Mini-banks and Tech-Banks: Why the European model for building FinTechs is broken.
The Mini-bank Model:
Ever notice that most new consumer-facing FinTechs entering Europe tend to be fully integrated financial companies; attempting to expertly manage not only product and customers but also a regulatory license, capital, compliance, data, front and back end stacks and everything in between? Because these are the responsibilities of mature, full service banks, I call this approach the “Mini-bank” model of FinTech development.
Unfortunately, for European FinTechs, this Mini-bank model is not producing positive results, as FinTechs in Asia and the U.S. continue to outpace Europe. It is no wonder. In our experience, European FinTechs are stretched to the limit by the diverse multitude of tasks they must perform, especially in the areas of compliance and regulation – not natural strengths for early-stage innovators. All of this effort might be logical if it saved FinTechs time or money but it actually has the opposite effect. An average European Fintech will raise €3.5 M in seed /early stage VC funding only to deplete half of that amount (€1.7M) just to obtain a regulatory license. And since that license won’t typically arrive for 12-18 months, the cost is fully front loaded. €Millions are being spent now without a single customer being served.
Naturally, the Mini-bank burden places the European FinTechs at a disadvantage relative to their foreign counterparts, which are often launched with little more than a brand and a UI/UX due to critical help from sponsoring institutions. So why do so many European FinTechs choose to launch on the “Mini-bank” path year after year?
From our our research, there are numerous reasons, some which involve perceived “control” and benefits from direct regulatory exposure, however, the biggest reason is simple: Good partners are hard to find. Few legacy banks in Europe seem interested or capable of regulatory sponsorship, and fewer still seem able to offer FinTechs the technical platforms or standard integration features that they require, such as real time accounting or a fully customisable and automated AML-KYC stack and workflow.
This is a shame, because the few European FinTech firms that do manage to find a suitable sponsors routinely out-perform the market. For example, N26 and Revolut both first operated as “neo-banks" through sponsoring institutions (e.g., Wirecard and PaySafe, respectively), which held their regulatory licenses. The results were astonishing. Both N26 and Revolut quickly scaled and, by mid 2018, had 2 million customers between them. By comparison, other neo-banks such as Atom and Tandem, which waited regulatory approvals to obtain their own licenses, only acquired 37,000 combined customers over the same period. Clearly, Atom and Tandem missed the market by waiting. To rub salt in the wounds, they also appear to have burned through more cash. A lot more.
Tech-Banks to the Rescue?:
Now a second model has emerged in Europe, which is a banking institution purpose-built to offer the FinTechs both a regulatory shield and end-to-end technical platform for development. We call this the “Tech-bank” model. An example of a Tech-bank model is Berlin’s Solarisbank, which emerged from the Finleap company builder group, and now includes BBVA and ABN Amro among its investors. For FinTechs, the benefit of the Tech Bank model is being able to focus on core strengths; perfecting its product, marketing and user experience, and leaving the bank to do the rest.
However, where the Mini-Bank model is flawed because it demands too much from the FinTech, I believe that the Tech-Bank model is flawed because it demands too much from the bank. While all banks must now be technology savvy, few can truly live up to the aspiration of being a best-of-class technology company. To win over hordes of FinTechs, which are now re-bundling the customers and service-lines they have pinched away from the banks, the Tech Bank must be able offer a best-of-class development platform across every product vertical. In our experience, this is unlikely. Moreover, I observe that most FinTechs, especially those arriving to Europe from non-European markets, are not motivated to migrate part of their global operations to a new platform, especially one developed by a bank.
A Third Model:
Is there a better way for FinTechs to build in Europe? I believe so. Along with my Universal Platform S.A. colleagues; a team of experienced FinTech and banking professionals, we are building a new banking institution, which proposes a third-model of Fintech development. If you might be interested to learn about our model, there will be more news to come… or feel free to contact us via Linkedin or here at upbanked.com to discuss.