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How cyber banking will shape the future of banking sector

Neobanks are hitting hard. They promise a better user experience than traditional banks adapting a very old business to modern times much more quickly than the typical mastodons we know.

The principles in which these banks operate are based on three pillars. First, the new banking users do not want to go to the offices, they consider it a waste of time. Second, they do not want to interact with a website either, they want to have any operation available in a mobile application. And three, they want simple, pleasant services with added value and excellent customer service.

Are neobanks really banks?

Around 2015 some entrepreneurs began to realize that the digital revolution had not reached the bank. While many sectors lived through the revolution, including the financial one, with fintech proposals, the banks of all the life continued operating in many occasions without taking advantage of the advantages of scale that can provide the technology.

At first, mobile applications emerged that were simply a more modern interface with traditional accounts. That is, these new companies agreed with a bank to use their services but with their own application to offer these services. The success was tremendous.

The success led many of these neobanks to request the bank card and become banks themselves. A few years ago, anyone would have thought it was crazy, especially since these new players were offering the most basic banking services, checking account, card, transfers that are usually the least profitable in the sector.

After a few years we have a series of new generation banks in Europe that are increasingly implemented. Are they all really banks? No, and even if they are, sometimes they do not offer all the services of a traditional bank.

N26

N26 was the first bank of the new batch to arrive in Spain. They launched their service in 2015 and quickly realized that to grow they needed to have a banking license. In 2016 they got it and therefore are officially a bank.

Its expansion was meteoric. With just 100 employees, they reached 100,000 customers throughout Europe. They took advantage of European Union regulations to expand without opening offices in all countries and only recently have been able, for example, to offer Spanish IBAN. Something that in principle should not be important but that is in day to day of many banking operations.

Although officially a bank, they do not offer loans, mortgages or checks. They focus on offering a bank account, card, a nice application with advanced cost control features, very cheap transfers and very cheap money withdrawals all over the world. They have different plans depending on the use.

Revolut

Revolut also operates in Spain. Its expansion has also been meteoric but until recently it has not had a bank card, in fact, it can not be used yet, and it operates through the Lloyds bank.

What it offers compared to N26 is very similar, although they focus more on offering customers foreign currency accounts, with a switching commission between them very tight. Apart from the typical services (account, transfers, cards, ATM withdrawals) they allow the purchase of cryptocurrencies.

Although it is officially a bank and soon clients’ accounts will be deposited in it, the truth is that they still do not offer services that a traditional bank does have, such as mortgages, credits or securities investment.

Monzo

Monzo is one of the new banks with the greatest projection. It is the favorite of many users, so much so that although they do not offer accounts outside the United Kingdom, many customers from outside the United Kingdom have used shortcuts to do so.

Until 2017 they did not get the bank card. Like other neobanks, they began as a simple interface, an app, and then evolved into a complete bank. But like his brothers do not offer all the banking services that a traditional competitor.

Atom Bank

Another neobank that is giving to speak is Atom Bank, which incidentally is participated by BBVA. The path of Atom Bank has been somewhat different from that of its competitors. First it obtained the bank card in 2015 and then launched its service in 2016, which is a bank from the beginning. At the moment it only operates in the United Kingdom.

The services offered are somewhat different from the rest of the neobanks. Instead of focusing on account and card they are focused on offering attractive deposits and loans and mortgages. That is, the traditional banking business, make money with the margin between borrowing money and lending it.

BNext

BNext is the neobanco of Spanish origin more popular. It really does not have a bank card, but pretends to offer the most popular services of a bank without becoming one. The money that is transferred there is deposited in an Electronic Money Entity, with a cash reserve of 100% (that is, the money is not used to invest, as traditional banks do). On the other hand, the money is not protected by the Deposit Guarantee Fund and neither can you deposit receipts or transfer the money out of BNext (but you can spend it or withdraw it at a cashier with the debit card).

Despite these limitations, BNext does offer some services that its competitors do not do, such as loans and mortgages, through a marketplace. That is to say, it is not BNext who offers these services but has agreements with other entities for them to do so.

Is it safe to have money in these neobanks?

One of the most important aspects of having money in an entity is the security it offers. And that there are new generation banks can create doubts among customers about the security of the money deposited.

One of the best things about having a bank card is that these banks are covered by European legislation, and among them is that each country must have a Deposit Guarantee Fund worth 100,000 euros or 85,000 pounds per depositor.

The downside is that these banks are not based in Spain, and in case of bankruptcy would have to claim the funds guaranteed to the countries of origin. Germany in the case of N26, United Kingdom in the case of Revolut, Monzo and Atom Bank. The procedures to recover the money can be complicated by this aspect of having to do them in another country, but recover the money deposited (as I say, up to 100,000 euros) should not be impossible.

The case of BNext is something special since it is not a bank. The good thing is that the money is deposited in an Electronic Money Entity that does not invest it, so in case of bankruptcy of BNext, it could be recovered. Another thing is to break the Electronic Money Entity, but in this case the money of the Entity is deposited in an escrow account off balance in Banco Santander with which security is high.

Is it likely that any of these entities will break down?

Is it likely that any of these entities will break down in a disorderly manner? Of course it is more likely than in the case of a traditional bank. In the end, these neobanks are startups that live to the limit, with rounds of financing every so often due to lack of profitability.

It is also true that being a bank is not easy and both Revolut and N26 have had some problems with regulators about certain controls they must carry. Is it possible for regulators to close? You can not rule out anything, but it would be more of an inconvenience. Due to the procedures that your clients would have to do to recover the money than a risk of losing it provided that the balances are less than 100,000 euros.

What is the future of cyberbanking?

It is clear that from 2015 until now we have seen the emergence of new banks, something we were not used to, and that these banks express themselves in a different way. Without offices and everything through mobile applications. But, what is the future of these new banks?

In my opinion, once they are strengthening, they will offer more and more traditional banking services. Loans will be the first to come, but mortgages will also come, at the cost of having to expand their structure to all the countries in those that operate, the mortgage is a more complex product, requires signatures of contracts in notaries, etc.

This will make these new banks look more like the traditional ones. Of course, we will never see a large network of offices, this is a thing of the past and we already see that many banks are precisely in the process of closing branches. So on the one hand we will see traditional banks reduce their structure and the new banks will expand it, until they converge on entities that offer the most demanded services.

There will always be certain services that will require more structure, such as services to large companies or other more complex operations such as letters of credit, syndicated loans, mergers and acquisitions, etc. Here I foresee that some entities traditional or new, specialize, and offer these niche services. But the typical bank that does everything and has an office in every town in the country is something to extinguish.


Also published on Medium.

Published inFintech

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