Too much money is jostling for a space in online banking. That's a recipe for disaster.
Just about every week brings another example of a few billion being poured into a snazzy new app for managing your money. The latest is the Berlin-based N26. Last week the company announced it had raised an extra $300m from backers, which included China's emerging internet giant Tencent and Peter Thiel, one of the founders of PayPal. That took its valuation up to an impressive $2.7bn, making it Europe's largest fintech start-up.
A crowded sector
N26 is certainly an interesting and ambitious company, but it's entering a very crowded sector. Monzo already has a value of $1bn; in April last year Revolut raised another $250m, taking its value to $1.7bn; Starling Bank raised plenty of money for its launch, and so have Atom and Tandem. That is before you get into the dozens of new firms focusing on particular niches within banking, such as foreign-currency transfer or collecting electronic payments. Hardly a week goes by without a few hundred million being invested in new apps to help juggle your finances.
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True, finance is an industry that looks ripe for disruption. No-one very much likes their bank, and plenty of customers can be persuaded to try something new. But that doesn't mean there is necessarily going to be a market for all the new players. In truth, there are three big problems.
Three big problems
First, the margins in banking are wafer thin. All the new web-based banks have the advantage of starting with a clean slate, and they don't have all the legacy costs of their main competitors, so they are cheap to run. Even so, people are used to getting basic banking for free; they are not going to want to pay for it. Traditional banks made money from collecting deposits and then lending it out, but it is going to take a long time for a new bank to build a profitable portfolio of loans. Attracting customers might be relatively easy, but making any significant revenues from them will prove a lot harder.
Next, there is a limit to how many online banks we need. In most markets, there are three or four players, but not usually a dozen or more. Not everyone can build brand recognition or build any momentum behind their growth. Banking is fundamentally quite a dull business, and more of a chore for most people than anything else. The new web banks are going to struggle to get anyone very excited about downloading their new app. Even if it does have some new features, they just aren't going to be terribly exciting. It seems unlikely anyone will pay much attention to the 15th new bank launched this year, even if it does great tweets.
Finally, the traditional banks have plenty of firepower. The traditional high-street banks are not the most tech-savvy companies in the world, but they have huge marketing departments and 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 don't be surprised if, instead of trying to charge you for a current account, they offer you a monthly bonus for remaining loyal.
Worse, the established internet giants are already targeting finance as their next big area for expansion. Amazon is planning a basic current account in the US, and Google, Apple and Facebook are all pouring more investment into financial applications. They have the data, the brands and the expertise to make a success of that and will prove formidable competitors.
In most technology sectors one or two powerful brands at most emerge. Banking isn't likely to be any different. Over the next few years, one bigger winner will make a ton of money from app-based finance. It might be one of the start-ups, one of the traditional banks, or one of the existing internet giants. One thing seems certain, however. A lot of the investment pouring into the finance start-ups right now will inevitably be lost. It increasingly looks like a bubble about to burst.
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