The world of personal banking has seen a revolution in recent years. A whole host of fintechs have emerged to take on traditional banks, offering digital-based services that are usually cheaper and far easier to use.
Many of these digital disruptors are now significant players in their own right, with the likes of Revolut having attracted more than nine million retail and 100,000 business customers internationally since it was founded in 2015. Some 500,000 customers in Ireland have signed up for it.
While curiosity may lead consumers to sign up for digital-only offerings, it would seem that once they get used to them, they’re hooked.
"What we are now seeing is that the majority of our Irish customers are now using Revolut as their primary spending card," Joe Heneghan, chief executive of Revolut Ireland told The Irish Times. "This is mostly due to the wide variety of features available in the app, which have been designed to put people back in control of their finances."
Rival N26, a Berlin-based digital bank with more than 3.5 million customers globally, has an average of 10,000 people signing up for its services every day. It also believes that its 100,000 consumers in the Republic are keen to embrace new offerings.
Initial curiosity has been overtaken by consumers using these digital entrants as alternative providers of day-to-day banking services
"In general, Ireland is one of the most progressive markets for fintech in Europe," said Sarunas Legeckas, N26's general manager for Ireland. "Adoption of new products is strong as is the move to go cashless. Irish consumers are looking for products that match their expectations and needs, so there is a lot of interest in challenger banks and other fintech products because incumbent banks aren't supplying them and are still busy charging quarterly fees and other costs."
Eddie Dillon, the man who helped introduced the concept of opening a bank account just using a selfie to Irish customers, has also witnessed the move by consumers to digital offerings.
Greater significance
“Over the last 12 months, there has been a surge in the pace of Irish consumers opening digital-first bank accounts, with nearly one-in-four adults in Ireland now having a digital or challenger-based account. Of greater significance, however, is the increase in the volume of transactions and balances held on these accounts,” says Dillon.
“This is a noticeable turning point where initial curiosity has been overtaken by consumers using these digital entrants as alternative providers of day-to-day banking services.”
The former director of innovation at KBC Bank Ireland before leaving to set up his own fintech, CreditLogic, he is adamant the sea change isn't necessarily a bad thing. "Rather than viewing this as a failure among the traditional banks to meet the needs of the modern consumer, this is a mark of a more healthy banking market and the emergence of new forms of competition, all of which is positive," he said.
Revolut and N26 typically focus on offering a small number of services but doing them extremely well, although both have plans to expand their offerings in the coming years.
They are expected to be joined by a number of other digital challengers shortly, offering a greater range of services. Monzo, a UK-headquartered digital-only bank whose backers include Stripe, and Starling, another British rival led by former AIB chief operating officer Anne Boden, are both reportedly lining up their entry into the Irish market.
Free banking
Given that it has become increasingly difficult to avoid being charged fees by traditional banks, the fact that Revolut and N26 promise free banking is definitely proving attractive, although consumers should be aware that costs still apply, depending on your usage.
The fact that the fintechs also make it considerably easier to open accounts, offers low-cost foreign exchange rates and budgetary assistance, has also gone a long way to helping them win over consumers.
N26 and Revolut both offer free accounts, although they also have paid options that come with more features.
Anyone who’s opened up a bank account with a traditional player of late would likely be shocked at how antiquated the process still is. In fairness banks are slowing coming round to making it easier, but for a generation used to being always on and being able to sign up for services quickly, it comes as a surprise how laborious the process can be.
Digital disruptors allow users to join up in minutes using their mobile phones, enabling them to start using services quickly by being able to quickly identify yourself using selfies and video documentation. It should be noted though that fintechs are still subject to the same money laundering and “know your customer” rules as their more traditional counterparts.
For Revolut, aside from seeking a customer’s name, email, physical address and a mobile to which they send activation details, they will also require a selfie and formal photo identification and passport details.
Starling, which does not as yet operate in Ireland, notes that applicants have to download the Starling app on their phone and submit a government-issued ID document as they fill in the application. They also have to submit a video recording of themselves, which is checked against the government ID. They add that, in certain circumstances, they can request additional information.
Both note that the procedures are specifically designed to ensure that people cannot “onboard” – ie register – family members, or anyone else, under false pretences. Starling says that if someone tried to open an account pretending to be someone else it would know “and we may have to report them to the authorities”.
Once registered, however, both current players in the Irish market offer instant transaction notifications. And Revolut makes it especially easy to send and receive money from friends – you can even send a gif with your payment – making it very popular with younger users.
Revolut also offers extras such as a budgeting feature and the ability to “stealth save” by allowing you to round up transactions to the nearest whole number and divert the change into a savings account.
N26 offers what it calls “shared spaces”, effectively sub-accounts, and soon plans to enable users to share money within those.
With a free Revolut account, you can withdraw up to €200 in cash every month without paying fees, with a 2 per cent fee on amounts above that
And they can exchange up to €6,000 a month in 30 different currencies with no commission charged and only pay a 0.5 per cent free on amounts above that threshold. They can spend in more than 150 currencies at the interbank exchange rate, with no additional margin. The more you travel or shop outside the euro zone, the more you could save.
When Uber arrived on the scene, it forced every type of taxi service imaginable to make improvements
To show show that compares, AIB, typical of traditional banks, charges 1.75 per cent of the euro value of a non-euro transaction for point-of-sale purchases, up to a maximum of €11 per transaction. If you want to withdraw money outside the euro zone, you’ll pay a currency conversion fee equivalent to 2.5 per cent of the euro value plus a commission charge of 1 per cent of euro value, up to a maximum of €6 per transaction.
Disadvantages
So what’s the downside? As N26 and Revolut accounts don’t come with an Irish Iban (International Bank Account Number), it can cause issues receiving payments as they count as international payments. Such payments are free, but it is not as straightforward to make them online and some account holders report being asked if they had an Irish Iban instead.
And while the digital disruptors may have had an impact, incumbents aren’t about to go out of business anytime soon. N26’s Legeckas said he believed the arrival of new players has meant that everyone has had to raise their game.
“When Uber arrived on the scene, it forced every type of taxi service imaginable to make improvements. Prior to its arrival, taxis were smelly, drivers were rude and cars were old. This all changed when Uber came along and there are similar behavioural changes happening in the markets where we operate.
“The incumbents are trying to focus more on digitisation, build better apps and so on, and this is something that is ultimately benefits everyone,” he said.
Banks may be battling to regain control but many are struggling to catch-up, says Dillon.
“Traditional banks have made huge investments in their core technology platforms over recent years. This is with a view to modernising legacy infrastructure, satisfying latest regulatory demands and providing digital first experiences to customers. However, the sheer complexity of these programmes has meant that customer experience has materially lagged that provided by digital only rivals.”
Dillon notes recent signs of the gaps narrowing, with banks accelerating in-house development to enable integration with the likes of Apple Pay, as well as increased collaboration with fintech providers, and a move to compete directly with digital-only brands, as evidenced with the launch of RBS’s new online banking app, Bo, last month.
Richard Walsh, head of digital and payments at Banking and Payments Federation Ireland, the industry body representing the largest players, agrees. "There is no question that challengers are able to eat into the bank's profits to some degree and this is, in part, because traditional players have had far less adaptive platforms at their core and are struggling to incorporate new services. But many have completed or are in the process of completing digital transformation programmes that will allow them to better compete with fintechs."
Walsh expects a strong level of convergence in the coming years as incumbents become more lean and fintechs mature, but he downplays the threat posed by tech giants such as Google, which have increasingly been elbowing their way into the banking and payments space.
People still have faith in the high-street banks despite all the turmoil over the last few years
“Traditional banks are putting a lot of money into being more like fintechs and the fintechs are investing more heavily in regulation expertise so it will be interesting to see how this evolves,” he says.
Traditional banks may have attracted plenty of ire in recent years, particularly in Ireland, but Walsh ultimately believes that consumers still trust them despite everything.
Justifiable anger
“People still have faith in the high-street banks despite all the turmoil over the last few years and the justifiable anger felt by consumers in the years after the crash. But despite all that, most people still trust them to look after their money, which is why they still keep their money with them, and this is a key advantage they can build on,” he said.
Walsh isn’t overly concerned about the future for incumbents but he worries that if everyone flocks to fintechs, banks may end up becoming like utilities, something that consumers use for core services such as mortgages and loans, but not for shiny new services.
“This could mean that banks will suffer the cost of heavy regulation but may not be able to engage in the most profitable services. There will possibly be a smaller revenue line that has to be spread a lot further. I think ultimately though that they are all aware of having to need to adapt and are up for the challenge,” he says.
