In this episode of The Challengers, Josh Liggett and Zack Miller explore what Varo Money getting a national charter might mean for the firm and for the challenger banking industry. We compare Monzo, which recently questioned its ability to survive as a going concern and Starling, which said it expects to break even in 2020 and reach profitability in 2021.
Lastly, your hosts discuss the new players in the challenger banking space: Kabbage and Intuit. Both recently launched accounts for SMBs.
Zack Miller: There’s been a lot of action in the space. I think probably the biggest move in the entire challenger banking world is Varo, one the first challenger banks in the US. It’s been going through the national charter licensing process for close to five years. Now, they have a charter.
Josh Liggett: First of all, full disclosure, we actually invested in Varo through a fund, so we have exposure there. But it’s just a good win for fintech, whether you like Varo or not. It’s really good to see a challenger come in and become a full fledged bank, get their charter, and get everything together — like everyone should be celebrating this, regardless of what your feelings are about Varo.
Zack: Right. And I think it definitely benefits the consumer because we’ll see more successful challengers launch with their own licenses. And that means they’ll be able to start taking deposits, offer better rates, get into lending — getting into full service banking products.
We are seeing a divergence within challenger banking, though. It’s not a rising tide floats all boats. If you want to contrast the fates of some of these companies, we saw Monzo, a couple weeks ago, give a warning about their ability to be an ongoing concern. They’re facing existential threats here. The same week, Starling, another UK bank, says there’s a chance that they’ll be breakeven in 2020, and profitable in 2021. So it’s not just that every challenger bank is going to succeed or everyone’s going to die — the model matters here.
W can talk about why the models are different. I think one of the differences is Monzo got caught up in this groundswell of other challengers saying let’s be a global bank, like N26 and Revolut. We’ll start from Europe and conquer the whole world. Monzo was late to the game, but they planned on coming to America. And Starling kind of said, no, we’re pretty comfortable sticking around the UK. I think that’s a big difference.
Revolut and N26 are saying they’re scaling back their global ambitions right now. This is not a time that they’re going out and expanding — they’re re-entrenching into existing markets.
Josh: I don’t know how many times on the podcast we’ve said that you need a business model that’s profitable. You need your economics, need to make money — you can’t have these situations where you just hemorrhage cash. On a daily basis, I see startups that are trying to keep that balance between global expansion and trying to get there as fast as possible versus having a little bit more sure footing in terms of taking that next step. You need it. So there definitely needs to be a balance between the two and I think the more successful challengers are saying, listen, we’re going to grow global, but at the same time, we need to have a super solid foundation.
I think we’ve seen challengers focus too much on expansion — they raised a ton of money but they didn’t fix those internal models that were there from the beginning. And shockingly, when there’s a downturn, it all comes crumbling down, which isn’t shocking.
Zack: Even though we have all these new players, the revenue model is still relatively similar, right? So, Starling did get their business accounts up and running. But Starling had introduced a premium type of business account early. Monzo still hasn’t figured it out. They launched one, they pulled it back, they’re still trying to find the right model. It’s important to find a differentiator. You got to bring in revenue. So whether that’s fees on a bank account, or whether that’s a subscription on the bank account, it matters.
Monzo focused on global expansion ahead of good fundamentals. I think we’re seeing challenger banks 3.0. We had the early stage, the Simples. And then we had the next class, and now we’re seeing some of the biggest ones mature. So, certainly in the US, N26 and Revolut, the global brands that came into the US and launched this year, and last year, they’ve all had changes at the top. We’ve interviewed some of them on our podcast. Monzo has also seen a change in leadership. That speaks to the maturation or the natural process that some of these tech companies are now moving into, this different phase of growth.
Josh: They need to grow up and they need to get more real and so, it’s also probably just heads need to roll. I imagine that’s part of it — we need someone to blame, a fall guy. You’re going have restructuring and reorganization and this person has got the new secret sauce or this person is going to run it for a little bit. It’s not great. It’s not usually the greatest sign in the world.
A lot of these challenger banks that moved cross border have had issues because they’re not playing on their home turf. It’s expansion and it’s not easy and they have to spend a ton of money. So when when it doesn’t work out, obviously the person in charge is going to have to go find another job, which is not surprising.
Zack: I want to touch on some of the new players in the space. Since our last episode, we’ve seen Kabbage, the online business lender, launch a bank account. So did, Intuit’s QuickBooks with QuickBooks Cash. Both are focusing on small businesses with interesting offerings. Being tied into the whole QuickBooks ecosystems, the accounting software — you could think about all the possibilities, like being able to forecast cash flows and lending off of that and spending the money. Small business owners spend a lot of time in QuickBooks anyway, so there’s a brand affinity. I feel I’d be open to using QuickBooks Cash and Kabbage. To me, those are both very smart products.
Josh: It could be a toe dip in the water for a lot of these traditional players. Small businesses that were not usually interested in a digital offering or any sort of account like that, they could be like, Oh, Intuit is doing it and I trust them. I’ve used them a million times, all the time, or I’m using them all day long, and they have all my data already. So sure, why don’t I try it and see what it’s like? So it could be an entry, a gateway, a gateway drug into the digital banking space.
It’s so tough. You and I sit on the cutting edge of tech, or at least I hope we do. We’d love to be using these challenger banks and digital banks. But to get to the mainstream population? I still think there’s a lack of trust in these new digital banks. I think of my dad — would he use something like this? Absolutely not. He wants somebody to talk to even on his digital brokerage account that he uses for trading. He wants to talk to somebody and not a bot — he wants to know that there’s a person he can visit if he wants to. I think a lot of people are still holding on to that theory.
COVID is a big deal right now and in six months, maybe we get over it. Maybe in a year or two. But eventually, maybe this isn’t the new normal. What is the new norm?