N26 and The Neobank Business Model

I want to talk about the business model. Recently, we’ve seen huge valuations for Monzo, for Revolut. There’s questions, from the investment community over, I guess, the underlying economics and whether these neo-banks can actually lend money. How do you look at the core business model of the incumbents, which is the asset driven deposit and loan book business, versus the neo-banks?

Two things. One it’s all so natural that it’s happening like this. Payment is a stream of money. In and out, very quickly. While investments and wealth, in general, it’s a stock and it’s much more difficult to move and it’s owned by baby boomers and Generation X, because they are at the prime age. As I said before, the Generation Y or the thirties to forties, are really in the middle. We are getting now, as Generation Y, the millennials, in our prime age, where we also get more wealth. This wealth, actually, if I was an incumbent bank, I would not feel so comfortable that, once all my grandparents, they distribute their wealth to their sons and nephews, that it will sat in the same bank.

Secondly, it’s the product focus. You want to become excellent at one thing at a time. The past decade, it was really for fintech to be good at that payment market. Now, there is a focus on lending money and wealth. Some neo-banks, they are starting work on that. Again, here we have the help of external factors. The new external factor is open banking, in my opinion. That’s going to help neo-banks, but fintechs in general, to start cracking how to lend money, with one product, that works in different countries. At the moment, it does not exist. It exists for payments. You have Mastercard and Visa and they have already covered the world in the past 50 years. You issue one card, as a fintech, but Mastercard has already done the work to have everything accepted, more or less, everywhere in the world.

This does not exist for credit, but that’s the thing for the next 10 years, where people are investing a lot. There is a lot of investment, at the moment, in the credit space and open banking. They need to collect more data and understand that client. That’s going to be the focus. It will be the focus, as well, because of the Revoluts. At the moment, neo-banks are focused solely on payments, core payments revenue stream, plus the premium and that’s it. Now they are all working on increasing their financial services in this area. They need to be good at that, as they play in more than one country, because that’s the overall aim of really creating, at the very least, a European bank. Revolut announced, a few weeks ago, that they have got a new funding round, but if you look at the interview with the CEO, they really said, we want to focus now on Europe. The same has been said by N26. So you need to find that new product that works everywhere in Europe. In credit, that’s the focus.

The next five years will tell us if the neo-banks can also fulfil the over side of the experience, which is getting money and allowing payments, but also lending.

What’s your view on the ability of the neo-banks to pull this off, in shifting to a complete banking solution?

I think it’s just a matter of time. Probably, not all of them will reach that stage. Many neo-banks started in the last decade and not all of them became N26 and Revolut. It’s always a mix of great product and selling it. There will be some that don’t even get into it, so they don’t have the right product, the right credit loan. Some others will be able to do it, but they will not be able to find the best way to sell or the best way for the customer to ask for it. We have seen a big push, by many players, including Amazon, on instalment plans. In France, Spain and Italy, at the moment, for certain products, you can click and pay for a product in three, six or nine months. That’s a way of lending money. It’s much closer to the purchasing moment, instead of, I would like to buy a phone and I ask for the loan before and then it’s a bit more detached.

I really think that some players will be able to do it. Why? Because just by pure statistics, many people are investing in it and working on that. The more resources you have – not just in terms of money – but the more resources there are, in terms of people working on these products, the more chance there is that someone will find the right recipe. The second one is the enabler of the open banking. You can tap into data that has not been used before. Having the data from your bank account, in bank one, bank two, bank three, all together, so that I can understand you better, it’s a very new way to assess the creditworthiness of a person or of a company. Until now, we have relied on how many times X has not paid for something. That’s it. Or is X paying their credit card every month. But it’s more based on data that is much smaller. Once a month, yes, he’s paid his credit card. Or once every two years, he is not paying for something. It’s more based on negativity. While the combination of all this sort of data shows you how I spend all my money, behavior wise. I’m pretty sure that there are partners also understanding how good I am at managing my own money.