Tearsheet's Briefings for Outlier members give a deeper and contextual weekly look into banking, payments, blockchain, green finance, and embedded finance. Subscribe to Outlier to get full access to Tearsheet content.
It’s a new year folks, and our new year’s resolution has been to sharpen our products and continue to keep you in the loop regarding all things finance.
Tearsheet’s new banking briefing for Outlier members does just that – well, for banking. (if you want to stay updated regarding payments, lending, marketing, data, embedded finance, and green finance, my colleagues have got you covered). Every week, you’ll get a bird’s eye view of what’s happening in banking, why it matters, and where this is all going.
To sum things up in one cringey pun (you’ll get a lot of those): you can bank on us for all things banking.
2021's biggest banking takeaways
2021 was one heck of a year for financial service providers. Here are some key takeaways:
Challenger banks enjoyed some serious funding success last year, with summer bringing in some particularly sunny days.
- Nubank was one of the first to bask in the summer sun with its series G funding round, bringing in $750 million at a $41 billion valuation (and that’s on top of the $400 million it raised earlier that year).
- Revolut hit a more “modest” valuation of $33 billion after its funding round in July, which brought the company $800 million.
- Fast forward to August, and we’ve got Chime, a fave among US consumers, raising $750 million on a $25 billion valuation.
Don’t think things died down at the end of the year, though. December brought quite a bit of holiday cheer, well.
Monzo’s valuation rose to $4.5 billion last month – an increase of over 200% compared to early last year – after a round of funding that brought the company $500 million.
The boost in valuation comes despite the company's legality slips – in July, Monzo said it was under investigation breaching anti-money laundering laws – and existential concerns for its business as it racked up losses.
Things seem to have turned around for the challenger bank, though. With twice as much revenue compared to the year before and new products bringing in 25% of its earnings, investors have been willing to overlook the company’s significant hiccups.
But all that money coming in may make it harder for these companies to raise funds in the future, especially if their business models don’t prove effective. It will also make it harder for less capitalized players to enter the market.
Nonetheless, consumers are digging digital banking.
And unlike mac & cheese ice cream and canned wine, the trend doesn’t look like it’s going away anytime soon. (If you are a mac & cheese ice cream lover or a canned wine sipper, please accept my humblest apologies, and continue reading. No weird foods coming up, but there will be some delicious data points on digital banking).
According to Publicis Sapient’s third edition of its digital life index, consumers continue to lean towards digital when it comes to banking.
- 62% of US consumers have signed up for a digital-only bank account
- On a global scale, 57% of millennials (ages 25-34) and 52% of Gen Zers (ages 18-24) say they have a digital-only bank account
Galileo picked up on similar findings with its 2021 State of Consumer Banking and Money survey.
- 21% of adults say they use a digital-only bank as their primary bank account. But at 65%, the majority of consumers are still relying on incumbents as their primary accounts.
- Still, consumers who rely on digital-only bank accounts reported a satisfaction rate of 79%, compared to those who rely on traditional banks as their main service providers – these folks reported 66% satisfaction.
But even with consumers flocking and funding soaring, digital banks’ plans to expand globally haven’t been too successful.
- In April, Revolut withdrew from the Canadian market, citing ‘limited resources’ as the main reason.
- In October, Monzo withdrew its application for a U.S. banking application, following its soft launch in June.
- In November, N26 announced it will be leaving the US market later that month, leaving 500,000 customers behind.
But while the expansion from Europe to North America hasn’t been going fabulously for a lot of these digital banks, things seem to be going smoother when the tables are turned.
Goldman Sachs has been serving the UK market since the 70s. Early last year, it reopened its digital bank Marcus to UK customers. This came eight months after the bank’s announcement that it would be temporarily stopping the application process due to demand overload.
But you can’t really mention global without mentioning Wise, which has been securing its place in international payments for years now.
In 2020, as Covid, hit, the company added 10,000 new SMB customers every month.
In light of the user growth, Wise gave itself a serious makeover:
- For one, it went from Transferwise to Wise as a way to associate itself with a variety of services in international payments.
- In an effort to redefine its relationship with banks and other fintechs, Wise has also been opening up its APIs for other companies, making it easier for them to enable international payments.
“International payments have been under-invested or ignored for quite a while, particularly on the user experience front. And we’re at a point now where we’re seeing attrition from traditional banks. And they’re thinking, how do we improve that? How do we defend these customers from growing fintech threats? How do we retain a customer for growth?” Ryan Zagone, head of Americas at Wise told Tearsheet.
With banks slowly moving to Wise for these APIs, the question becomes whether or not Wise will be able to expand into all things international payments.
Finally, these days it’s hard to mention banking without mentioning non-bank companies.
Closing up on big tech, we’ve got Facebook – oh, sorry, I mean Meta – as one example, gritting its teeth to make it into financial services.
Even with its crypto efforts failing in the past, the company hasn’t given up yet. It’s focusing on Novi as its fintech platform, and has plans to launch a new stablecoin called Diem.
Then from big tech to fintech, we’ve got Square – oh sorry, I mean Block – which got approved for a banking charter early last year. It has plans to expand its SMB banking offering to its clients and expand overseas.
Then there’s Intuit, which is swimming deeper into banking waters. Last month, the company introduced Quickbooks Checking. Originally launched as Quickbooks Cash in 2020, the new product creates a money management hub for small businesses. Over 150,000 small businesses have signed up for this product within the past couple of years.
This week’s takeaway article:
Digital transformation should be incumbents’ hottest new year’s resolution
Research by The Financial Brand found that in 2021, one in six financial service providers said their digital transformation plans were only partially deployed. Less than half said they’ve seen success with their digital transformation strategies.
But incumbents will have to step up their game if they want to keep up with competitors.
The Financial Brand names six digital transformation trends we can expect this year:
- Building a better digital banking experience
- Combining data and AI to personalize banking products
- Going for mobile-first consumer focus
- Updating back-office processes
- Incorporating more ESG and DEI into KPIs
- A more flexible workforce model
As banks start defining their goals for this year, they will need to come to terms with the fact that the role they play in consumers’ lives is changing.
As more competitors enter the scene, traditional banks may no longer be must-have establishments in their customers’ lives, but rather just another banking option – and an outdated one, if they’re not careful.
The new year may see banks having to court their customers anew.
In a way, we’re already seeing this happening. With Ally presenting itself as a financial ally rather than just a service provider, and major banks like Capital One making steps to get rid of overdraft fees, we seem to be seeing a change of tone among banks.
A new generation of financial service providers seems to be taking hold this year, one that aims to say – in the friendliest way possible – ‘hey, we’re here to help with the money stuff. You can trust us.’
Quote of the week
“If you are only in the on-prem game you are missing out on the cutting edge.” Zac Maufe, head of global banking solutions for Google Cloud
The day before Christmas, Maufe shared his thoughts with Forbes contributor Tom Groenfeldt on what retail banks need to do to stay relevant in 2022.
For one, they need to get their heads out of the clouds and move to the cloud (I did warn you about cringey puns #sorrynotsorry).
But it’s not just that. Before going full cloud, banks need to make sure they're making the move as strategically as possible. Moving legacy infrastructure to the cloud doesn’t fix the mess, says Maufe, it just relocates it.
Then, there’s also the matter of putting too much focus on on-prem software. According to Maufe, that can slow you down in the long-run, since processing data and analytics on homebase software can be tricky. Companies have tried to work around this with data lakes, but that can end up leading to data swamps – undefined data sets with unknown sources.
Cloud could be a way to process massive data sets and get more clear-cut insights.
What we're reading
Good to know
- Starting early next month, FDIC chair Jelena McWilliams is resigning, giving Biden a chance to play a bigger role in bank regulations (CNBC)
- US regulators are pushing for climate financial risk assessments for big banks (Reuters)
- New tax rule for small businesses lets the IRS look into their digital payment accounts (The Guardian)
Food for thought
- To keep SMB loyalty, banks may need to start offering “a la carte” products (PYMNTS)
- A strong visual brand may be the new must-have for banks (The Financial Brand)
- Banking predictions from Frank Sorrentino, chairman and CEO of ConnectOne Bank (Forbes)