For years, fintech entrepreneurs have drawn comparisons between their attempts to disrupt financial services and examples of disruption elsewhere. Music streaming is a favourite, so too transport. But perhaps the most frequently-drawn parallel over the years has been between fintech firms and airline disruptors.
As far back as 2014, Simon Champ, then CEO of the peer-to-peer lending industry’s largest investment trust P2PGI, likened the state of the P2P market to the air travel industry when easyJet and Ryanair were first emerging. In 2016, when fintech lending in the US was in the doldrums, former Prosper President Ron Suber drew a comparison between marketplace lending and Boeing, an airline which endured a period of turbulence (so to speak) prior to making a full recovery.
Fintech founders are well aware of the airline parallels – and yet nobody seems to have foreseen the possibility that airline bosses might also be alive to them.
When forecasting exogenous threats to peer-to-peer lenders, digital banks and robo-advisors, experts tend to turn straight to the tech majors: Facebook, Apple, Amazon. And not without justification. Amazon, as we’ve recently seen, is making strides towards launching a banking service, and is already well-advanced with its small business lending operation. But others have been slower to move into financial services (their payment facilitation services notwithstanding).
Far faster to reveal themselves have been the projects of airline giants. In February we learned that Virgin Money had spent a whopping £38.3m on building a new digital-only bank, and last week we reported on what that bank (named VMDB) will look like. It’s scheduled to go live in beta-mode later this year.
Meanwhile, easyMoney, franchised under Sir Stelios Haji-Ioannou’s ‘easy’ fleet of sub-brands, came to market in February with an Innovative Finance ISA that offers investors a target annual interest rate of 4.05 per cent, with all loans secured against UK property. The new platform has just announced a second ISA with a boosted interest rate of 7.28 per cent – secured against both residential and commercial property in the UK.
Both platforms will be leaning on their parent brands in their attempts to make serious inroads into already crowded markets.
VMDB’s plan, for example, is to achieve significant penetration within Virgin’s existing customer base, across both its financial services arm and the broader Virgin Group, which boasts 19 million customers all-told. As of November last year, Virgin Money had 3.3 million customers.
At the time of easyMoney’s launch, CEO Andrew de Candole likened the state of the ISA market to European air travel 23 years ago; clearly he has listened to his fair share of fintech keynotes.
But the question is: will it work?
Exactly how alluring will the Virgin and easy brands be for investors and savers? And are these brands too late to market (VMDB’s full launch isn’t expected until 2019)? Who are they competing with primarily, big banks, or nimble fintechs?
The key to answering these questions is the fact that neither project needs to ‘win’ outright in order to be considered a success. Consider the scale of VMDB’s ambition, for instance. Five years from now, the new digital banking service hopes to have captured one million customers. For context, digital banking darling Revolut recently passed 1.5 million customers – and is less than three years removed from launch.
As a digital bank, launched from scratch, Revolut arguably needs to acquire more customers than any (or at least most) other digital banks in order to scale and morph into a major financial services player. So too the likes of Monzo,Starling et al. But for VMDB, as just one branch in a vast array of Virgin businesses, there is less urgency. Not to say that one million customers isn’t an ambitious target, but even half a million customers would add a valuable string to the Virgin Group bow – and, as noted, the hope is that these customers can be acquired relatively cheaply due to the brand’s existing clout.
Similarly, easyMoney does not need to shoot the lights out. As a franchise, the extent to which the new platform is able to draw on the resources of its parent brand is not entirely clear. But a giveaway might be the fact that the platform has been advertising its latest IFISA offering in the hallowed pages of the Financial Times over the weekend. Such space does not come cheaply. The new easyMoney platform does not need to ‘own’ the IFISA market to be considered a success; it just needs to own a part of it.
But even achieving even these ‘modest’ goals will be tough.
The easyMoney platform is making a play into a market that has, according to recent AltFi research, been slow to get going. Our report, Scaling up the Innovative Finance ISA, found that more than three quarters of people surveyed had never heard of the alternative investment wrapper. Perhaps easyMoney has the kind of brand appeal needed to blast the wrapper into the mainstream, but in all likelihood breaking down what former FT Weekend editor Andy Davis has described as “a wall of public ignorance” will be anything but easy.
For Virgin, it’s the opposite problem. The digital banking market is red hot and between now and 2019 it will only get hotter. It is possible, perhaps even probable, that three or four firms (Revolut,Monzo,Starling,Tandem,N26, Atom, etc.) will have more than a million customers to their name – and some will have significantly more than that.
That is not to say that nothing will be left for VMDB, but the digital bank is going to be hard-pressed to convey to potential users what value it offers over-and-above its competitors. Our recent article on the what the new service will look like revealed that it plans to acquire customers via affinity partnerships, PCA (personal current account) switching and Open Banking/PSD2. In other words, it is not relying exclusively on uptake from existing Virgin customers. For that reason, differentiators will be key.
The good news for Virgin is that it thinks its digital bank will offer a fair bit that existing disruptors cannot. A slide from its strategy update presentation highlighted ‘coaching’ and ‘snapshots’ as two tools VMDB will offer that other digital banks, by Virgin’s estimation, do not.
Whether or not Virgin and the easy group manage to make dents in the fintech sector seems to me to boil down to two things: are their respective brands as strong as they seem to think they are, and are either propositions good enough to compete with existing disruptors?
Well, we’ll have to wait until at least 2019 to find out – by which time Revolut will have somewhere in the region of three billion customers.
