In recent years there have been a significant number of new "neo-banks" or "challenger banks" launched with much hype, here in the UK. Many of these appear to have been brought to market quickly, on the back of a pre-paid card platform and are buying customers now with a plan to build a revenue model in the future.

Whilst I am not planning to comment on that as a business model I do wonder at the wisdom of starting from a pre-paid card platform when building a financial institution that will later become a bank. Such a platform fails by its very architecture to allow for multiple access to one account, one person with more than one account, non-card transactions etc. This is a path that is, by definition, a development cul-de-sac.

Surely, if you’re coming to market with a brand new proposition for the customer, flexibility is going to be the cornerstone of your success. 

Every time you fail to provide an expected feature you reduce your potential market. If you are offering business banking but can’t allow multiple access to accounts with differing permissions for each user, clearly you are limiting your audience. If you are providing personal banking but can’t provide a way for people to segregate funds off into another account or have a joint account with their partner then you are limiting your audience.

Almost worse than that though is the fact that every transaction on a pre-paid card platform is a card transaction, every account on the platform is another card and each must be paid for as such, even if the transaction has nothing to do with the card or the account has no need of card access. This makes creating a business model that funds itself extremely difficult and limits growth of the platform into other areas. 

What happens when, after you have attracted customers to your financial institution with your new user experience and low fees, you wish to offer savings, loans, overdrafts, credit cards etc? Perhaps you wish to start charging fees for some of these services. Are you now looking at a complete system rebuild? If you are operating on a pre-paid card platform I can’t see that you could have any choice.

What’s the alternative? You could look instead at an account platform. Clearly you will still need cards but they become an access point to the account. Any transaction that doesn’t use the card (e.g. deposit, transfer, payment) attract only operational expenses rather than card charges. Any account that doesn’t need a card, doesn’t have one and in the business model there is no charge for that. As a result you can give your customers a current account (with overdraft), savings accounts, loan account. You can even let customers create their own accounts as they start to save for a special purpose, and close them again when they are done. Joint accounts and company accounts can be shared with those who need access and appropriate user access can be granted (a partner may be given equal access to a joint account while a tax accountant may be given read only access for example).

Your basic account management platform will allow you to integrate into any payments network and support any currency (even BitCoin), as long as you have banking to support it. Some will even allow you to store multiple currencies in one account (but that’s a bit niche). They provide double-entry ledgers, manage KYC/AML, apply any fees or limits the business requires, manage your call centre and provide all security and logging.

So, given that account management platforms exist, why are there so many neo-banks running on pre-paid platforms?