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The virus has crushed the challenger bank dream – Financial Times


There comes a time in your life that you realise that some of the friends you used to consider good friends aren’t actually your true friends. These are your party friends. They’re great in the good times, but they lose their charm, or function, when something bad or life-altering happens to you (like losing a loved one or getting seriously ill, for instance).

The phenomenon known as “fintech” grew up in the good times, in the aftermath of the global financial crisis. Fintech firms were great during these party years, when VC money flowed easily, when profitability didn’t seem to matter (in any “tech-enabled” sector), when the idea of “being your own bank” was somehow a positive thing, and when contact with other people felt so normal — so incessant — that having an app that only spoke to you via robots felt like a nice break from the relentlessness of human interaction.

But the party years, for now at least, are over. In the UK, we are suffering our worst recession in 300 years. Globally, the economy is set to shrink by 4.4 per cent this year — the worst contraction since the Great Depression of the 1930s — and the IMF has warned the coronavirus crisis will wreak “lasting damage” on people’s living standards. Regular interaction with different humans is, for now, a thing of the past.

With lockdowns speeding moves to “go digital” across various industries, commerce rapidly shifting online, and cash being shunned as a potential virus-spreader, this should really have been fintech’s time to shine.

And for some, it has been. The less sexy business-to-business — or B2B — fintechs, particularly those that support rapidly growing ecommerce, have performed well on the whole, and have been popular among investors. European B2B fintechs this year have raised €5bn, compared with €3.1bn for business-to-consumer firms. London-based company Checkout.com, which processes payments for online retailers and services, raised $150m over the summer at a valuation of $5.5bn, more than twice the valuation it had raised money at a year earlier.

Klarna, meanwhile, the pretty-looking debt trap for millennials and Gen Zers (but which also tends to get counted as a B2B firm because it provides the payment infrastructure for e-retailers) was valued last month at almost $11bn, making it the most valuable fintech in Europe, having seen a surge of spending on online shopping during the pandemic.

Consumer fintechs

But for the big consumer fintech names, it has been rather different story. Some, such as Monzo, have seen valuations plummet. Both Monzo and Revolut have faced a barrage of complaints from customers who have had their accounts frozen.

In June, Monzo completed a funding round at a 40 per cent discount to its previous valuation, as the coronavirus hit its growth outlook, apparently pretty hard — in July, the challenger bank went as far as to warn that the pandemic had threatened its ability to continue to operate. Eesh. It also had to lay off 120 staff.

In a desperate bid to make some money, never-profitable Monzo has recently launched a £15-a-month premium account, which offers perks like metal cards (apparently some men people like them), and 1.5 per cent interest on balances of up to £2,000. (So that’s a maximum of £30 interest. On a £180-a-year account.) Monzo has tried premium accounts before, it should be said, and it didn’t go too well.

At the height of the lockdown, hundreds of its customers complained they had been shut out of their accounts for sometimes weeks at a time, with Monzo freezing accounts without notice. And the issue doesn’t seem to have gone away — there are now almost 5,000 members of a Facebook group called “Monzo stole our money” and on Trustpilot, 12 per cent of reviews are now “Bad”, with the bulk of the complaints about accounts being shut down or frozen, leaving customers unable to access funds.

Monzo says it has to sometimes freeze accounts in order to “stop criminals using Monzo for illegal activities”. It told The Guardian back in January that when it investigates its frozen accounts, it finds it makes the correct decision in 95 per cent of cases. Which would mean in 5 per cent of cases . . . it’s the wrong decision. Not great.

Revolut (also never profitable apart from a brief period in 2018 when a surge in crypto trading boosted its revenues) has struggled too. While it managed to extend its Series D round with a further $80m in fundraising in June at the same valuation as before ($5.5bn), it has been beset with issues in recent months.

Its revenues have fallen sharply since the start of the pandemic (and that comes after its losses tripling in 2019) and like Monzo, complaints about money going missing for weeks or even months at a time have increased in recent months. Online complaints service Resolver said last month it has received 3,911 complaints about Revolut this year so far, up 2,487 for the whole of 2019, with most of the complaints about not being able to access funds.

Many of these issues predate the pandemic. But it’s when the times get rough that challengers need to really prove that they are just as reliable as the incumbents. Despite having succeeded in acquiring millions of customers and becoming household names, fintechs like Monzo and Revolut have still not managed to acquire a key attribute: fidelity.

SME challengers

In terms of building trust, challenger banks serving SMEs have also not had a great pandemic. Business lender Tide, for instance, which is listed by the government as one of 28 banks offering state-backed bounceback loans, recently had to close its waiting list (which reportedly had 70,000 firms on it!) after many customers had been waiting for weeks, because it just didn’t have the money to lend out. In a recent survey by Moneysavingexpert.com, while Lloyds got a net positive score of 81 per cent for the way it operates its bounce-bank loan application process, Tide came bottom with minus 90 per cent. Metro Bank has faced complaints about the same issue.

SMEs that are trying to switch banks so as to get access to the loan scheme are finding that most of the incumbent banks, such as TSB and Bank of Ireland, are restricting loans to existing customers. This is the worst possible advertising for fintechs: if customers know that only the big banks will be able to help them when times get tough, they are of course going to dodge the challengers.

Fintechs have complained that the system is rigged in favour of the incumbents and in many ways they’re right. The big banks are too big to fail, and that’s why customers know that they will probably be safe if they bank with them, especially in the bad times. It will take years for fintechs to achieve the balance sheets and loan books that banks have, and they might find that the VC money that has so far kept them afloat is not as readily available in a global downturn.

What fintechs really needed was a crisis so that they could prove once and for all that they were just as good as the best of em (or at least the rest of em). This year, they got just that, but they have failed to prove themselves. The problem, as we see it, is that anything they can do, the big banks can do better. And “innovation” and fun user interfaces suddenly become less seductive when the world is crumbling around us.

In life, when things get rough, you often find yourself back in touch with those old friends and family members who you shunned when you just wanted to party. They might not have been as cool and exciting as your new friends, but they won’t let you down when things get scary.

Deep down fintech customers know this too. While it might be very trendy to say that you hate the traditional banks, not many of us pay our wages into even the most established of their challenger rivals. Fintechs needed to prove that they’re not just there for the good times. They’ve still got some work to do.

Related links:
Monzo: the bank that doesn’t want to be — FT Alphaville
How Monzo is banking on customer apathy — FT AlphavilleRevolut saga spotlights concerns over digital banks’ service standards — FT



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