Traditional bankers are hardly afraid of the digital upstarts that are out to steal their customers, but Moven founder and CEO Brett King insists they ought to be.
Just as the telephone displaced the telegraph and internal combustion replaced steam engines, these disruptors will win over consumers by taking the friction out of everyday banking transactions, like opening accounts, making payments and borrowing money, King predicts.
"Any time an industry has been faced with technology disruption over the last 250 years, there has never been a case where an incumbent industry has survived with its business model intact," says King, who is researching the topic for a book. "In financial technology, you have thousands of startups coming in and disrupting the distribution and the experience, and it's just not possible for banks to survive this transition."
He doesn't expect mainstream banks to vanish, if that's any comfort. But there will be far fewer of them in the coming years, and the survivors will be relegated to the background, merely facilitating the products that will be sold by the so-called neobanks, such as Moven, Simple and GoBank. (BankMobile is a recent entry, and Fidor Bank and ZenBanx have U.S. launches in the works.)
It's a bold claim, especially considering the high failure rate among fintech startups. It's also ironic, given that neobanks' very existence often depends on partnering with traditional banks. Simple, a mobile-only startup that offers no-fee checking and savings accounts, sold itself to BBVA Compass last year after concluding that it needed the resources of a bank partner to add new products and expand into new markets. Even Moven, which started out by marketing its mobile banking app directly to consumers, is now staking its future on co-branding relationships with large banks across the globe.
"Ultimately to be successful in this space you need to continue to innovate, continue to improve the customer experience and expand into broader product offerings," says Amol Shah, a director in the financial services practice at Alix Partners. "At this stage, it's hard to imagine that many of these providers would be able to do that on their own, without the backing of a large financial institution."
Ron Shevlin, a senior analyst at Aite Group, says the newcomers are essentially offering the same products as banks — albeit with different features. Though they have excelled at embedding personal financial management capabilities into savings and checking accounts, they aren't a major force to be reckoned with. To change that, they would have to start developing products that consumers can't get anywhere else.
"The idea that these neobanks are disruptive and will cause the downfall of big banks is really just a lot of hype," says Shevlin. "The reality is that the number of consumers attracted to what they are offering is not particularly big. Maybe it's big enough to support a startup, but it's not going to cannibalize a huge chunk of Bank of America's or Chase's or Wells Fargo's business."
Even so, it would be a mistake to outright ignore them. Their market share may be minuscule, but they have gained some traction with millennials and the underbanked, two demographics that mainstream banks covet. They are connecting with customers in ways most banks can only dream about, turning users into genuine fans.
They also have some serious brainpower behind them. Their founders include the likes of King; Arkadi Kuhlmann, who led the online-only bank ING Direct and now heads the upstart ZenBanx; Matthias Kröner, the CEO of a mobile-only German startup, Fidor Bank, which is eyeing a U.S. expansion by next year; and Jay Sidhu, the former Sovereign Bank CEO. All have track records in challenging the status quo.
Sidhu runs the $6.8 billion-asset Customers Bancorp in Wyomissing, Pa., which made a novel move in launching a separate mobile banking unit this year.
He doubts the day will come when mainstream banks are reduced to mere bit players in financial services, but he does believe that they are far from perfecting their digital strategies, making them vulnerable. His BankMobile plans to aggressively go after their customers, first by offering checking and savings accounts and very quickly moving into home and auto loans.
"Banks are dealing with a change that came on very rapidly and it's going to take them 10 years to adapt," says Sidhu, who is CEO of BankMobile, but has put his millennial daughter, Luvleen, in charge of the initiative.
"Not all customers are going to wait 10 years."
Not quite fighting words, but something for bankers to think about. Here's what else to keep in mind about these challengers.
THEY'RE MANIACAL ABOUT IMPROVING THE CUSTOMER EXPERIENCE
Simple, Moven and GoBank are all similar in that they primarily offer checking, savings or prepaid accounts to millennials who don't have much money.
The products themselves aren't new, but what these neobanks are selling is the experience. They are digital first, so their mobile technology is often superior to that of traditional banks, observers say. That's evident by the speed with which their customers can open accounts via mobile apps, track spending in real time and, in some cases, take out a small, short-term loan.
Simple and Moven also have done away with account fees for the most part and they are engaging with customers in new ways to try to better understand their financial needs.
But neobanks generally aren't trying to fulfill all of their customers' financial needs, because that's not what millennials want, King says.
"The universal banking model is going to be challenged because the new emerging behavior is cherry-picking the brand that can a do function best for me, whether it's saving or investing or crowdfunding or peer-to-peer lending," King says. "There's no logical reason for me to pick a bank and stay with it for all of my financial needs."
BankMobile — perhaps because it is the offshoot of a traditional bank — has a different philosophy.
Its goal is to be a customer's primary bank, says Luvleen Sidhu, the chief strategy officer. It's already offering a no-fee line of credit to go along with its free checking and savings products and it has a team of financial advisors on call to provide free money-management counseling to customers who need it.
It doesn't see itself as a "neobank" per se, but rather as a mobile-only bank that can compete with both the digital upstarts and the traditional brick-and-mortar players.
"If you compare us to the neobanks, we have a full suite of banking products — we're not just limited to checking and savings accounts," Luvleen Sidhu says. "Compared to the big banks, the big difference is account opening. Within five minutes you should be able to open a checking, savings or joint account. We have yet to see banks onboard new customers from the mobile channel."
Like BankMobile, Fidor is an actual bank. (Simple and Moven don't have bank charters.)
Kröner, its CEO, considers this an important distinction. He is out to revolutionize the banking experience, and he says you have to be on a plane in order to hijack it.
His vision is for Fidor to be a place where consumers store all kinds of things with value — not just money. (Yes, it takes bitcoins.)
It also offers features like crowdfinancing and precious metals trading. Its demographic skews slightly older — twentysomethings generally don't trade in precious metals — but its app does offer a very millennial-friendly loan feature that lets customers borrow up to 200 euros (roughly $217) with the tap of a button. The cost for the service is just 6 euros.
ZenBanx is already operating in Canada, but is still waiting for approval in the United States. It is not seeking a charter, but needs a bank partner to hold customers' deposits.
Its main product is a savings account in which customers can hold up to five currencies. So a customer who travels frequently to Japan can convert dollars into yen with a quick tap in the app and then withdraw the funds from an ATM with a ZenBanx debit card after landing in Tokyo. The account also lets customers quickly send money to friends and family overseas for a flat fee of $4.95.
"You can do a lot of retail banking domestically on the mobile device, but you can't do much internationally," says Kuhlmann. "In that sense, we see this as a clear disruptor."
THEY ARE AS NIMBLE AS THEY SAY THEY ARE
A couple of years ago Simple found that it was getting a lot of calls on Sunday mornings from customers who had lost their debit cards after a night of partying and needed to cancel those cards. Inevitably, they would later find the cards in a jacket pocket or under a bowl of nacho chips, but once the cards were canceled Simple was powerless to turn them back on.
Simple engineers got an idea to create a sort of on/off switch that would let a customer go into the mobile app to turn off a lost debit card and turn it back on once found. The on/off switch is now a core feature of a Simple checking account.
"The whole process — from inception to ideation to execution — took less than 10 days," says Krista Berlincourt, its head of global communications.
Moven's King says the ability to test new products quickly is a key difference between traditional banks and neobanks.
"Their view of the world is, 'We can't do that because our regulator won't allow it.' A startup can go, 'Yeah, we'll try that,' and if regulator says we can't, we'll negotiate, and if they still tell us we can't, then we will change our approach," King says. "It's a completely different mindset."
Sometime soon, Moven plans to start offering a payday-like loan product to direct-deposit customers who are running low on cash ahead of their next pay period. The fee will be a flat $15 and Moven will automatically deduct the loan amount from the customer's account on payday.
It's the kind of product that might raise eyebrows with regulators — many banks stopped offering similar loans last year -- but King says that Moven's product encountered little such resistance. "They told us that as long as it's a flat fee and that we are up front about it, it's fine," he says.
Still, it can take regulators time to get comfortable with newfangled products or accounts. Case in point is ZenBanx, which has been waiting close to two years for U.S. regulators to approve its business plan to operate a mobile-only, multicurrency bank account.
"It's mobile, it's foreign currency, it's international payments. In this world today, with issues around security and fraud, things just take longer," says Kuhlmann.
THEY ARE REALLY GOOD AT ENGAGEMENT
Consumers generally don't tweet about their banks unless it's to shame them, but at Simple, it's not unusual for customers to say thanks publicly, whether for helping them save for a house or pay off credit card debt.
Berlincourt says that customers' attachment to the brand starts when they receive their Simple debit card in the mail. Unlike most cards that come in nondescript envelopes, the Simple card arrives a in giftwrapped box. (One customer was so impressed that she painted a water color of the packaging.) They further appreciate that Simple seems to always be looking out for them, by eliminating ATM and overdraft fees, constantly tracking their spending and saving, even developing a technology that lets its customers make accelerated ACH payments for free. Most banks would charge roughly $10 for that service.
"We don't compete on fee structure because we don't charge fees," says Berlincourt. "We only compete on experience."
Simple does not disclose customer figures, but Berlincourt says the total number has roughly tripled since its sale to BBVA early last year (at the time Simple was reported to have roughly 100,000 customers). She adds that its number of employees has increased from 80 to roughly 200 over the past year.
Simple and other neobanks also obsessively seek customer feedback. BankMobile was in regular contact with about 200 consumers before it launched, seeking advice on the design of its mobile app, and incorporated many of their suggestions into the app's design. It continues to engage with its customers on potential improvements.
Fidor has created a community on its site in which it actually seeks customer input on major policy decisions, like where it should set the interest rate on certificates of deposit. It also encourages customers to ask questions of each other — financially related or otherwise — and even pays them up to a nickel for responding, up to a limit of 20 cents a month.
"Ask a question of anybody and I'm sure you will get an answer," says Kröner. "The first answer is usually given within five minutes, no matter if it's day or night, and on average one question will receive eight answers."
That's engagement — and Kröner says it's a big reason why 40% of his customers now call Fidor their primary bank.
ONE WAY OR ANOTHER, THEY NEED BANKS AS PARTNERS
Since Moven doesn't have a bank charter, it has teamed up with the $14 million-asset CBW Bank in Weir, Kan. To customers, Moven is their bank, but it's CBW that holds their deposits and issues their debit cards.
To accommodate its global growth ambitions — it now has roughly 500,000 customers worldwide — Moven has needed to change its approach. It recently signed agreements with TD Bank in Canada and Westpac New Zealand to embed its highly regarded personal financial management capabilities into the Web- and mobile-banking platforms at those banks. Moven will continue marketing directly to consumers in those countries, but in more of a co-branded way. (Something along the lines of Westpac, powered by Moven, says King.)
"To get 100 million people in 30 countries on our app we have to have a network of banking partners," King says.
Those partners don't mind giving up some control if it means attracting new business, he says. "What we say to them is that we are giving them access to new markets and a new approach to acquiring customers at a fraction of the cost, but that they are going to have to let us do the experience."
Since going live in 2012, Simple has used The Bancorp in Delaware as its back-end bank. Eventually it will transition the accounts to BBVA Compass, but Berlincout says that even though it is now owned by a major bank it will never co-brand its products.
"That's something we are not flexible on," she says. "Simple will never become a white-labeled version of BBVA."
Fidor does have a banking license in Europe, and that's allowing it to team up with an unnamed U.K. telecommunications company, which will then offer mobile banking to its customers.
But here in the United States, it intends to team up with an existing bank that lacks a retail presence rather than go through the process of securing its own charter. It won't reveal exactly when the U.S. launch is expected because, Kröner says, "we want it to be a big surprise."
BankMobile is unique in that it is a separately branded unit of an existing bank. Its parent, Customers, targets primarily business customers and management decided a new mobile bank would be a way to create a unique experience for consumers, says Luvleen Sidhu. The intent is to create a national retail banking presence without the expense of building branches.
With the resources of a traditional bank behind it, BankMobile is planning an aggressive marketing push in which it will target millennials, the underbanked and what it calls "affinity" groups, such as teachers, firemen and policemen. (It already has a deal in place to offer its mobile banking to members of the New Jersey Education Association).
The bank affiliation also will allow BankMobile to continue rolling out new products, including mortgages and car loans, Luvleen Sidhu says.
Daniel Latimore, a senior analyst at Celent, says he expects other banks will be watching the BankMobile experiment closely. Having a separate mobile-only brand alongside a heritage bank could be a winning strategy, he says — so long as the mobile capabilities are state-of-the-art and not tied to legacy core systems.
Another option is for larger banks to buy the startups outright. BBVA snagged Simple and Aite's Shevlin says Moven and GoBank also could be attractive targets as they continue to grow.
"It's likely that the path to success for these startups is to actually sell out to a larger bank and become its entry-level product," he says. "The larger banks don't have to go out and spend all this money to develop a product that appeals to the younger consumer. They can just go out and acquire it."
THEY ARE THINKING AHEAD (AND WANT YOU TO TOO)
As they try to gain relevance in a world dominated by banking goliaths, neobanks often turn to each other for advice and support. King says he routinely shares and discusses ideas with Simple founders Shamir Karkal and Josh Reich and he hosts his own weekly radio show, "Breaking Banks," that serves as a forum for wannabe disruptors.
That's why King was so frustrated when, in announcing BankMobile's launch, Jay Sidhu seemed dismissive of other neobanks. "My argument to him was that we would be better off working as a group, not competing with each other, because together I believe we can take 15 to 20 million people out of the mainstream banking system" in the United States, King says.
Jay Sidhu's response to that: "We are not in the business of joining a fraternity; we are in the business of helping our customers succeed."
At some point — though not quite yet — Jay Sidhu also might be open to sharing his mobile approach with other banks. He expects the total number of U.S. bank branches to shrink by one-half to two-thirds over the next decade or two as consumers shift to digital channels, leaving banks no choice but to improve their mobile offerings. He insists he would have no problem with other banks mimicking his strategy.
"We don't own this," he says. "We think there ought to be 20 banks like ours."
Kuhlmann, too, says he hopes other banks are watching ZenBanx closely.
"Apart from us building a successful brand, we want to do something positive for the industry and for society," Kuhlmann says. "If we can influence the rest of the industry to do things a little differently, we would be all for that."
Alan Kline is an editor at American Banker.
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