transparency Archives

The Rubik’s cube, once used as a test for investment banking applicants, now serves as inspiration for one of the fastest growing digital banks.

N26, formerly known as Number26, gets its name from the 26 smaller cubes that make up a Rubik’s cube. Without a strategy, solving the cube is nearly impossible; but a simple explanation and strategy makes the task much easier. Extending the metaphor to fintech, N26 wants to give consumers a simple way to navigate banking, and has been working on creating the bank of the future since its debut at TechCrunch’s Startup Battlefield in 2014. Embracing the unbundling of the value chain in financial institutions, N26 presented itself in the role of a digital customer service hub surrounded by third party financial services.

Since then, N26 has changed both in size and form. Strategic partnerships with TransferWise, MasterCard, and Vaamo give customers forex, mobile payment, and investment capabilities, respectively. Investors, including Peter Thiel, have poured over $50 million into the German based company. N26 has grown to over 200k users, and on July 21st, announced it had obtained a German and European Union banking license.

Although N26 may not look the same, the firm’s values have stayed on point, with an ethos revolving around millennial ideals: customer service, transparency, and trust.

The core of N26’s philosophy centers on putting customers first, since caring about customers naturally leads to building trust and transparency. Valentin Stalf, CEO and founder of N26, feels that a bank needs to understand what customers want and need, and only then create financial products. “What is going to make the bank of the future valuable, I think, is not the size of the balance sheet and the risk weighted assets, but the value driven by the relationship with the customer,” he remarked. “Banks have reduced value proposition to being the cheapest, and in the end the user experience was really shitty.”

Embracing the message of putting customers first has led to a digital product that tries to make finance as simple as possible.

It takes four minutes to sign up for a N26 account on a mobile phone. Abnormal transactions are brought to the user’s attention, making the ability to spot fraud easier. And when it comes to using the platform, one click interactions are featured, including the ability to report a credit card missing with the click of a button.

To Stalf, the clarity and ease in which customers interact with a financial product is the foundation of trust and honesty. “Transparency doesn’t mean you show everything at every moment, but show people the right thing at the right time, creating a trusted brand,” said Stalf.

Although trust is important to any company, a digital bank utilizing third party financial tools needs to acquire trust in more than one way. Not everyone has the time and understanding to find the best financial tools on the market, so N26 needs customers to trust that partnerships they’ve made are with the best companies possible. “If TransferWise is connected with us, we’ve done the preselection that it’s a good offer,” he remarked. “That’s what we have to build our brand around: winning customer trust and putting great products forward.”

Not everything has gone as planned. On June 6th, 2016, several hundred customer accounts were canceled after frequent ATM withdrawals led to higher than anticipated fees for N26. Through a press release, N26 explained its decision to shutter the accounts, and announced a new fair use policy outlining usage guidelines for its customers.

N26 has since changed the manner customers withdraw and deposit funds, utilizing in-store retail networks to facilitate account activity. Customers can now go into one of eight thousand retail locations across Germany to withdraw money,and deposit cash into QR-marked envelopes.

Users are still limited to five free ATM withdrawals a month. Stalf understands that problems arise when building a business, and how a company responds to an issue may be more important than the issue itself.

“We tried to be very transparent, and tried to change fundamentally the cost structure behind everything,” concluded Stalf. “Our customers understand that the model has to be sustainable, transparent, and fair. We tried to respond honestly and transparently, and we focus on the core value proposition of simplifying your financial life.”

Being honest and transparent seems to have worked, as user activity and signups increased in the period following the cancellations, according to N26’s CEO.

N26 may be building a bank of the future, but it still has a long road ahead towards its goal of disrupting the banking world. If N26 can grow its customer base, while keeping costs low and including more services catering to a larger audience, it could have a chance of becoming more than a niche bank. Whatever happens, digital upstarts are providing an interesting example for the bank of the future.

Over the past few years, investors have been treated to an unprecedented level of transparency thanks to Twitter/Facebook/blogging.

With millions of people tradestreaming (the collective publishing of investing advice 24/7) out onto social networks, all an investor needs to do is just plug in and begin learning from investors much more experienced and talented than he.

Moving beyond just listening to the stream, many investors are replicating hedge fund returns by following top investors’ quarterly regulatory filings on sites like market folly and using research tools the likes of AlphaClone (affiliate link because it’s awesome).

Here’s an example of how I’ve built my own DIY all-star hedge fund.

Professional advisors and the social media pushback

But this post on Quora (if you’re interested, follow the Tradestreaming board on Quora) got me thinking about how transparent investors — particularly, investment advisors — really are online.

In fact, in talking with many portfolio managers about the merits of joining a marketplace for portfolio managers like Covestor, one of the biggest pushbacks I’ve heard has been the need to be completely transparent. It’s one reason why truly valuable actively managed strategies may not make their way to ETF format: investors can track (almost) every move.

As the Quora post describes, many investment advisors feel that their stock picks are their special sauce and wouldn’t do anything to jeopardize losing their edge.

There’s little advantage in it for them, because for most the exclusive nature is their bread and butter

Freemium: emphasis on the -mium

When they approach publishing online, these investors actually reveal very little of what they’re really doing with their portfolios. They throw a bone to investors here and there, but typically it’s just a throwaway investment idea, not something they’d stake their livelihoods on.

If these investment types are really using a freemium model to attract new clients, they’re definitely emphasizing the –mium part, not the free.

The downside risk of being wrong outweighs opportunity of being right

Of course, like financial newsletters, there’s a downside to being completely transparent — the risk of being wrong. Investors want to believe good managers (and newsletters) are infallible. All their picks go up. Returns are always outsized.

Just take look at Jim Jubak — he’s publishing away, airing his laundry for the world to see. He gets some right and some wrong. The point is no stock picker is going to be infallible.

Advisors have good months and bad ones — that’s part of the game and inevitable. It’s how well advisors limit their downside on the bad months that determines how good overall performance is going to be. Investors don’t like to think about how hard investing is (geez, May 2012 was impossible).

As Barron’s Steve Sears said in my recent interview with him:

Investors want a pharmaceutical solution to investing, a magic performance pill they pop to succeed.

But of course, for most of us, we understand that it’s not always the outcome of the investment advice. Rather, it’s the thought process, the intellectual back-and-forth to hone a thesis about what the world will look like in the future.

That’s hard but it’s also a conversation worth having. That’s why I’m betting on the tradestream as the future of investing.

photo courtesy of Fayster

Tag: transparency

With focus on customer, N26 builds a digital bank