
The Profitability Challenge for Challenger Banks - admp
https://fincog.nl/blog/15/the-profitability-challenge-for-challenger-banks
======
benjaminwootton
I think the challenge goes beyond just profitability.

I’m currently locked out of my Revolut account due to a bug on their end.

There is no telephone support and no in app support until after you are logged
in. Apparently you have to contact them via Facebook or Twitter for
assistance.

They are forever destined to be a toy with this kind of approach to people’s
money.

~~~
jlokier
I was locked out of my Revolut account too, for about a day.

I was able to chat via messages in-app. But each time I did, the support
person asked me to upload photos of supporting documentation to prove my own
other bank cards were in my possession, that sort of thing. I duly did so, and
then there would be acknowledgement followed by silence at the other end for
hours. Eventually the person would log off (their status is visible) and the
system would show that it was "waiting" for someone to become available to
handle my query.

That "waiting for someone to become available" would typically last some 6
hours or so.

Then I'd get someone, and we'd go through another loop, going nowhere, and
them going silent on me.

I read somewhere that this can go on for a week or more, which had me really
worried because I'd put in about £1000 just before they locked the account,
which I needed sooner than that.

I also read that their Twitter and Facebook teams are much more responsive
than their Customer Service.

So I reached out on Facebook. Someone replied quickly that they'd asked somone
in Customer Service to deal with my query, and... my account was unlocked
about 15 minutes later.

So, all credit to Revolut's Facebook team....

~~~
londons_explore
This is common where the issue is something "hard" to fix, so the original
employee punts it to the back of the queue and hopes someone else more
knowledge takes it on.

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RcouF1uZ4gsC
> While these challengers are successful in attracting large number of
> customers, many of them haven't quite yet made profit. Simultaneously, the
> larger the size, the more the losses.

I have seen this story okay out before. Startup basically grows base by losing
money. Eventually they need to actually make a profit. Then come out all the
dark patterns, selling of customer data, and other scummy behavior. If you are
a customer of these banks be extra vigilant.

~~~
Nextgrid
I am using Starling Bank. As far as I know they are profitable - they offer
enterprise services (payment processing, etc) and use that to subsidise free
consumer-facing services.

What I don’t understand however is how the other challenger banks didn’t see
this coming. Like how do you decide to build a bank and take millions of VC
funding without a reasonable path to profitability? Also I think Monzo
could’ve done well had they not taken VC money and spent it all - they do have
a good product, they could’ve charged a token amount for it (1£/month?) and at
scale it would’ve been decent revenue (they’re at 3 million customers now).

~~~
wdb
Guess, they can spend the £100m of the special RBS fund in the UK:
[https://www.starlingbank.com/news/rbs-cif-funding-
feb2019/](https://www.starlingbank.com/news/rbs-cif-funding-feb2019/)

------
shoo
It sounds like the plan for a lot of these newer banks is to grow customer
base selling services at a loss, then cross sell once they have a profitable
offering (home loans etc).

I wonder how plausible it is that some of these mobile only new banks will
never be profitable before they are acquired by existing legacy banks.

------
stubish
It certainly takes time, and nothing really new. 'Building Societies', 'Coops'
& 'Credit Unions' have grown over time, add features and get regulated to the
point we think of them as Banks. Not all will survive of course.

------
FailMore
I worked as a VC and saw the cohorts of (non superstar) challenger bank... and
omg: the more customers you have the more you lose, the more they use your
product the more you lose.

~~~
BubRoss
Why? It seems almost impossible to take people's money, charge them fees for
it, then loan it out again for interest and still lose money.

~~~
55555
They all charge almost no fees and there is almost no money to invest for
interest. Monzo is very transparent with their financials and when I checked
in mid 2018 their account balances totalled a mere 150 million USD. A single
rich person might have that in an older bank.

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Animats
These are just payment systems, like Zelle, Paypal, Stripe, etc., but running
as standalone banks. The numbers indicate that's not a viable business model.

------
blibble
always seemed to be lunacy to me, given:

\- the margins for retail banking were wiped out a long time ago

\- consumers have been used to free banking for decades (at least in the UK)

\- near-or-even-below zero interest rates for the last decade (with no signs
of this ending)

\- the "legacy" competition are some of the most well captialised entities on
the planet

is a "legacy" bank going to pay several billion dollars to acquire a nice app
with an unprofitable business behind it? I doubt it

~~~
notyourday
> \- the margins for retail banking were wiped out a long time ago

In the US retail banking is a cash cow: most of the country does not have
enough money in the bank which means customers periodically pay overdraft
fees.

> \- consumers have been used to free banking for decades (at least in the UK)

In the US most of consumer banks have a service fee, some as high as $15/mo.

> \- the "legacy" competition are some of the most well captialised entities
> on the planet

Legacy competitors are carrying branches in the most expensive real estate
markets in the world.

The problem of the upstarts is that they do not want to attack one issue and
do what MCI did to AT&T ( pick one - lower overdraft fees/lower service
charges/do not waste money on stuff (real estate), instead they want to
completely destroy the business model by making banking free, wiping out
overdraft fees and still wasting money on real estate ( headquarters/staff in
the most overpriced cities etc ) and after that they wonder why they don't
make money.

Here, a brilliant idea: take BoA fees, cut them in half, don't put everyone in
San Francisco, issue debit cards and hire a pile of people in Ohio to do
customer service a-la Discover. You will make money hand over fist and every
time BOA matches your fees you make yours $0.05 less - MCI did it to AT&T and
it cleaned Death Star's clock as long as it continued to do that non-sexy
stuff.

I'm actually thinking in next 5-10 years we will have the likes of Capital
One, Discover and Amex clean up on the banking side.

~~~
blibble
the US does seem to be approximately 20 years behind the UK and the rest of
Europe from a consumer banking perspective

maybe they'll have more luck there

~~~
xioxox
A lot of banks charge here in Germany. My previously free bank has started
charging, presumably because of the low interest rates which make it hard to
be profitable. A couple of online only banks are still free if you have enough
turnover, however. Germany has a crazy number of small banks, compared to the
likes of he UK.

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user5994461
Monzo and Revolut doing -58M and -40M a year. Ouch. Didn't see that coming.

I guess better cash the paycheck somewhere else before they're the next
MoviePass.

~~~
pkaye
Aren't the accounts insured by government entities like the FDIC in the US?

~~~
trollied
In the UK current account deposits are insured up to £85k.

Northern Rock went pop ~8 years ago and the public did not lose money - the
government did though.

~~~
user5994461
Makes one wonder what's the procedure and how long it takes to get the money
back.

Either way, it can't be a good experience to be stranded with no card, no bank
account, and the bit of money you had all frozen indefinitely.

------
Spinosaurus
Are there any challenger banks with an API? I'm not entirely sure what I'd do
with one but it seems like a neat idea.

~~~
qubex
The EU’s PSD2 (second Payment Services Directive) specifically introduces the
concept of Third Party Providers (TPPs) that are allowed to interact with your
bank account on your behalf either to collect/aggregate information or to
initiate payments. These of course require an API to do so, but unfortunately,
within the same piece of legislation, the TLA ‘API’ unfortunately suffers a
namespace collision with “Authorised Payment Institution”, a lesser kind of
online banking institution a step below the full EMI (Electronic Money
Institution).

I’m currently heading a project to set up such an institution so I’m into this
stuff up to my neck.

~~~
Spinosaurus
> I’m currently heading a project to set up such an institution so I’m into
> this stuff up to my neck

What's the project? Any links?

------
CaliforniaKarl
Possibly related: N26 (in the UK) possibly closing accounts of people who make
too many withdrawals.

[https://www.revk.uk/2019/03/what-are-n26-bank-up-
to.html](https://www.revk.uk/2019/03/what-are-n26-bank-up-to.html)

------
tomatocracy
There’s a catch 22 problem here I think. As least for me, a large part of the
reason I’m not willing to commit to any of these banks as a primary account is
precisely because they are unprofitable. Most people know what happened to
banks when they ran out of money to fund their losses in 2008/9 and how that
worked out for their customers (took months for people to get their money
back).

It’s not like eg Uber where I take very little financial risk as a customer
because I only pay them once the transaction is complete so as a consumer I
don’t need to care about whether they’re sustainable as a business.

Add in their treatment of web and telephone as second class citizens at best
(I don’t need a branch but I do need the website to be capable of being used
as a primary access method and I do need decent telephone support), and I’m
not surprised that most people won’t trust them.

~~~
bobthepanda
Does the UK or EU not have deposit insurance? In the US, as long as the FDIC
insures it I wouldn‘t blink an eye. (They cover $250K at a single
institution.)

(It‘s also why Robinhood in the US initially got in trouble for its checking &
savings account, because as an investment broker it is _not_ subject to the
FDIC but the SIPC, which does not have the same exact guarantees.)

~~~
tomatocracy
It does but (i) I’m not sure how many people actually trust it, (ii) it’s
limited to GBP100k per customer per institution I think, assuming they are UK
regulated banks, so they may struggle to get big deposits and (iii) the time
and administrative hassle of getting your money back may be a problem. The
experience during the crisis was that it took months for some people to regain
access to their money in some instances, even though it was covered by one
scheme or another. That is supposed to have been improved upon since, but it
hasn’t been tested with a large scale bank failure and it’s not clear if a
mass migration of accounts could even be done seamlessly. Eg see the
catastrophe of TSB trying to change their own backend in an operation which
had been planned for years. In the mean time, people might miss mortgage and
other critical payments for example, and for most people I suspect it just
isn’t worth the risk. I certainly wouldn’t risk it with my own money.

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pawkaman
I am curious why Transferwise was not mentioned at all...

~~~
scrollaway
Transferwise is more of a middleman IMO. I wouldn't use them in lieu of a bank
but they are wonderful to use as a money dispatch.

