“When B-school students prepare for McKinsey case interviews, they start with ‘Profit = Revenue – Cost’. To make a profit, either you grow revenue or cut cost or both. Then we graduate, enter the world of work, get a twitter account, learn about the future, the digital revolution and other such things and forget that equation,” fintech strategist Ajit Tripathi reminded us, and entrepreneurs anywhere, in a post earlier this year. I came across his piece on The Finanser and, just like Chris Skinner, found it spot on.
As you might have guessed, Tripathi was talking about the current state of fintechdom, in particular, challenger banks’ bumpy road to revenue. Most of them drove the fast lane to fame and popularity, only to get further from their ultimate destination: profitability. Some took a different route, like having fewer customers but more of their money. And now the poster child for the latter, Starling, is about to become the first major UK neobank to turn a profit, Wired reports.
Here’s why personalisation is neobanks’ best bet, no matter how close they are to make bank.
Fintech growth strategies roughly fall into three main categories. The first, called “blitzscaling”, is an aggressive growth tactic embraced by fintech darlings such as Revolut, Monzo or N26. “It’s the science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale,” says Reid Hoffman, co-author of the definitive book on Silicon Valley’s go-to scaling strategy. Cheap venture capital and a product with a universal appeal are essential for success, à la Uber and Airbnb.
Can a VC turn a neobank into a 100 bagger?AJIT TRIPATHI, FINTECH STRATEGIST
A variation of this model is, well, the exact opposite. Instead of large-scale expansion, Starling and Oaknorth, for example, have stuck to their niche and continued serving the UK and SME markets respectively. And it might be for the better. “How hard is that market with local competitors like Cashapp, Venmo, Paypal (let alone the 6000 banks)? Kinda hard. How big is it? Very very big i.e. marketing, compliance and distribution costs add up quickly. Now if you don’t conquer the US, China, India, Brazil or all of Europe, can a VC turn a neobank into a 100 bagger? No, not really,” points out Tripathi.
Then, there is the platform approach. Many fintech players have branched out into selling their proprietary technology to traditional banks and other challengers as a plug-and-play solution. Banking-as-a-service is a win-win for both parties, allowing platform developers to outsource the long and costly customer acquisition process to established players with a massive client base and a need for capabilities outside their comfort zone. Earlier this year, Movenbank went as far as to shut down its consumer-facing businesses to focus solely on its enterprise software business.
Others swear by the marketplace model, which is based on the idea of letting customers mix and match products from a carefully curated financial services ecosystem. Starling and Revolut have both spearheaded this trend, offering in-app lifestyle, insurance, wealth management and crypto trading services to customers.
To my mind, what all of these strategies could greatly benefit from is personalisation. Whether fintech lenders are competing with each other or traditional banks, a deep knowledge of customers and their needs will remain the ultimate competitive advantage. Think about it: using advanced data analytics, financial service providers are able to pinpoint the exact moment a new insurance plan, investment opportunity or a piece of financial advice would come in handy. And offer these with tailored conditions, a better user experience and less hassle. Plus, in the case of personal and business loans, with lower risk and costs, thanks to data-driven, AI- and ML-powered credit scoring models. According to Tripathi: “Banking is so simple that no amount of technology can make it more complicated.” No argument here. But the right technology can make it so much better for customers – and even more profitable for service providers.