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The next generation (read: online) bank

Prodigy Finance - November 12, 2014

Next Generation Bank

Traditional brick-and-mortar bank, be gone. A whole slew of new start-ups are changing what banking is, how it works, and most importantly, how much it costs.

The online bank

A number of companies are trying to crack the model of a fully online bank, with no physical retail storefronts. You can apply online, get your card mailed to you, review transactions on a mobile app, and consult customer service online or via the phone. And due to the lower costs of running a digital company, fees can be significantly reduced.

Simple Bank, established in 2009 and purchased by BBVA in February, is the leader in this field. Yet it has run into obstacles with customer acquisition and bank licensing. The deal with BBVA in part was to alleviate such regulatory hurdles. As a Quartz article sharply noted, “Reinventing finance for the internet age apparently requires a bank from 1857.”

Yet despite Simple’s difficulties, competitors are moving into this space. In the U.S., mobile-only bank Moven goes one step beyond Simple: the startup aims for a cardless, branchless experience, in which customers use the tap-to-pay Mastercard Paypass instead of swiping.

In Europe, the Finnish start-up bank Holvi already has users in 19 countries. Austrian-led Number 26 intends to challenge Holvi for techy European clients, by providing a seamless mobile app experience linked to its ATM card. Unlike traditional online banking, whose clunky infrastructure results in many delays, Number 26 provides real-time transactions data.

Algorithmic wealth managers

While avid investors can actively manage their own trades (or mimic others’ movements) through eToro and other platforms, many investors may prefer a lazier option: they want their money to managed for them. Previously, such services bore high fees and/or required high minimum deposits—thus restricting access to only the relatively well off.

But in the last few years, “robo-advisers” have democratized wealth management. Startups like Wealthfront, Betterment, Future Advisor (all USA), and Nutmeg (UK) provide automated platforms at a fraction of the cost, with much lower (or no) minimum investments. Investors select a risk tolerance level and, in some cases, some investment goals. Algorithms then do the rest, trading stocks and bonds in the background to maximize returns. The companies claim that their robots do better than most traders or wealth managers.

Upside (USA) has a slightly different spin on the trend, by targeting wealth advisers rather than individual investors. Advisers can override/tweak the algorithm’s suggestions, on behalf of their clients, or leave it on autopilot. Upside claims to significantly improve advisers’ productivity, allowing advisers to take on more clients for a better bottom line.

Foreign exchange and crypto-currencies

Startups like Transferwise and Xoom provide much faster and cheaper services than international wire transfer options or Western Union. They operate bank accounts in various countries, from which they can accept or send money. For the startups, then, money is traveling domestically in two different locations, while consumers benefit from lower fees and better exchange rates. Xoom even provides cash pick-up and door-to-door delivery in certain countries, enabling even those without bank accounts to remit money abroad.

Although not intended to be a foreign exchange trading platform, Bitcoin can also be used to transfer money abroad. Depending on the crypto-currency’s price volatility, as well as the spread of exchange rates in the various Bitcoin exchanges/currencies, this could be a better or worse deal than an international wire transfer.

Where do we go from here?

We hope the financial services revolution continues. Much of what happens from here, and the speed at which it happens, depends on:

  • Changes in regulation (how to regulate niche start-ups versus big banks? How to regulate forex or Bitcoin in a globalizing world?),
  • Consumer interest (how does Simple customer acquisition grow beyond early adopters?), and
  • New disruptions – for instance, Eric Ries, of The Lean Startup fame, has called for a Long-Term Stock Exchange, which would disincentivize high frequency and day trading, to better align shareholders’ interests with that of the long-term vision of budding startups.  
As part of the beyond-banks movement, we’re excited to see—and shape—what comes.

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