Protocol | Fintech

The transatlantic battle for the future of banking

Banking is becoming increasingly all-digital, and European upstarts want to dominate in the U.S. But it won't be that simple, experts say.

A laptop and a piggy bank

Neobanks operate only online and require customers to manage their finances digitally. Despite regulatory hurdles, they are beginning to take off in the U.S.

Image: Atomic Imagery via Getty Images

The way people bank is changing, and for many, it's going all-digital. That's thanks in part to neobanks: small upstarts that generally operate without physical locations and require account holders to transact online or on their smartphone.

Over the last five years, banks like Monzo, N26 and Revolut have risen to prominence in Europe. Neobanks operating in the U.K. have almost tripled their customers over the past year and now count more than 19.6 million people as users. Even established banks like Barclays and HSBC have moved more and more of their offerings online. And the trend is coming to America — along with Europe's neobanks.

The online-only trend is further along in Europe than stateside. Chime is the current leading U.S. neobank, with 8 million users. But compared to the U.K.'s biggest neobank, Monzo, Chime comes out looking far less dominant. Monzo has just 4 million users, but that's in a market six times smaller than the U.S.; in terms of market penetration, Monzo is twice as successful. Others like Revolut and Germany's N26 are less so, but they're still household names in much of Europe.

With a huge credit-hungry population, America offers these companies a chance to rake in big profits. It should come as no surprise, then, that N26 launched in the U.S. last year, followed last month by Revolut — with Monzo also beta-testing in the region.

The entrance of these well-funded, successful banks may make the U.S. incumbents nervous. N26, for one, signed up 250,000 U.S. users in five months. But in interviews with Protocol, executives at Varo Money, Simple Bank and MoneyLion — some of the leading U.S. neobanks — all said that the European firms were disregarding the challenges ahead. Colin Walsh, CEO of Varo, summed up the mood: "I think that the European challengers have completely underestimated the complexity of the U.S. market."

Regulation hurdles

European banks looking to enter the U.S. market would do well to look at how little traction American neobanks have achieved so far. "U.S. regulators are supremely focused on consumer protection," Simple CEO David Hijirida told Protocol.

"In the U.S. after the financial crisis, we really tightened up our regulation around who could get a de novo charter," Walsh said, referring to a charter gained from scratch, rather than from acquiring another bank. That's in sharp contrast to the EU and U.K., where "regulators were determined to create more competition." According to CB Insights' Lindsay Davis, that regulation — like making it easier for banks to get licensed and launching an instant, free switching service — meant "getting a product to market was made easier."

Once products did enter the market, Walsh said he thinks European consumers trusted them more, given that they actually had banking licenses. In the U.S., a neobank must rely on a partner bank for federal insurance. That creates a trust issue that could hinder people from signing up. "I think the idea of working with a regulated bank is important to a lot of consumers," Walsh said.

Davis said that's even more true stateside, where the financial crisis hit banks' reputations even harder than in Europe. "There's been this trust deficit that just has never been able to be repaired in the U.S.," Walsh said.

To rub salt in the wound, relying on a partner bank also eats into neobanks' margins: The neobank has to pay the partner for their services. "You have a partner that's taking a huge part of your revenue," Walsh said, also noting that not being a fully regulated bank means certain products — like credit and joint accounts — are off-limits in the U.S. In Europe, meanwhile, neobanks could offer popular products like debit cards with no foreign exchange fees, which allowed them to quickly gain traction among a wide range of customers.

"U.S. banking is one of the most competitive markets in the world," Simple's Hijirida said. "In the U.S., customers have come to expect free checking as standard. I suspect Europe overall may be ripe for lower-fee and lower-margin competitors in general, versus the potentially more battle-tested U.S. banks." The U.S. market also features much tougher competition from old-fashioned banks, which have adapted to the smartphone era better than many of their European counterparts. Goldman Sachs has Marcus, which offers high-yield online savings accounts and no-fee personal loans; Spain's BBVA acquired Simple as part of its U.S. push. Over in the U.K., banks are scrambling to launch competitive offerings, with little success.

All those challenges — higher costs, a more competitive market and a tougher regulatory landscape — made it hard for U.S. challenger banks to grow as large as their European counterparts. And now those Europeans, flush with cash and customers, think they can muscle in on the Americans' territory. In practice, though, that might not be so easy.

Related: Varo CEO Colin Walsh on the future of banking

Monzo, Revolut, N26 and other foreign neobanks will have to face the same challenges the American ones did on U.S. soil — and according to some experts, they're in an even worse position to do so. European banks will have to go through the same regulatory process as the American ones, relying on partner banks for the foreseeable future. And they'll have to do so against tougher competition — like Varo, which is set to become the first neobank to receive a charter in the next few months, after over three years of regulatory wrangling. Getting a license could prove trickier for the Europeans, too.

"I think they're waking up to the reality that, if they become a bank in the U.S.," Walsh said, referring to U.S. law, "their parent has to become a bank-holding company, and all their global operations are subject to fed oversight."

N26 has already experienced some of the U.S. hurdles, with the company taking six years from launch to break into the American market. "If you look at N26 and how long it took them to get to market, I think they vastly underestimated how fractured our regulation is," CB Insights' Davis said. And when asked by Protocol, N26 gave no indication that it would apply for a license anytime soon, citing a "very good and strong relationship with Axos," its partner bank.

Cultural differences

Do non-U.S. banks know what American customers want?

Some features offered by Monzo and N26 — such as debit cards with no foreign transaction fees — aren't a high priority for many U.S. consumers, who are much more inclined to use credit. But they do offer some attractive features for those trying to increase their cash flow: organizing "pots" of money for upcoming bills and then autopaying them, in Monzo's case, and no minimum balance or account maintenance charges, in N26's.

"At the end of the day, almost any product or feature can be copied," Simple's Hijirida said. "Our secret sauce for competing in this market is creating a culture focused on fast experimentation and then quickly doubling down on what works. We will win because we can pivot quickly to respond to customer data and feedback." That being said, a 2019 survey by Cornerstone Research suggests that Simple, which was founded in 2009, has less than one-third the number of deposit accounts as competitors Ally and Chime have.

Some leading U.S. neobanks are focused on getting consumers to view them as full-stack banking solutions for all their financial needs instead of niche platforms dedicated to one specialty, such as investing or managing cash flow.

Hijirida is confident in Simple's "treasure trove" of customer feedback, spanning over a decade, although the company was "not always the best at converting these lessons learned into action," he said. "We're changing that now."

We're not trying to sell you a beautiful metal card and telling you that you're going to be part of some fashion movement, right? We're actually trying to get more cash into your family's pockets. — Bill Davaris, CMO of MoneyLion

Bill Davaris, CMO of MoneyLion, describes the unfolding competition for neobanks as a "tech race." But he said he believes MoneyLion has set itself apart by combining approaches from different areas of the industry. "Brands like Stash or Robinhood, they've all created their little viral front door in order to get you in and get you that instant value. I think what MoneyLion's done is we've taken notes from not only the broker-dealer world or the trading world, but we've also taken notes in the banking world to see where is the most valuable product we can offer day one, and we've done that across the board."

Davaris says that winning over competition and knowing the customer goes beyond having the best stack or the best research: "It's also delighting them, surprising them and offering them disruptive products that make them feel like MoneyLion has their back," he said. "And that could be a cultural difference between here and the U.K." Davaris added that he wants the bank's messaging to portray a trustworthy brand: a seasoned neobank that "understands America, understands Americana as a culture, understands hard-working Americans like nurses, police officers, public safety people, civil servants — everybody."

"A lot of these banks that are coming in are trying to be glamorous," Davaris said. "We're not trying to sell you a beautiful metal card and telling you that you're going to be part of some fashion movement, right? We're actually trying to get more cash into your family's pockets."

MoneyLion focuses on what Davaris calls "today money" and "tomorrow money." One of its core products is Instacash, a cash advance that allows customers to borrow from up to $250 from their next paycheck at 0% interest. Another is Credit Builder Plus, a loan with the potential to help a consumer build credit (depending, of course, on how responsibly they pay it back) by allowing the neobank to report to all three credit bureaus on their behalf.


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American neobanks Protocol spoke with seem firm in their belief that they'll be able to weather — and come out on top of — the incoming competition. But that could also render them blind, in a sense, to what's coming. After all, a heads-down approach and a head-in-the-sand one aren't too dissimilar.

"Whether they're coming into the market or not, I've got to be honest with you: Our focus is the same," Davaris said.

"We spend very little — if any — time talking about competitors," Hijirida said. "Our leadership team has not spent any time discussing Varo's license. We are heads-down, executing our own plan." But he does offer that the bank is observing developments as the area of fintech charters and alternative licensing evolves.

"My main concern is our customers," Hijirida added. "As long as we can quickly innovate on their behalf, I'm not worried."

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