European challenger banks are facing a wave of new hurdles as their customers’ changing maturity raises new product complexities, and as overseas expansion – particularly to the US – becomes the next step in company growth, putting pressure on the technology infrastructure and licencing which underpins this sort of growth.
Neobanks have traditionally centred their products around current accounts, with innovation beyond this proving difficult. In the UK, Revolut, Monzo, and Starling Bank have all made efforts to reach beyond the basic current account offering.
“It’s not just about a sexy frontend or onboarding – we’re seeing a real shift towards focus on the entire digital experience,” says Ohpen’s CCO
Revolut offers a trading app with the ability to trade in gold and crypto. Monzo has offered short-term loans since last August, and Starling Bank has been lending millions to small and medium-sized enterprises (SMEs) during the coronavirus crisis.
But in many instances these players have reached limits which have forced them to temporarily scale back. Take Monzo as an example. Its plan upon launch was to lend up to £15,000 to its users, but now the bank only lends up to £3,000. Was the risk too high? Was the demand too low? Or was the technology too complicated?
Chief commercial officer (CCO) at Dutch core cloud-based banking provider Ohpen, Angelique Schouten, tells FinTech Futures that she sees “a little bit of a shakedown in companies” in which viable business models are being set against those “just burning cash”.
“It’s not just about a sexy front-end or onboarding – we’re seeing a real shift towards focus on the entire digital experience,” says Schouten.
Ohpen works with both incumbent and challenger banks. It started out eleven years ago focusing on savings solutions and working with more traditional players, but the likes of Netherlands-based challenger bank Knab run everything on Ohpen, and it’s pivoted to focus on current account offerings in line with the challenger demand.
Last month, the core banking provider appointed its chief technology officer (CTO) Joost Reijnen to its executive board, in a bid to further hone in on the technology-first approach financial players are taking.
Whilst the craze for current accounts has likely served Ohpen well in recent years financially, Schouten says that “more complex” offerings such as stocks and shares Individual Savings Accounts (ISAs) and Junior Individual Savings Accounts (JISAs) are still really lacking in good digital experiences, especially in the UK.
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“There’s a reason they just cannot handle the digital experience that comes with that customer,” says Schouten, pointing out that challenger bank’s technology needs to evolve and mature alongside its customers, otherwise these sorts of offerings simply aren’t possible on a mass scale.
Robinhood faced “unprecedented load” on its infrastructure in March
“If you want to offer a complicated product like a stocks and shares JISA, be damn sure that it works with the kinds of volumes [challengers experience],” says Schouten. Robinhood is a good example of where challenger tech has fallen at the hurdle of high user volumes.
On 2, 9 and 12 March, the fintech’s in-house built tech stack crumbled, locking out 10 million traders the same day the Dow Jones experienced its biggest one-day points gain ever. The fintech blamed the “unprecedented load” which weighed on its infrastructure and is now facing three lawsuits in the US.
Schouten cites UK roboadviser app Nutmeg, which had a great front end, but for a time the backend was manual. Nutmeg, like Robinhood, has fixed its architecture issues now.
As well as building – or buying – technology which lays the foundation for more complicated products, Schouten also wants to see more cross-border initiatives by UK challenger banks in particular.
“If you look at it from a retail perspective, Revolut is doing a really good job to offer its propositions to multiple countries,” says the CCO. Currently, the UK challenger bank allows users to transfer money to bank accounts for free in more than 150 countries in 25 currencies.
“What I would love to see is for [other] UK challengers to take that international step. They’ve grown a lot within their [own] country. And I think compared to continental Europe, challengers in the UK are on a better path to acquiring volume.” This is partly down to the favorable regulatory conditions of the UK market, compared to markets like the Netherlands where getting a banking licence is a lot harder.
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But how UK challenger banks go about this expansion raises a few questions. Schouten cites ING Direct as an example of how not to do it. The Dutch multinational bank had one proposition but rolled out seven different banks to deploy it.
“That meant the operation was so bloody expensive, they were just focusing on keeping the damn thing rolling. So that didn’t work.”
Monzo applied for a US banking licence in April
Which raises the question: does a challenger build a new tech stack and operations per country? Or, is it going to scale existing technology which can be used across multiple geographies at a lower cost base?
“It’s not a matter of copy pasting what you have, I think it’s a matter of adapting your proposition to the countries and keeping the operation and technology as simple as possible,” says Schouten, who estimates it takes roughly 50,000 development hours for a challenger bank to launch in each country.
That’s a huge chunk of funding which companies have to allocate, and in the US, it is even more complicated, as each state has different requirements and regulations. “It’s more than just speaking the same language – and that’s not sufficient, trust me, I know as a Dutch participant,” Schouten laughs.
Last month, following the announcement of its US banking licence application, Monzo’s co-founder Tom Blomfield shifted roles from CEO to president in a bid to escape the mires of regulatory paperwork which had loaded on top of him. Challengers are not only trying to solve the technology conundrums of expansion – which Blomfield says are his sweet spot and why he moved roles – but they are also trying to hack legislative processes they have little or no experience with.
Schouten says that solutions to these challenges – product and geographic expansion – will come with maturity and time. She says a big part of what allows more complex products to operate on a mass scale is down to software maturity, plus the knowledge and competence which can only be gathered over years, not days.
Despite many challenger banks still cropping up to this day with new, lookalike current accounts, consumers are getting older. “Clients will demand it,” says Schouten, “and the question is – will they build it themselves, or outsource?”
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