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Digital natives vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019

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Page 1: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Digital nativesvs.

digitally transformed incumbents

fighting (?) in the battlefield of open banking

Sotiris Syrmakezis30 January 2019

Page 2: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Digital-only and

Challenger Banks

Page 3: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Case Study: The UK Challenger Bank Precedent• Low customer satisfaction

• Worsening client relationships with SMEs

• Lack of investment in technology

• High regulatory requirements limit banks’ operations

UK Bank Consolidation Over 60 Years

Sources: PwC, Deloitte, Greek press.

Note: (1) Stands for Cheltenham and Gloucester.

12

BarclaysMartins

Woolwich

LloydsC&G(1)

TSB

Bank of Scotland

Halifax

Leeds Permanent

RBSNational Provincial

Isle of Man

District

Westminster

Lombard

National Commercial

National

MidlandAbbey National

Provincial

Burnley

Alliance

Leicester

Bradford

Bingley

Southern CoopNorthants

Leicestershire

Portman

Derbyshire

Cheshire

Dunfermline

Barclays

Lloyds

RBS

HSBC

Santander

Nationwide

1957 1964 1971 1978 1985 1992 1999 2006 2013

Based on “Who are you calling a ‘challenger’?”, PWC, 2017

Page 4: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

2017201620152014201320122010 2011 2018

New banks enter the market: the Challenger Banks

Page 5: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

What are challenger banks?

• Digital distribution channels, typically mobile, instead of physical locations

• Competitive retail banking services such as current accounts, savings accounts, loans, insurance, and credit cards

• Underserved and unserved demographics

• Improved user experience

• Launch new products via API integrations with other Fintechs

• Expand into new markets

Fintech companies leveraging technology and software

to digitize and streamline retail banking

Page 6: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis“Financial Services Analysis”, CapGemini, 2016

A perfect storm enables the emergence of challengers

Page 7: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

5 Raisons d’ être

Page 8: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Challenger banks: Raison d’être

A shift in demographics: the Millennials

• US: 92M compared to 77M of baby boomers (UK: 13.8M)

• Digital natives, socially hyperconnected

• Increasingly concerned about financial stability

• More comfortable with on-demand services like AirBnBand Uber and simplified experiences like Google

• Economic drivers like low interest rates

• Desire for a simplified, intuitive, on-demand and mostly free customer service

1

“Challenger Banks”, Burnmark, Oct 2016

Page 9: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Challenger banks: Raison d’être

Smartphone penetration Singapore – 92%South Korea – 82%UK – 75%USA – 70%Germany – 65%

Hong Kong – 63%China – 58%Israel – 57%.

3%

28%

56%

13%

Telephone Internet Mobile Branch

Mobile Banking penetration

2

“Challenger Banks”, Burnmark, Oct 2016

Page 10: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Challenger banks: Raison d’être

Customer confidence in banking

Western Europe and USUK 33%France 33%Germany 40%Italy 24%USA 37%

Asian countriesThailand 89%Malaysia 86%Philippines 77%China 72%India 70%

Other European countriesMalta 72%Luxembourg 66%Estonia 55%Czech Republic 50%

3

“Challenger Banks”, Burnmark, Oct 2016

Page 11: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Challenger banks: Raison d’être

Geographical region

Emerging markets

Accelerate banking innovation

Financial inclusion and wellness through digital and mobile to onboard, engage and serve customers

Developed markets

Underlying inefficiencies of incumbents in serving the customer in the best possible and transparent manner

Trust and confidence seriously eroded post the financial crisis

Space for competitors to enter or to gain market share by offering a superior service, or by simply being available to customers

4

“Challenger Banks”, Burnmark, Oct 2016

Page 12: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

A big opportunity to plug into traditional banksand build new services for consumers

New regulations help challengers expand services

5

Challenger banks: Raison d’être

“Challenger Banks”, Burnmark, Oct 2016

Page 13: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

A glimpse into digital banks

Page 14: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

• Founded 2015

• The “quickest crowdfunding campaign in history”: raised £1 million in 96 seconds via the Crowdcube investment platform

• Raised £85m @ valuation of over £1bn

• Loss £33.1m for the year ending Feb 2018

• Loss £7.9m in the previous 12 months

• Just £1.8m in operating income.

• Recently passing the 1 million user mark

• Less than £150 per account

• Recruiting 20,000 new customers a week

Monzo raises £85m to become UK's latest tech 'unicorn’ 31 Oct 2018

Company announcements in the press

Page 15: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

• Founded 2013

• Raised $300M in a major funding round

• Customer base 2.3M, tripling it in the last 12 months

• Deposits €1B

• Planning to launch in the US in H1 2019

• N26's total raised: $500M

• Investments from Facebook board member Peter Thiel's Valar Ventures, insurer Allianz and Chinese technology giant Tencent.

N26 becomes Europe’s leading digital bank with $2.7bn valuation 10 Jan 2019

Company announcements in the press

Page 16: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

• Raised $250m @ valuation $1.7B

• February 2018: break even

• Has received $336M in funding

• Latest round: April 2018, $250M

• 1.25M customers in UK, 30% over 40

• Actively planning a U.S. launch in the near future

• Waiting list: 60,000 U.S. customers

Banking app Revolut becomes UK's latest unicorn 26 Apr 2018

Company announcements in the press

Page 17: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

• Founded 2014

• Loss £11M in its first year of operations

• End 2017:

43,000 account holdersAverage account balance £420

• Aug 2018:

210,000 usersAverage account balance £900 by Aug 2018

• $190M in funding to date

Starling looks for further funding as users grow fivefold 27/8/2018

Company announcements in the press

Page 18: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis“The state of the financial services industry 2017”, Oliver Wyman, 2017

COMBINED VALUATION OF TOP GLOBAL FIRMS IN EACH CATEGORY

Digital disruptors grow much faster than incumbents

Page 19: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

• Culture

• In-house vs. outsourced

• Modern core banking systems

• Methodologies: design thinking, service design, journeys and agile

Operations & technology as an advantage

• Emphasis on digital offering, mobile-1st

• Cloud-based operation

• Advanced APIs

• Open banking expertise

• Marketplaces & partnerships

Page 20: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Partnerships: disrupting the notion of competition itself

28 more banks

1 international money exchange app)2 energy comparison platform3 home insurance

1

2

3

Page 21: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Fintechs cooperate to create larger challenges

Page 22: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Digital customer onboarding

Page 23: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Personal Finance Management

Page 24: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Card lock/unlock & notifications

Page 25: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Control, savings, P2P payments, …

Page 26: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Agility and new technology as a weapon against incumbents

Page 27: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only
Page 28: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

More money spent pursuing a bank charter

18,58 18,87

2,881,57

8,3

2016 Operating Cash from the Statement of Cash Flows ($M)

Atom & Tandem spent 2x more cash than Revolut

“The Challenger Bank Playbook: How 6 Digital Banking Startups Are Taking On Retail Banking”, CBInsights, Mar 2018

Page 29: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Products more important than bank charter

17.000 20.000 15.000

500.000 500.000

1.500.000Customers Acquired Since Respective Launch Date

Revolut added more customers without a charter

“The Challenger Bank Playbook: How 6 Digital Banking Startups Are Taking On Retail Banking”, CBInsights, Mar 2018

Page 30: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Are challenger bankschallenging enough?

Page 31: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

“App-only newcomers Starling Bank and Monzo took the top spots in Smart Money

People's 'Best British Bank' awards, bringing an end to First Direct's three-year reign and leaving traditional incumbents trailing in their wake.”

“OakNorth becomes first UK digital bank to report annual profit”

“Challenger banks have issued 32% of the UK’s business mortgages and charges in the first half of 2016.”

“In 2015, Aldermore reported an impressive growth in

Asset Finance (+29%); SME Commercial Mortgages (+50%); Buy-to-Let (+18%); Residential Mortgages (+42%).”

“OneSavings Bank leads the field,

reporting a CTI ratio of 26% in 2015 with the bank’s efficient and scalable low cost offshore back office.”

Good news in the News

Company announcements in the news

Page 32: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Margins are very thin• Fees keep getting reduced: are people willing to pay for basic banking?

• How long will it take for a new bank to• Gather substantial deposits? Average account balance around €500• Build a profitable portfolio of loans?

• How easy is to build brand recognition and momentum behind growth?

• Isn’t making any significant revenues from acquired customers a lot harder?

• How and when will they start breaking even and making money?“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019

Page 33: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Banking is boring

People stay with their bank for 17 years but stay married for 11 (UK stats)

Why would you switch banks? Just because of easy onboarding?

Even if your new banking app gives you some nice features, can you really be terribly excited with it?

How long can you keep being excited?

Every new player receives much less attention than the previous ones

Account switching is very important

“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019

Page 34: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

The firepower of traditional banks

Huge marketing departments

Plenty of cash to spend

If customers start defecting to the newer banks in any significant numbers, they will hit back hard

Advertising budgets will be stepped up and money will be thrown at keeping customers on board

What about a monthly bonus for remaining loyal?

“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019

Page 35: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

GAFA: potential formidable competitors

Established internet giants targeting finance as next big area for expansion

Amazon planning basic current account in US

Google, Apple, Facebook, Alibaba investing in financial applications

Google & Alipay recently licensed in Luxembourg

Data, brands and expertise to make a success of

“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019

Page 36: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Main drivers for investors

New business model: old banking is dead

Worldwide expansion

Traction: new customer onboarding

Engagement: usage of new features

+

–Exit: next fund raising round, IPO, M&A

Revenues and profitability in first years

Deposits & Loans in first years

Page 37: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

The online banking bubble is ready to burst 20 Jan 2019

One or two powerful brands in most technology sectors

One bigger winner will make a ton of money from app-based financeOne of the start-ups?One of the traditional banks?One of the existing internet giants?

A lot of the investment pouring into the finance start-ups right now will inevitably be lost.

A bubble about to burst?

“The online banking bubble is ready to burst”, Matthew Lynn, MoneyWeek, Jan 2019

Page 38: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Are incumbentsjust standing and watching?

Page 39: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Digital disruptors vs. Incumbents

Disruption is always dangerous, but digital disruptions are happening faster than ever.

“Why digital strategies fail”, McKinsey & Co., Jan 2018

Page 40: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Growth rates will plummet. To survive, companies must be first movers.

Incumbents have to move fast

“Why digital strategies fail”, McKinsey & Co., Jan 2018

Page 41: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Trust

Brand recognition

Large customer base

Wealth of data

Sizeable branch networks

Digitized incumbent banks are dangerous

Self-cannibalizing

Disrupting status quo

Control lion’s share

Multiple reaches of value chain (digital natives: one segment)

Growing importance of digital in B2B

“Why digital strategies fail”, McKinsey & Co., Jan 2018

Page 42: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

• They get 20% share of digitizing markets. Digital natives command a 5%

• They create as much risk to the revenues of traditional players as digital attackers do

• Their moves push an industry to the tipping point

• Slow movers get exposed to life-threatening competition

Bold, fast moving incumbents are even more dangerous

“Why digital strategies fail”, McKinsey & Co., Jan 2018

Page 43: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Incumbents vs. digital nativesa marketing-based comparison

Page 44: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018

Brand awareness

Page 45: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Brand usage

* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018

Page 46: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Ad awareness

* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018

Page 47: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Purchase IntentBrand consideration

* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018

Page 48: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

PerceptionsBrand perception

* Results based on survey of 989 internet-connected UK respondents, Dalia Research, July 2018

Page 49: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Sotiris Syrmakezis

Though in the UK these digital-only banking apps have taken off like wildfire, their

popularity may be on the wane. One survey found a marked decline in

appetite for mobile-only banking among UK consumers, falling from 78 percent to

54 percent from the beginning of 2017 until the end of that year. However, the same RFI

report found that globally, the proportion of people using digital banking

rose from 58 to 68 percent through 2017. RFI Group said consumers

appear to prefer digital offerings from existing banks

to making the bigger leap to mobile-only startups.

“View From the UK: Fintech Startups Are Eating Banks’ Lunch”, Martijn Moerbeek, Banking Exchange, Jan 2019

Are people buying it?

Page 50: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

my take

Page 51: Digital natives vs. digitally transformed incumbents …...vs. digitally transformed incumbents fighting (?) in the battlefield of open banking Sotiris Syrmakezis 30 January 2019 Digital-only

Thank you!

[email protected] @sotiris11