Revolut and N26 will be launching in the US soon, but what sort of market will they be entering? How are local banks adapting their offerings to suit younger users? And what will be the impact of the newly-announced bank charters for fintechs?
It is unusual to see European firms dominating a niche in the US. It hasn’t happened yet in digital banking, but it could.
At least two of Europe’s biggest and best-known banking challengers are planning to go live in North America within the next six months. Meanwhile, the Office of the Comptroller of the Currency (OCC) has just announced that it will begin accepting applications for ‘special-purpose national bank charters from financial technology companies that don’t take deposits’. The stage is set.
But what is the state of the America’s digital banking market as things stand? There are certainly a few fintechs. In my conversations, local brands like mobile money app Varo and payments firm Zelle were mentioned. Zenbanx was another player in this space, but it was acquired and subsequently closed down by SoFi last year.
As Nicolas Kopp, US CEO of German app-bank N26, told me in an interview: “There are a few players but it is not a market that has fully taken off or taken off to the extent that we’ve seen in the UK or Europe.”
“There are a few app-based banks or app-based banking services in the US. I don’t think anyone is doing it as well as the offerings here in Europe at the moment,” he said.
Incumbent US banks may prove a greater source of competition for smartphone-loving customers. There are a number of standalone ‘flanker brands’ already in circulation. JPMorgan Chase launched Finn by Chase – an ‘all mobile bank’ – earlier this year. Goldman Sachs has been building up its lending and deposit platform Marcus for the past couple of years, and sees it as a key revenue stream over the next decade.
N26’s Kopp said such efforts have met with ‘mixed’ results to date. Joe Oehmke, a principal at consulting firm Promontory, was less dismissive. “I think they [European digital banks] are going to face stiff competition from the incumbents,” he said.
But Oehmke sees demand for mobile-optimised banking as high enough to satisfy all-comers.
“I think there’s a market opportunity for N26, for Revolut, for some of the US guys, to grab some market share and make some headway,” he continued. “There’s great demand for more consumer-focused and more mobile friendly banking in the US.”
Revolut’s Westgarth thinks his firm’s ‘instant payment rails’ will go down a storm stateside. He explained the burdensome nature of making payments to friends in the US as things stand, often involving hefty charges from the banks. Even fintech offerings, he said, can take days to load and charge fees for real-time payments.
Westgarth said that only high net worth individuals may open bank accounts in pounds or euros in the US, and that the threshold for what constitutes a high net worth individual is far higher in the States than in Europe.
“The barriers to entry for that kind of product are very high and we’re going to be offering that up to everyone,” he said.
“There are so many different aspects of our product all in one place. There’s nothing even comparable at the moment. We’re going to launch essentially foreign currency checking accounts, so customers can hold 28 different currency accounts.”
“And then we’ve got all the different other aspects of Revolut. We have fee-free remittances, cryptocurrency, the insurance, the peer-to-peer aspect.”
But if there’s already pent-up demand for mobile banking, faster payments and multi-currency accounts – why hasn’t a US operator stepped up to the plate? Why is it European firms like Revolut and N26 that seem best-placed to deliver such solutions? After all, we’re accustomed to seeing American tech giants stamping their dominance on Europe – but not the other way around.
For Westgarth, the answer is simple.
“It’s 100 per cent regulation. The regulation of launching such a service in Europe is incredibly light-weight, or should I say it’s incredibly effective,” he said.
“I mean even the capital requirements by the FCA are relatively low, relative to everywhere else in the world. I think almost anyone that’s driven in this current sort of VC market would be able to raise the money required to obtain a licence and to launch something.”
Kopp echoed Westgarth in saying that UK and European regulators are ‘quite proactive and good around fostering innovation’. He referenced Open Banking and PSD2 – which allow third-parties (often fintechs) to access customer data held by the major banks – as examples. He also cited e-money licences as a useful tool for getting fintech businesses off the ground.
But Kopp also sees customer behaviour as an important factor. He explained that financial innovation in the US has generally been built up around specific niches, such as payments, in which PayPal’s Venmo is making strong headway.
As a result, Kopp thinks the financial life of the average US consumer is fairly ‘dispersed’, with many different providers involved. In Europe, the situation is a lot more ‘linear’, he argues.
Such expectations play nicely into the hands of Europe’s app-banks. As Revolut’s Westgarth put it: “Revolut is going to create this all-encompassing digital banking experience in the US in the same way as we have in Europe, and it should blow US consumers away.”
Launching a financial services business (let alone a fintech firm) in the US is notoriously tricky. Yet both Revolut and N26 plan to go live within the next six months or so. How do they hope to pull it off?
An impossible-to-ignore development came yesterday in the form of the OCC’s announcement on bank charters for fintechs.
In a statement on the proposals, Sam Taussig, head of global policy at lending and licensing platform Kabbage (which is backed by SoftBank), said: “Kabbage is incredibly supportive and interested in the OCC’s Special Purpose Fintech Charter! We’re very happy with our US bank partnership and are excited about new regulatory frameworks that fit diverse fintech business models. This ecosystem will better serve our customers' needs and encourage healthy competition.”
N26 may well go after a charter in due course, but in the short-term it would seem the bank will follow its European blueprint. The fintech firm is fully-licensed as a bank by the German regulator BaFin, but it first came to market by partnering up with an established bank and piggy-backing of its permissions.
Similarly, in the US N26 will be partnering up with a bank in order to get to market ‘as quickly as possible’. But in the long-term, Kopp said ‘there might be a scenario’ in which the firm pursues its own charter.
Westgarth acknowledged the difficulties of getting a fintech proposition going in the States, but was mum on how Revolut will go about hurdling them.
“I think the barriers to entry or the barriers to launch are really, really high. I think they’re much, much higher than Europe, much higher than other markets, much higher than Asian markets. And I think there are several different ways of getting there – different routes to market,” he said.
He did, however, add one caveat: “I think getting a bank authorisation in any part of the world is going to be lucrative and important to Revolut as we grow.”
Revolut’s founder and CEO, Nikolay Storonsky, told Anna Irrera of Reuters in June that Revolut could apply for a US banking licence by the end of the year. But he also said in the interview that the firm plans to launch services in the US with a banking partner this summer.
It’s possible, perhaps likely, that the introduction of fintech charters will accelerate the pace of innovation in app-based banking in the US.
The charters offer a route to market hitherto untrodden, and both new and existing local operators will surely look to take advantage.
But the authorisation process is unlikely to be straightforward.
Joseph Lynyak III, a partner at international law firm Dorsey & Whitney, said in a statement: “The OCC’s Policy Statement on FinTech charters (and its Licensing Manual Supplement) is one of two things: it is either an attempt to eliminate the issue by setting an insurmountably high standard to obtain a national bank charter or else a policy change that will ultimately be a disaster because of the nature of FinTech companies.”
The fact that this is a fairly damning assessment of the charter aside, Lynyak clearly thinks it possible that fintechs will struggle to meet the standards required to secure themselves a charter.
That may open a window of opportunity for Europe’s app-banks, if they can find a way to get to market expediently.
And the opportunity is substantial. As Revolut’s Westgarth put it, there are ‘340 million customers in the US, all in one place under one language – that makes it a huge market opportunity’.