FinTech has disrupted the conventional ways of carrying out business and financial transactions. Thanks to the innovation all aspects of the financial systems are in a state of transformation and technology like artificial intelligence, big data or blockchain are applied to reinvent how we do payments, deposits, lending, financing or investment management. The rise of the digital bank is probably the most visible element of this revolution and startups springing up almost anywhere around the world, we take a snapshot of the current state of the industry.
No Digital Strategy?
While traditional banks often are still concerned about their digital strategy, native digital banks are expanding their business at dizzying speed. The British startup Revolut is the new number one in the industry.
Known for its particularly aggressive growth strategy, the digital bank is valued at $5.5 billion a good five years after it was founded, despite making losses. It is at the forefront of the most expensive, unlisted FinTechs in Europe, on a par with the Swedish competitor Klarna and ahead of the N26 and Monzo.
The German digital bank N26 was valued at the last round of financing last year at $3.5 billion, the British Monzo Bank at $2.6 billion. The London-based Revolut offers money services via smartphone app. In the latest round of financing, it was able to raise $500 million from TCV, a venture capital company in Silicon Valley, California, and other investors, who have secured just under a tenth of the shares. Overall, the company has received approximately $840 million from investors in recent years. The new valuation of $ 5.5 billion is more than three times as high as in the previous round of financing in April 2018. “The capital injection now received proves that investors trust our business model”, says CEO Nikolay Storonsky, and he can look back on a successful growth story. In 2015, former Lehman and Credit Suisse exchange trader and Russian-born Storonsky started with StartUp funding of just $3.5 million.
Digital Banks: More than meets the eye?
“Our focus now is to clear out bank operation in Europe, to increase the number of people using Revolute as their daily account, and to strive for profitability,” said Storosnky.
Revolut said it had more than 8 million customers last year. According to a report by the consulting firm Accenture, the bank could even able to appeal to more than twice as many users but has difficulty in retaining customers on a permanent basis. The digital bank has been making losses so far and sales have until now been only a fraction of the billion-dollar valuation. However, in 2018, for which the most recent figures were released, sales quadrupled to £58 million, while at the same time, the losses doubled to £33 million. The reason appears to be high investment and advertising costs for the expansion in Europe, and especially Central and Eastern Europe.
The End of the Party?
The rapid growth of the digital banks is at the expense of the branch banks.
“We want to end the party among the traditional banks,” announced Revolut when it entered the German market in 2017. The bank has no branches, and only a few with the exception of Great Britain. Revolut promises particularly cheap and fast financial services. The company has been offering checking accounts via smartphone app in the UK and some other markets since 2017.
So far, the FinTech company has only offered limited banking services and has no real banking license, except in Lithuania. The majority of the accounts are managed by a so-called e-money license. As with many fintechs, deposits are with another bank and are not directly protected with Revolut via the deposit guarantee system. Little by little that should change. With the Revolut app, customers can not only make transfers, but also withdraw money from the machine with a card or exchange it into several dozen currencies. For currency exchange, the company promises to use the favorable large bank exchange rates on weekdays. On the other hand, there are surcharges on weekends. Competition in the UK is particularly fierce. Last week, German competitor N26 announced it would withdraw from the island later this year. N26 cited Brexit as the reason, but observers consider the company’s reasoning to be advanced. In fact, the competition in the British market is too fierce for the German digital bank, whose app has a somewhat slower user growth than that of Revolut. Behind the Berlin startup N26, founded in 2013, are investors such as the American billionaire Peter Thiel and Li Ka-Shing from Singapore.
For in-depth information and analysis on FinTech, check out our dedicated section or download our eBook #FinTech – An introduction to the different sectors, innovative technologies and hashtags that transform the financial industry.