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Challenger Banks in Europe: Challenge Accepted

Digital challenger banks have raised more capital than any other FinTech vertical in Europe, totalling nearly $500m since 2015. Mired in controversy, acquisitions, mega-rounds, and mega-write-downs, challengers are now headline news in tech/business press on a weekly basis.

These European phenomena are enabled by new regulations that make it easier than ever to start a bank. Will this emerging breed of challengers displace high street banks? Read on to learn more about:

- NPS of European incumbents and challengers
An overview of online-only, VC-backed, and branched challengers — and who is funding them 

- Regional and demographic customer surveys, bank ROE, rates for savers

- The fee structure of 8 challengers and 5 incumbents
Public challengers: Metro Bank, Shawbrook, Aldermore, Virgin Money

- An overview of PSD2, a regulation that enables digital challengers

- How incumbents BBVA and Santander are “fighting back”

- Standouts in UI and App store rankings

- Global mobile banking adoption

- Predictions for 2017

Frontline Ventures is a B2B seed VC. Please ❤ if you’ve enjoyed the post and you can sign up for our newsletter at http://frontline.vc/newsletter

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Challenger Banks in Europe: Challenge Accepted

  1. 1. 1 frontline.vc Challenger Banks in Europe Challenge accepted A GLOBAL PERSPECTIVE BROUGHT TO YOU BY:
  2. 2. 88 80 73 6259 50 35 2827 221917 52 -6-8-10-17-22-24-41-42 2 Low NPS creates opportunity for challengers 1 Customer Loyalty in Banking, NPS Benchmarks, Net Promoter Score Ranking (Germany), Lloyds Annual Report, First Direct, NPS Benchmarks, Redpoint, UK Brand NPS NET PROMOTER SCORE IS THE LEADING CAUSE OF BANK SWITCHING1 CHALLENGERSINCUMBENTS AVERAGE UKBANK
  3. 3. 3 Newly formed banks rush in A new landscape: Challenger banking annual results , Zopa VC BACKED WITH BRANCHES ONLINE ONLY
  4. 4. £131b £25b£39b£53b £43b 4 To capitalize on a £300b opportunity Lending assets of the (UK) big 5 decrease 5% YoY Challenger bank lending assets grow 30% YoY Market cap of the UK big 5
  5. 5. 5 Challenger Banks
  6. 6. 6 Customers benefit from challenger efficiencies switched from their bank in the past 12 months2 would consider banking with Google financial products are not targeted at 18-34 year olds A new landscape: Challenger banking annual results , The Pulse of FinTech Q1 2016 Review, CBInsights 59% Bank ROE (return on equity) Rates for Savers Less Complex IT Systems Simpler product set Favorable regulation Less costly real estate No legacy compliance 40% 18% Customer View Challenger Effencies 36bps 108bps Challengers Incumbents 4.6% 17% Challengers Incumbents
  7. 7. 7 While digital challengers refine their business model Interest rates Product features Ease of opening 1 2 3 United Kingdom 1 2 3 Germany Fees Ease of opening ATM locations 1 2 3 USA Fees Branch locations Product features Customer Loyalty in Banking “Quite frankly I couldn't find a business model that was compatible with customer expectations" -Carlo Gualandi, CEO TOP 3 CUSTOMER PRIORITIES
  8. 8. Account Foreign Purchase Fee Foreign Withdrawal Fee Monthly Fee £1.25 2.75% £5 2.99% + £1 1.5% (min £2) 2.99% £1.50 £3 2.75% 2% £0-5 2.75% min. £1 2% min. £2, max £5 8 And compete on fees Account Foreign Purchase Fee Foreign Withdrawal Fee Monthly Fee Free in EU Free in EU - Free £1.50 - £1.25 + 2.75% 1.5% (min £1.99) - 2.75% 1% 0.50% 0.50% £5 Free 1.7% €0-5,90 Free Free - Revolut Free Free-2% - N26 Pricing, Money Saving Expert, Overseas Card Charges, Monese (subject to change) CHALLENGERS INCUMBENTS
  9. 9. 9 Challengers acquire customers more efficiently Neo Banking FAST ONBOARDING BETTER MARKETING NETWORK EFFECTS N26 Moneybeam Monzo.me payments Monese e-mail notifications Performance marketing Content marketing Video KYC solutions
  10. 10. 10 PE backed challengers are lending off their balance sheet £1.2b valuation at IPO 700k Customers Growing 40% p.a Lending £3.5b annually, +123% YoY £5b in deposits, +78% YoY UK based, w/ local branches Founded in 2010 $200m+ in private funds raised Branch-based challenger Metro Bank valued at £1.6bn on IPO,, Shawkbrook 2015 Annual Report £725m valuation at IPO Lends to 60k SMEs and consumers £1.6b 2015 originations £80m profit before tax Total assets of £4b UK based, w/ local branches Founded in 2011 $200m+ in private funds raised £650m valuation at IPO Targeted towards SME’s Growing 42% p.a £300m in revenue £105m in operating income £78m net income Founded in 2009 £62m+ in private funds raised £1.25b valuation at IPO 2.8m customers Mortgage lender Total customer balances +13% YoY Profit before tax £127m UK based, w/ local branches Founded in 2011 $200m+ in private funds raised 5 CHALLENGERS FOUNDED SINCE 2009 IPO AT £500m+
  11. 11. 11 While VC backed challengers pursue a marketplace model Asset Management Currency Transfer And charge success fees for completed transactions
  12. 12. 12 The EU will roll out a major regulatory overhaul in 2018 Prohibition of card surcharges PSD will now include one leg out (foreign) transactions 3rd party payment initiation, push vs pull Security of online payments and account access Extends the definition of payment institutions 3rd party account access What is PSD2?
  13. 13. 13 To increase competition, innovation and transparency EXISTING BANKS PRIMARY REVENUE STREAM IS LENDING PSD2 LEVELS THE PLAYING FIELD FOR DATA ACCESS, PAYMENTS This could shift power toward digital players
  14. 14. 14 Incumbents fight back
  15. 15. 15 BBVA acquires a number of challengers US Based, 100k retail customers $15m funds raised Acquired for $117m UK, Pre-launch Banking license $292m funds raised Majority owned by BBVA Finish based Founded in 2011 $5m in funds raised
  16. 16. 16 Santander improves competitive position through product Customer Loyalty in Retail Banking Santander has simplified offerings, gone digital
  17. 17. 17 Investment landscape
  18. 18. 18 $500m+ has been invested into EU digital banks Atom Tandem Starling N26 Monzo Monese Osper Ffrees Pockit 0 75 150 225 300 $3.5m $8.5m $11m $15m $18m $52m $70m $80m $292m CONSUMER CHALLENGERS (FUNDS RAISED) The Pulse of FinTech Q1 2016 Review, CBInsights DIGITAL SMB CHALLENGERS (FUNDS RAISED) Fidor Holvi Tide Kontist 0 1.25 2.5 3.75 5 $2m $2m $5m $5m
  19. 19. 19 Consumer challengers $300m in funds raised $17m in funds raised Harald McPike QuantRes $70m in funds raised $80m in funds raised $52m in funds raised Pre-launch Banking license Pre-launch Banking license 200k users Banking linense beta 85k users Pre-paid card Live 55k users Banking license $16m funds raised
  20. 20. 20 B2B challengers Acquired by Acquired by 3 minute setup no monthly fees finance tools accounting 3 minute setup no monthly fees finance tools accounting Bank account for freelancers just launched SMB bank account Invoicing, accounting connectivity In beta Bank account for Targeting SMBs 3-30 pre-launch 1st digital bank in Germany 100k+ Founded 1999
  21. 21. 21 Founders of challengers mix tech and financial services CEO George Bevis CEO Valentin Stalf CEO Matthias Kröner CEO Joshua Reich
  22. 22. 22 Conclusion
  23. 23. 23 2017 Predictions More “horizontal” banks will emerge, catering to a specific customer segment Challengers in continental Europe emerge Early movers are rewarded with customer acquisition costs that defy gravity As VCs struggle to pick the winners, late entrants struggle to get funded Incumbents spend to improve their mobile apps More strategic investments from retailers as banks become loyalty schemes
  24. 24. 24 Appendix
  25. 25. 25 Mobile banking adoption varies across geographies 0 15 30 45 60 China Singapore HongKong Spain USA Australia Norway Poland Sweden Russia France Italy Germany UK Finland Denmark Netherlands 27%27% 32%33% 35%36%37%37%38%38% 40% 43% 45% 49% 53%54% 60% % OF RESPONDENTS WHO HAVE ENGAGED IN MOBILE BAKING LAST Q Customer Loyalty in Banking
  26. 26. 26 Companies and tech that enable challenger banking
  27. 27. 27 Standouts in UI ALL TIME ITUNES CUSTOMER RATINGS (DEC 2016)
  28. 28. 28 Twitter Medium Quora
  29. 29. 29 FOLLOW FRONTLINE CONTENT BY SUBSCRIBING TO OUR NEWSLETTER! 29

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