Hyper-personalisation, banks operating in the crypto space and other banking niches will dominate digital banking in 2021, writes Marcel van Oost.
The challenger and neobank landscape is as diverse as it is complex. New trends in financial services emerge fairly often but these 3 trends (SME focused banks, crypto banks and personalization) are the ones I believe will be the strongest in 2021 and the coming years.
1. Niche banks: challengers focused on freelancers and SMEs
In recent years, there has been a new breed of challengers focused in different niches like LGBTQ+ banks, international students and even war veterans. But then a new breed of challengers that are aimed at freelancers and SMEs.
Despite 2020 being a difficult year for financial services these banks are having big funding rounds and growing at a rapid pace.
Despite competition with mainstream banks being of the biggest challenges for SME focused banks, there is a lot of room for growth. According to the European Central Banking, 99.8 per cent of companies in the EU are SMEs and they employ 93 million people, accounting for two-thirds of total employment. If SME focused challengers offer better products and services from the mainstream banks, they will grow very quickly.
Israeli fintech Lili that caters to freelancers, had a 10 million funding round and UK’s Coconut has just raised over £2.4m in its latest crowdfunding campaign, beating its target by 350 per cent. Innovative features are a crucial point for these banks, for instance, Coconut developed specific accounting features, including VAT and invoicing that cater to the day-to-day needs of the self-employed.
In France, the top player is Qonto, a neobank for freelancers and SMEs that offers a professional current account, payment cards and easy accounting features. Meanwhile, French startup Shine focuses on micro-businesses.
In Germany, there’s Penta, an SME banking provider acquired by Finleap in April 2019, and Kontist, focused on freelancers and micro-businesses. In the Nordics we have Aprila in Norway, and in Finland, Holvi, aimed at freelancers and solo-preneurs and it became the official banking partner of Estonia’s e-Residency program.
The key factor for an SME bank to become successful is how they monetise their services which isn’t an easy feat.
In the UK, Starling has become the first retail digital challenger bank to break even and is on its course to become profitable. Starling has around 80,000 of its 1 million users are enterprises. They make money with net interest income - using customer deposits to lend to other customers as overdrafts and loans. Another way is with their treasury income where surplus deposits are held by the Bank of England, and Starling gets small returns via interest.
The SME digital banking sector is so attractive that even retail challengers are launching corporate accounts too. In the end of 2019, Revolut launched Revolut for Business targeting SMEs following the launch of Monzo’s Business Accounts.
So for 2021, we will be seeing a lot of SME challengers growing their business and launching innovative products, and hopefully turning a profit.
I also predict a boom of banking apps for underbanked minorities like Greenwood and Tenth in the US. Now is the moment.
2. Crypto Banks
In 2020 we saw the rise of crypto challengers and neobanks and this trend will carry on into 2021. Some might argue that cryptocurrencies are the antithesis of the banking system for its decentralization aspect, but as more and more people start to know more about cryptocurrencies, the demand for an easy and user-friendly financial service will grow too.
Having that in mind, Ziglu launched in the UK with the core focus to provide a seamless way for consumers to buy cryptocurrencies. Ziglu is the creation of Mark Hipperson, co-founder and CTO of UK based Starling Bank. Ziglu is eyeing millennials that want easy access to crypto.
In a recent interview, Hipperson added, “In 2020, we think the 25-45 [age] demographic will want easy, safe access to crypto,” he said. “Only about 1% of people go to the large platforms to buy crypto and we think we can do better, and perhaps get them better prices as well.”
Still in Germany, not a crypto bank but a crypto banking app and newcomer Spot9 has brought a lot of innovative ideas to Germany’s crypto community. In addition to an innovative mobile banking app, Spot9 will introduce legally compliant Crypto ATMs and offer a white label solution in partnership with Sutor Bank.
When asked how Germany’s financial bodies are dealing with crypto banks, Johannes Gorski, CEO of Spot9, explained: “In comparison to other countries Germany does not provide a regulatory sandbox for FinTechs and especially crypto banks. Thus the legal regulatory framework, mainly the banking act (KWG) is applicable. In addition, banks as credit institutes are obliged to conduct KYC and AML-procedures according to the German anti-money-laundering-law (GWG).
The good news is that crypto banks, in some countries, don’t need a banking license. Crypto neobank Bitwala bypassed the need for a banking license by partnering up with SolarisBank. Bitwala’s strategy wasn’t aimed to “cut corners” as BaFin and Bundesbank, Germany’s financial regulatory bodies, require either a formal banking license or a partnership with an existing bank.
As cryptocurrencies are still relatively new, countries in Europe are still working on regulations that will prevent illegal financial activities like money laundering for instance. Some countries, like Malta, for instance, have a more focused regulation for crypto companies and others will soon catch up with regulations.
With more cryptocurrency adoption and better regulations coming up in 2021, we will likely see more crypto banks being launched in Europe.
3. Hyper personalisation
The personalisation trend is not new, but things are changing to a greater level of personalization - the so-called, hyper-personalisation.
Mainstream banks have been offering some degree of personalization in their services for quite some time. For the upcoming years, offering hyper-personalisation in banking services will be a real game-changer for digital banking.
But, what’s hyper-personalisation after all?
Hyper-personalization combines real-time data and cutting-edge technologies like artificial intelligence (AI) to deliver more relevant product or service information to users. Some say that it takes the personalization one step further.
FinTechs are already in the forefront of this trend, especially those aimed at millennials and Gen Z’ers.
Millennials and Gen Z’ers, the true digital natives are those demanding more hyper-personalised features from their digital banks. But taking financial services hyper-personalisation to millenials and Gen Z is a different game altogether. In addition to being more financially savvy, millennials and Gen Z’ers have a different way to spend their money - how they do it and what they choose to spend on.
One startup combining hyper-personalisation with conscious spending is Mitto, a Spanish neobank focused on teens and young adults.
Mitto offers a carbon footprint measuring tool that tracks the CO2 impact of their user’s purchases and compares it with that of their friends. By understanding the impact each one of their purchases or payments, they will be able to nudge to more sustainable behaviour. Mitto also offers discounts on sustainable brands and services, bringing together consumers and brands with the same sustainability values.
Hyper personalisation is, without a doubt, one of the strongest financial services trends in the coming years. Challengers and neobanks investing their time and creating ways to offer a high level of hyper-personalisation will be the winners in the digital banking battle.
Marcel Van Oost is a fintech angel investor. The views and opinions expressed are not necessarily those of AltFi.
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