographical boundaries for the digital services.

The right infrastructure for disruption is in place

Years ago, banks were the obvious place to go when you wanted to perform a non-cash transaction. With the development of the infrastructure we are surrounded by today, non-banking financial services providers do not have to rely on banks for providing transactional capabilities any more. Firstly, the technology to set up digital wallets with zero marginal cost transactions inside their ecosystem is widely available even to less tech-savvy organisations. Secondly, client on-boarding including KYC (Know Your Customer) can be solved by calling the API of a service that provide real-time client ID verification. Lastly, but most importantly, clients have the right devices in their hands that allow the delivery of relevant services given the context of the transaction. All this leads to the emergence of a “super wallet”, a smartphone application that fulfils a broad range of transaction services previously conducted by banks and single purpose financial services e.g. remittance payments providers.

Rise of the digital “super wallet”

The “super wallet” will do most of the transactional activities you have done before without requiring any banking license or being burdened by a legacy banking system, which was designed over 20 years ago. Also, it will replace single purpose financial services with an umbrella offering by taking care of:

  • Peer to Peer payments including cross-border payments (remittance)
  • Card present transactions and not-present transactions (via prepaid debit card)
  • Payments to merchants directly from the wallet
  • NFC payments with smartphone (Host Card Emulation)
  • Foreign currency exchange
  • Personal budgeting
  • Utility payments
  • Digital identity management

What’s left for banks? Yes, of course, lending is missing from the list above. However, lending can be provided as a white-label product from a bank with a local license. Banks will perform their underwriting process based on demographic information, credit history and most importantly, rich transactional information from the “super wallet”. Although the non-banking services described above will still have to comply with AML / KYC rules, they will not require regulatory capital and complex regulatory reporting and compliance. The resulting savings will be passed to their clients, which will be warmly welcomed in the developed markets. At the same time, lower costs will decrease accessibility criteria for the unbanked population of third-world countries. Therefore, it seems likely that the bank of the future will not be a bank at all.

Notes
The blog post reflects an opinion of the author and it is not an official point of view of PwC.
* Atom’s goal is to achieve 5% market share in 4-5 years with the cost to income ratio below 30% opposed to 50%+ for incumbent lenders.

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Comments: (4)

A Finextra member
A Finextra member 01 July, 2015, 11:50Be the first to give this comment the thumbs up 0 likes

The headline is certainly attention grabbing, partly because it channels the worlds' largest building society's marketing and partly because it channels a quote attributed (quite possibly erroneously) to Bill Gates c1993: People need banking, they no longer need banks. But the evidence in the UK is somewhat contrary.

The TSC, Lord Vickers, the EU. the FCA, the CMA et al are all so obsessed with promoting competition in UK banking precisely because banking has consolidated in the years since 1993 and customer inertia to switching is massive (see my blogs on why CASS has so far made no real difference to consumer behaviour  ).  

As for 8 million customers? That's the whole of the switcher market for almost 3 years. Based on current evidence the cost in terms of cost incentives will swallow up more than all of Atom's investor funding...just ask the current winners in this space - Santander and Halifax. Ok, some of these will be new accounts rather than switched but perhaps someone ought to let Atom's investors know that the number one source of new accounts is the one channel Atom doesn't have - hint: it's located in a high street near you.

Looking at the super wallet elements I don't see anything in there that most of the majors in the UK either do not currently have in play, live testing or development for live launch before the end of the year. Granted a small pure digital bank can no doubt do it slicker and quicker and with more magic in a very nice package but the banks are pretty close to a 'good enough' solution for the vast majority of customers in the UK. And when you have huge inertia and largely a zero-sum outcome from switching, I suspect 'good-enough' will usually win out over 'fancy but completely unknown digital start-up'.

 

A Finextra member
A Finextra member 01 July, 2015, 11:54Be the first to give this comment the thumbs up 0 likes

Not wanting to appear a complete luddite but some issues with posting the link:

blog.gfk.com/2015/06/cass-18-months-so-far-so-what/

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 July, 2015, 16:401 like 1 like

I've long believed that sales happens primarily in branches, both in India and USA (https://twitter.com/s_ketharaman/status/615497632274886656). From @IanD's "hint", I guess the same is true of UK. Neobanks are right in assuming that (A) providing a place to park money - aka bank account - is a commodity business and that (B) money management is what will differentiate them. However, they're living in a fantasy world if they believe their strengths in (B) will overcome their weakness in (A). Especially since banks' digital offerings are getting better day by day. In fact, in India, some of the best digital banking solutions have come from banks. Latest example: PayZapp from HDFC Bank.

HDFC Bank's PayZapp Ends My Bill Payment Woes

Balasubramaniam Gd
Balasubramaniam Gd - DBS - singapore 20 July, 2015, 09:49Be the first to give this comment the thumbs up 0 likes

It can actually be a smart phone, to a tablet and to a virtual network called banks, can we relate to Apples push to do away with the SIM card or the similar initative from Google, guess its going to be a combination of complexities.  A game between pull and push.

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