Digital Disruption: From Challenger Banking to Fusion Banking.

Digital Disruption: From Challenger Banking to Fusion Banking.

The proliferation of neo banks, challenger banks and mobile only banks, super mobile wallets and a multitude of digital payment providers has meant new ways of grabbing market share from the same customer.

Retailers are now entering this space in full force. Pertinent to Asia, Grab launched Peer to Peer transfers in GrabPay Mobile Wallet, Singapore was chosen as a first port of trial with even hawkers payments via GrabPay.

Most people don’t think of Airbnb as a Payments company. However, similar to the manner in which PayPal was critical to eBay’s success as the first global online marketplace, payments at Airbnb is critical to Airbnb’s growth as a global platform for travel.

Walmart is launching a global money transfer service called Walmart2World. It already has a domestic platform, known as Walmart2Walmart. The retailer aims to serve the roughly 2 billion individuals worldwide who are considered unbanked.

This shows that companies, local, regional and global go beyond their traditional sectors of retail, transportation and hospitality -  frontiers between all these players and platforms and offers is rapidly blurring.

Rewinding the tape

Taking a couple of steps back, with the explosion of the Internet wave during the first decade of the 2000’s we saw a first generation of digital banks being launched. While some of them have perished, others persist and endure due to their solid business models. In recent years we have been seeing a second generation of digital banks, also named neo-banks, mobile only banks or challenger banks launching in Europe, with the UK concentrating the largest number of challenger banks initiatives, but also in the US, South America, Asia, Australia, and with the latest region to join being Africa.

The ubiquity of smartphones has contributed to an upsurge in digital banking which appeal to cross generational segments already accustomed to using websites and apps rather over physical high-street shops for everyday activities. Challenger are on the uptick as they aim to challenge and acquire market share from incumbents operating across the large spectrum of financial services.

Fusion Banking

With the emergence of alternative banking and a multitude of payment providers who offer banking services, the definition of neo banks or challenger banks is rapidly blurring.

Instead of Neo Banking I personally prefer to call it Fusion Banking, an amalgamation of several converging consumer finance and tech megatrends. Fusion banking is powered by unparalleled access to consumer technology democratized via mobile devices and the proliferation of instant social messaging and networks for all kinds of personal and professional goals, the emergence of alternative low cost payments. This has been possible due to the historical low cost of technology and new regulations that are designed to foster competition, thus reducing entry barriers for new entrants and allowing both fintechs and non banking players to enter the financial services playground like never before.

This results in fusion banking where main banks, fintechs, technology players and telcos and retailers offer banking services, compete and partner at the same time to navigate one of the most dynamic industries globally right now.

New fintech start-ups, mergers, acquisitions and strategic collaborations are happening at a rapid pace with the entry of some major players signalling the rise of this nascent industry.  Having monopolized the online retail space, for example, Amazon is reportedly preparing to enter banking with a newly-formed mortgage lending division. Meanwhile, Virgin Money spent £38.3 million developing a new digital bank last year.  

It’s the question that drives us: What are other Neo Banks doing?

Inventing the Atom, Monzo in Tandem

With over £900m in deposits, less than two years after launching its savings product,

Atom Bank leads the UK’s challenger sector in terms of deposits. Spanish bank BBVA recently invested €96 million in Atom Bank, raising its stake to 39 percent.

A prestigious acquisition lending authority to the emerging sector came last year when challenger Tandem Bank purchased Harrods Bank from the famous department store.

Previously owned by the department store of the same name, the acquisition gives Tandem access to a banking licence, access to £80m in capital and over 10,000 new accounts. Notably, Tandem is the first digital challenger bank to offer a credit card.

Tandem’s pioneering plastic example highlights how digital banks can offer significantly different features and services. British digital banking app Revolut, for example, allows customers to open a current account in just 60 seconds. The app also offers currency exchange at the interbank rate and enables users to buy, hold and sell cryptocurrencies like bitcoin, ethereum and litecoin.

Monzo and competitors like Starling Bank still largely steer clear of the loans and hefty fees for overdrafts or foreign exchange that have been so lucrative for existing banks, but which the newcomers see as ripping off consumers.

IOU UAE

This is a global trend and the Middle East is no exception. Banks in the UAE are quickly rising to the challenges and opportunities presented by this fintech revolution. Emirates NBD (ENBD) launched LIv, a millennials digital banking proposition, Abu Dhabi Islamic Bank (ADIB) is partnering with Fidor Bank to launch the Middle East’s first community-based digital bank, Commercial Bank of Dubai’s launched CBD NOW, also targeting the millennial and digitally connected customers with mobile proposition and Mashreq Bank launched Neo, its new full-service mobile bank.

The Emergence of Mega Tech Banks

With the likes of Amazon, Google, Facebook/Whatsapp, Wechat, Kakao Bank, Webank, Ant Financial, Alipay, etc the financial services industry will face more competition than ever before. Some of these mega tech players can become the true challengers in the near future simply because they have the confidence of hundreds of millions of customers, they know a great deal about the consumers personal preferences, lifestyle, and much more and hence they can leverage on data and analytics to offer unique and unparalleled products and experiences. This is accentuated by the fact these are digital native companies with limited or no legacy systems to carry on their shoulders, with lean and agile organizations driven by a digital mantra.

Take for example Ant Financial, with more than 800 million customers, 200 million of whom are outside of China, Ant Monetary handles approximately 200 million transactions daily - everything from taxi fares and grocery funds to reserving lodges on-line or lending small quantities to friends.

Controlled by Alibaba Chairman Jack Ma, Ant has become a financial giant that was said to be valued at $60 billion and currently has more outstanding consumer loans than China’s second-biggest bank. The Hangzhou-based company has evolved from the Alipay payments business into money market funds and micro-loans and is said to be considering an initial public offering.

WeBank is known for being the first private digital-only bank in China. Established in early 2015 by Internet giant Tencent, the operator of WeChat, China’s biggest messaging and social networking company. WeBank provides consumer banking services through digital channels, as well as microcredits and other loan products.

Kakao Bank, an internet-only bank is managed by South Korea’s largest mobile messaging service provider Kakao Corp. Yun Ho-young, the bank’s co-head, said that one of Kakao Bank’s distinctive offerings was overseas remittances. Kakao Bank’s quick remittance service is based on Kakao Talk’s friend list. Within first 8 hours of its unveiling, customers created more than 100,000 bank accounts. After only five days, the number of accounts surpassed the one million mark and then further broke the record by reaching two million thirteen days after the launch.

“Cash-In, Cash-Out”

CICO is “Cash-in, Cash-Out” and this how cash enters and exits a digital ecosystem. It’s important because CICO is how digital and cash-based economies are able to interact. You might want to use digital currency to transfer money to a far away family member, but your local produce seller might not have the right incentives or infrastructure to accept digital payments, especially if credit cards are not widespread in the country.

Some e-commerce sites to resort to cash-on-delivery: Online shoppers pay in cash once the package arrives. Others use intermediaries in physical stores to help people make online purchases and pay in cash – this concept is known as Online-to-Offline (O2O). ATM transfers are another common form of payment.

In East Africa, cash to digital and back is handled by a network of mobile money agents. In the U.S., it’s handled by the brick and mortar banking infrastructure, underpinned by bank accounts. In China, the super platforms supply CICO abilities more like the U.S. than like East Africa. While you can cash out your wallet in some retail locations, debit card and bank account infrastructure still play a critical role in how cash interacts with digital payments.

In China, reforms were set into motion with centralized planning and regulatory directives focused on reinvigorating China’s rural banking sector on a global level.

Indonesia on the other hand, faces a similar path to those faced by many African countries. Its super platform must solve for CICO without the benefit of high bank account penetration.

It should be mentioned that WeChat, Alipay, and Go-Jek are not just super platforms, but are super apps as well. They provide a mobile-first (sometimes mobile-only) experience where their entire suite of offerings live within one app on your phone.

Not to mention Alipay’s ascension and reach has been incredible. Its parent company Ant Financial is controlled by Jack Ma, the founder of ecommerce platform Alibaba. This gives Ant Financial access to all of Alibaba’s ecommerce businesses and the merchants who sell through the platform. Through ownership of Alipay, Ant Financial plays a part in about 65 per cent of China’s online payments and about 80 per cent in the mobile space.

Contrast this with U.S.-based super platforms that live across multiple apps, desktop sites, etc.

Banks as powerful & agile behemoths

According to Citigroup’s ‘Bank of the Future’ report, the banking market in the US and Canada will be more profoundly disrupted than elsewhere in the world by the new entrants and emerging technologies. Ronit Ghose, Head of global banks research at Citi, believes that “US is also the home market of “Big Tech such as Amazon, [who are] looking to enter the client facing financial business” and that “lots of fintech start-ups [are] already across all product areas” in the US.

To keep up, Citi has announced it will launch comprehensive, new mobile capabilities on the Citi Mobile App? for iPhone to serve the full spectrum of client needs nationwide. The range of new features, rolling out in the weeks ahead, will include seamless in-app account opening, a 360-degree view across all financial accounts and spending insights to enhance clients' financial wellness.

Trading in Ivory (the Coast)

Long considered a backwater, Africa has emerged as the world’s second banking market in terms of both growth and profitability. However, it’s also the world’s most under-served banking market; the shortage in supply allocates just five branches per 100,000 adults – the lowest rate in the world.

Seeking to harness new technologies to reach customers, and take advantage of Africa’s deepening mobile phone coverage, international bank Standard Chartered recently launched its first African online-only bank in Ivory Coast. Clients of Standard Chartered’s Ivorian bank can open an account in under 15 minutes using an app to carry out all their banking activities on their mobile devices.

Fusion Banking Products and Experiences.

The emergence of the new digital ecosystems provides many opportunities for consumers, merchants, banks and payment providers. Banks can either choose to lead the development of such ecosystems and/or play an active role partnering with larger ecosystems promoting open banking services, collaboration, launching APIs developer portals and hackathons to play the game.

Either way, fusion banking is here to stay and additional consolidation is expected to continue with banks acquiring more fintechs, but perhaps more surprisingly, with some fintechs and other unexpected players also starting to acquire banks. This wave of disruption will go beyond one single industry to simultaneously impact across industries blurring the frontiers of who offers what, thus forcing new business models. This amalgamation will result in more competition, innovation and better products and services for consumers, ultimately leading to fusion banking products and experiences!


Tony Rimon

Mortgage Broker | Home Loan Broker | Commercial Loans | Business Loans | Car Finance | Equipment Finance

6 年

Do you have some more information on digital disruption? I’m enjoying reading about this.

Yustus Aribariho MBA

Co-Founder Furaha Financial, StartUp, MD, Global Head Digital Platforms, Standard Chartered Bank

6 年

Good one Pedro. Indeed it's a fusion concept at play and all of us must do what we understand best. This is when the pie size will increase if a significant number of the unbanked get on board.

Gokhan Ozevin, PhD

Financial institutions strategy and implementation

6 年

When you take into account the structural impact of digital on value chains and market structures (unbundling, rebundling, hyper scaling), this could be way more disruptive than neobanks. Essentially a neobank is a niche traditional bank without legacy issues. But they still push instead of pull which is the essence of digital.

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