Why do we need banks? People have traditionally used banks to deposit cash, stash their savings, obtain debit and credit cards, apply for loans and transfer money to their children.
To date fintech start-ups have been picking off the higher-value additional banking services (like money transfers and wealth management) but today, thanks to fintech start-ups like Number26, SavingGlobal, Funding Circle and Osper, banks’ core functions, the very things that make banks, well, banks, are under threat.
What’s more, these start-ups are starting to offer pan-European and global services that banks are not offering.
Nearly three out of four young people would rather visit their dentist than their traditional bank and half think banks are essentially like toothpaste — indistinguishable from each other. And one-third think they won’t need a bank at all, according to the Millennial Disruption Index, a study of industry disruption at the hands of “millennials” the generation born between 1981 and 2000 and more than 84 million strong in the U.S. along.
All of which adds up to a big opportunity for disruption. That’s the topic of a November 5 Web Summit panel discussion on the money stage moderated by Informilo’s Jennifer L. Schenker. Panelists include Number26 co-founder Maximilian Tayenthal, SavingGlobal CEO Tamaz Georgadze and Osper CEO Alick Varma.
Replacing Bank Branches
One of the few remaining advantages of using a bank branch was to be able to deposit cash. Not any more. Number26 has teamed with Berlin start-up Barzahlen.de and retail partners to allow people to both deposit and withdraw cash while doing the weekly shopping. The service, which was launched in October and is called Cash26, is now available at 3,000 shops in Germany, including grocery stores, drugstores and other retail chains. As a result, Number26 says it now supplies its clients with more cash withdrawal and deposit possibilities than Deutsche Bank and Commerzbank bank branches put together.
The Cash26 feature — which will be rolled out in other European countries — enables banking at checkout registers via barcodes directly on a smartphone. Customers choose the amount they want to deposit or withdraw and receive a barcode after entering their pin code. This is scanned at the checkout counter and instantly synchronized with the bank account. Cash deposits are immediately available for use. The app also displays partner shops in the surrounding area directly on a map.
“The financial services industry is dominated by slow, boring products that show little innovation,” says Tayenthal. “People are not going to bank branches regularly anymore. How much can they know about you if you show up once a year? In contrast they are opening up our mobile apps several times a week so there is much more possibility to reach the customer and learn about the customer.”
Number26 says it wants to bring more intelligence into bank accounts so that it can show clients the right things at the right time. It can, for example, use geolocation of smartphones to prevent fraud in real time. And when using the Number26-issued Mastercard shoppers can see how they are spending their money and get help with budgeting and spending goals.
At its start Number26 envisaged offering a prepaid card for teenagers that would allow parents to load pocket money and give real time feedback on their spending. But when the German start-up did the beta it found that the parents were using it for themselves.
It also realized that 80% of what people do with a retail bank account is connected with their cards, so at the end of 2013 it decided to offer full-fledged bank accounts for all types of customers.
The company plans to expand to other European countries, with the goal of eventually becoming a pan-European bank. But, says Tayenthal, “we don’t want to build everything ourselves.” Instead it wants to become a “fintech hub” that will make it easier for consumers to find and use alternative services like TransferWise, a London-based start-up that offers money transfer services.
Like Number26, the goal of SavingGlobal is to create a true single market for financial services in Europe and to help consumers access products that offer more attractive rates than those of their local banks.
EU households manage €10 trillion in savings according to European Central Bank estimates, but despite the EU’s single market there are large differences in deposit rates across the Continent and even within countries. Today customers can not easily open accounts across borders due to language, regulatory barriers and red tape associated with ‘know your customer’ rules. As a result, German savers alone lost out on €190 billion in interest earnings over the last five years due to low local interest rates, according to a DZ Bank study quoted by SavingGlobal.
SavingGlobal (which is in the process of changing its name to Raisin) aims to offer savers access to the best interest rates across Europe, offering a single user interface, from which users can manage accounts across its multiple banking partners from a central location. It is currently working with 12 banks and plans to launch its pan-European platform by year’s end.
“If you look at banking today it is one of the last areas where you have to interact directly with the service provider and can not shop around,” says Georgadze.
In August the company closed €20 million Series B financing led by Palo Alto-based Ribbit Capital and Index Ventures with participation from Russian entrepreneur and venture capitalist Yuri Milner, bringing the total amount raised to €30 million.
Meanwhile the UK’s Osper is targeting a sector that banks are not serving at all: children under the age of 11. “We have the opportunity to redefine the way children think about money, to offer them a mobile-first way to manage their money, make their life easier and carry on that relationship once they grow up,“ says Varma.
In the UK children under the age of 11 are not even allowed to open bank accounts. Osper allow children as young as eight to sign up.
Its pre-paid debit card is backed by MasterCard and comes with a simple mobile app (Android or iOS), which has separate logins for the young person and their parents. The accounts have no credit or overdraft so children can only spend what they have. Parents and relatives can easily add money to the cards. The Osper Cards cost a flat £12 per year and can be used in stores, for cash withdrawals at ATMs and for online purchases and service subscriptions such iTunes, meaning parents no longer need to hand over cash or lend their own credit cards for online purchases.
This is key, because research has found that less than 30% of young people in the UK with a bank account use online banking and instead rely on cash or credit cards from parents, according to Varma.
The UK start-up raised $10 million from Index Ventures in 2014 and plans to use the money to expand across Europe and to the U.S. “There are over a half a billion children in the world,” says Varma, “so we can create a global brand for young people and money without becoming a bank.”