Why having no customers could be the best thing for your fintech startup


In Malcolm Gladwell’s book “David and Goliath: Underdogs, Misfits, and the Art of Battling Giants”, Gladwell asks his readers to reframe the classic biblical battle of David and Goliath. Rather than say David won despite his disadvantages in height and size, he argues David’s disadvantages should rather be seen as direct advantages, they’re just not as obvious. He argues there is a fundamental psychological difference to viewing the world in this way that as humans and entrepreneurs, we shouldn’t ignore.

The ultimate purpose of Gladwell’s book is to parallel David and Goliath’s battle with that of entrepreneurship in the face of incumbents. No more so is this evident than in the realm of challenger banking.

So, taking Gladwell’s approach, if you were to start a challenger bank from scratch, what is one classic disadvantage that could be reframed into an advantage that in fact gave you more than a fighting chance?

An obvious one is that banks have customers while challenger banks and fintech startups have none

Many fintech startups consider partnering with banks as the swiftest route to market, mainly because of the existing customer base that can be tapped into. Given the option to become a bank or not themselves, this can be a big consideration to weigh up.

Of course there are plenty of other concerns, like compliance overheads and capital requirements – and these are not trivial by any means. But from a strategic go to market perspective, the opportunity to co-market and have your products pushed to new customers by a bank’s marketing and sales teams looks like a great deal – on paper.

To challenge this obvious advantage, my suggestion is to consider the following:

  • How energised and engaged is a banks customer base today and do they really trust the messenger?
  • Are banks effective at distributing the products they already have? And if not, what makes you think your product will fare better?
  • How many people, from how many different banking divisions are going to have to get into a room to agree on a distribution strategy for your product? And, if it eats away at their business line’s margin, how will you prevent them from sabotaging it?

Executive buy-in into fintech partnerships is one thing, mobilising a bank’s troops around a common goal is another. We’ve already seen this flounder massively in the push for banks to become more accountable through business lines when it comes to acting in a customer’s best interests from an ethical standpoint. Intent versus execution has been a gap you could drive a truck through. Wells Fargo is the latest to spring to mind.

Flipping this around as a challenger bank, it’s interesting to throw around how you could use your perceived disadvantage of not having customers to your advantage.

  • You can create energy and enthusiasm around your products and vision, rather than spend marketing efforts trying to re-energise a jaded customer base
  • Not having customers allows you to only choose profitable customers you want on your books, not those you don’t
  • You can have complete creative control over your distribution strategy, rather than be locked into some archaic commissions driven hierarchy within a bloated, unproductive sales team
  • If something isn’t working, you can move fast. I challenge any non-challenger bank to deliver on that one in a fintech partnership

There are stories of fintech startups who tried the challenger banking route and quasi-failed, like Tungsten in the UK. And these lessons should be learned from – Bernard covers some of them here in this post from 2015.

Having the ability to look through a disadvantage to see its possible advantage cuts across all aspects of building a successful fintech business. This includes product design, pricing, sales and marketing.

As Jack Ma, founder of Alibaba famously said when he decided to take on online shopping behemoth eBay, “eBay is a shark in the ocean. We are a crocodile in the Yangtze. If we fight in the ocean, we will lose. But if we fight in the river, we will win.”

And if Alibaba’s estimated market cap of $237 billion is anything to go by, let that be a lesson.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Fast and Cheap IPO on SGX: Ayondo


Are you preparing a roadshow, the conventional way of accessing public markets by selling shares? Are you using an investment bank to take care of the messaging, positioning and pricing of the deal?

This capital raising route typically means aiming for a listing on one stock exchange, which is typically in the home base of the company and the region out of which it scaled up. Foreign listings in the equity market have been mostly successful at a second stage (i.e. after successfully listing in the home origin market). All this is especially true for businesses that are B2C or B2B2C.

Pre-IPO pipeline wanting to be dressed as Fintech

We have covered the trend of declining IPOs in tech and in Fintech and the reasons companies choose to stay private for a prolonged period.

In our Daily Fintech global index, we have been tracking publicly traded incumbents and startups that qualify (based on our criteria) to have a strong Fintech component.

In this post, we are more interested in pre-IPO companies that are looking to and would desire to be seen as candidates in the Daily Fintech global index. We want to interpret their under-the-radar screen steps, even before they engage in a formal roadshow.

The Ayondo pre-IPO Fintech journey

Ayondo is a Swiss broker with headquarters in Germany, London and Singapore founded in 2008. Its customer base has grown to 200,000+ users in 195 countries with a heavy tilt towards social trading.

Ayondo was listed on Berne stock exchange under the name of Next Generation Finance Invest AG as an investment holding company in the early years. Ayondo has been accelerating its business positioning and offering. Its brokerage offering includes extra insurance in case of adverse conditions.

The company has an Asian footprint and has received funding from a Singapore-based private equity group Luminor Capital. Ayondo has entered into partnerships with KGI Fraser Securities, a Singaporean brokerage.

Since 2013, Ayondo has received three awards in the Fintech space. It has restructured its operational side to align with its changing strategic positioning.

Two facts caught my attention this month, the acquisition of Tradehero by Ayondo and the soon to-be-completed listing of Ayondo on the SGX via an RTO. Social trading has been around more than 5yrs and in What was your first impression with Social Trading?, the Fintech Genome community has been discussing about this vertical. Is Social trading, rather a form of Signal providing and Social analyzing; as per Filippo Ucchino of Investingoal? Is it simply to complement Charting tools, as Henry Schwab of TradeIt points out? Is it the digital trading floor to bread micro-managers, as I like to think of the potential of Social trading and as Marek Trepa of t-financials broadens the space, by including Motif investing?

The acquisition of Tradehero, a Singaporean Fintech mobile app for gamified trading, on the Ayondo platform gives a strong positioning to the company to tap into the beginner social trading market segment. It makes the training phase required on any social trading platform (e.g. eToro, Zulutrade etc) less intimidating and aims to reduce conversion time and rate (from a registered user to a paying user). Virtual trading and academy training on the Tradehero platform, increases customer engagement. The TradeHero weekly awards are one of the ways to award prizes.

An acquisition before listing however, doesn’t qualify as an alternative approach.

The first Social trading Fintech listing

Starland is a Singaporean property developer that will enter into an RTO with Ayondo. The consolidated group will carry Ayondo’s name. Starland will pay $157.5 million for Ayondo and this will be done through the issuance of new shares priced at 18.7 cents.

Reverse mergers are a cheap and fast way to get listed. RTO, reverse takeover offering, can be used if the regulatory environment allows it. Essentially, an active private company (like Ayondo) takes over a dormant public company (Starland).

Through this transactions the time to market and the costs are reduced to close to half or more. The consolidated Ayondo group will have a market capitalisation of S$210 million (US$155 million) with Ayondo shareholders owning 75 per cent of the new consolidated group. Ayondo gets an injection of new capital.

RTOs are a cheap and fast way to raise capital in the public markets, especially for small size companies that have a 2C type of business. It also allows the owners to maintain significant control of the company.

Will the RTO route become trendier in Singapore, as Western companies look for fast ways to tap into the large Asian market potential?

I researched the SGX RTO market for other Fintech or tech with social tilt type of deals. I found Yuuzoo a Singaporean social media firm that listed on SGX in 2014 via an RTO with W corp an electronic equipment manufacturer (market cap of RTO deal was around S$400mil; roughly double the Ayondo size but still small). Yuuzoo maintained 80% ownership through the RTO.

Will Zulutrade and eToro, accelerate plans to tap into the public markets? Both leaders in the social trading Fintech vertical, have been growing by broadening their product offering (from FX, CFDs, to indices, and equities). Rumors about an EToro IPO were floating around 2 years ago but have not revived recently.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network.  Efi Pylarinou is a Digital Wealth Management thought leader.

Why the R3CEV Blockchain consortium is splintering & what that signals


First it was Goldman Sachs to leave R3CEV. Then it was Santander. However you spin it, this is not good.  As Anna Irrera reveals (from her new job at Reuters in New York), R3CEV “has reduced the amount it aims to raise from bank members in its first large round of equity funding to $150 million from $200 million and is changing the structure of the deal”.

Once means nothing, twice is coincidence, three times is a trend. R3CEV cannot afford a third defection.

R3CEV was one of the big Fintech stories of 2016, signalling that banks were embracing Blockchain and making it “respectable” by getting rid of Bitcoin and making it “permissioned” (meaning only banks can participate). 

The R3CEV news is signaling a big shift that we shine a light on in this post.

Bitcoin climbs out of the slough of despond

2016 was the year when Permissioned Blockchain rode to the top of the hype rollercoaster and Bitcoin fell deep into the slough of despond (other than for a few true believers). As we move into 2017, Bitcoin is getting more traction and there is more skepticism about Permissioned Blockchain. The R3CEV news signals this shift under way; but it is not the fundamental reason why we are seeing defections.

The massive payoff from eliminating Settlement Latency in Capital Markets

There is massive payoff from implementing Permissioned Blockchain to eliminate Settlement Latency in Capital Markets (aka Real Time Settlement ). That can lead to Business Process Elimination and huge cost savings. In simple terms, this could give Banks the same efficiency as a born-digital startup. So there is no lack of motivation for the banks.

Who will be the Visa & Mastercard of the Blockchain era?

R3CEV was going for that prize. The idea was a cooperative owned by the banks that would deliver the Settlement Latency prize. In a different era, that is what Visa and MasterCard did.  Dee Hook of Visa explains the Chaordic Organization business model in this paper.

Some of the issues at R3CEV may simply be a haggle over what % founders and management get vs the banks. Given the size of the payoff, this could be resolved with some negotiation. However, there are more structural issues at work as well.

Look at B3i in Insurance

The payoff from eliminating Settlement Latency in Insurance is even bigger than the payoff from eliminating Settlement Latency in Capital Markets.

That is why, in October, Aegon, Allianz, Munich Re, Swiss Re and Zurich launched the Blockchain Insurance Industry Initiative (B3i). At first glance it looks like R3CEV except that it was created by the Insurance/Reinsurance companies directly; there is no profit-seeking company in the middle.


It is no coincidence that Goldman Sachs was the first to leave R3. Not only is Goldman Sachs the best at technology among the Wall Street Banks, they are also shareholders in Digital Asset Holdings which owns Hyperledger.

Hyperledger is a cross-industry collaborative effort, started in December 2015 by the Linux Foundation to support blockchain-based distributed ledgers.  Linux Foundation is a trusted, independent entity as far as the banks are concerned. If you need a place to hash out standards and protocols, Hyperledger is a good alternative to  R3CEV.

Qui Bono?

The key point is that while the Banks definitely want to eliminate Settlement Latency in Capital Markets using Blockchain, they don’t care who will offer the service. It could be an existing intermediary (Exchange plus Clearing firm) or a startup. Owning shares in that startup if it is R3CEV, is only icing on the cake.

SWIFT – far bigger than R3CEV in Membership and not asleep at the Blockchain switch

SWIFT, derided by many as a dinosaur, has 11,000+ Members in 200 countries. R3CEV had 15 as of August 2016. SWIFT could make it easy for 11,000 members to use Blockchain – and seems determined to do so.

Richard Gendal Brown

I don’t care whether R3CEV goes into the dustbin of history. I do hope that Richard Gendal Brown (CTO at R3CEV) continues blogging about Blockchain and Bitcoin. He is my go to source when I want to understand something complex in that domain. I suspect others rely upon him the same way. Explaining complex subjects in simple ways is hard to do and essential for the ecosystem to develop.

On his blog he is currently writing about how Corda from R3CEV is going open source. This may help, although it might be too late (everything significant in Blockchain is already open source. For a discussion on patents in Blockchain please see this conversation on Fintech Genome.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.



Wrap of Week #47: Credify, Marcus, Challenger banks, Blockchain


We started the week with our insights about What does the Credify story tell us about Market Place Lending and $LC stock and then looked at Marcus, the consumer lending arm of Goldman in Will Goldman become a verb? Watch the Marcus ads!

 Continuing our consumer focus we looked in front and inside challenger banks in Scaling a challenger bank from the back to the front.

As we approach year end, we looked at what has happened in 2016 in Blockchain and Insurance: The future of Blockchain and Insurance one year later. In What would Gandhi have thought about Bitcoin?, we took a global tour to bitcoin adaptation.

The Fintech Genome platform

Join the conversations on the Fintech Genome. The global community is sharing insights, creating great conversations, and business is starting to happen.

A few picks:

NLP and FinTech – Introducing a free text search API

SENTIMENT ANALYSIS – in financial services (edit this wiki)

Fintech Risk Events: An open catalog of Fintech business failures

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What would Gandhi have thought about Bitcoin?


Gandhi and His Spinning Wheel: the Story Behind an Iconic Photo

Bitcoin is anti-establishment. It is feared by most governments and banks. Yet Bitcoin is also a driver of innovation – which drives productivity and wealth creation which is what citizens want their governments to focus on.

That is why the relaxed attitude to Bitcoin in wealthy Switzerland, where the government is respected and the Swiss Franc is trusted, is such a game-changer.

Most other governments have reached phase 3 in Gandhi’s famous quote in their attitude to Bitcoin:

First they ignore you, then they laugh at you, then they fight you, then you win.

Switzerland skipped the “then they fight you” phase – the country sees a win/win scenario.

Paytm says thank you Mr. Modi

Lost in the US election news cycle, was a story from Mahatma Gandhi’s country that was quietly almost as earth shattering as Trump’s surprise victory.

In an effort to control the black economy (read, collect more tax revenue), the Modi government did something that shook faith in Fiat currency. The government simply declared that 500 and 1,000 Rupee notes were no longer legal tender. Why is a bank note worth money? The answer is because we all agree that it is because government backs it with some variant of “I promise to pay the bearer on demand the sum of…” The Modi government move, labelled demonetization, breaks that contract with the people.

Indian people have always loved gold as a reliable store of value. Unlike gold, Bitcoin does not look good with a sari and won’t be any fun at a wedding, but it is a controlled supply store of value that no institution can take from you.

So, the Modi government just gave a huge boost to digital cash – perhaps not what was intended.

Nearly two years ago we reported about India’s first Fintech Unicorn, Paytm.

Paytm is not Bitcoin but it is digital money that has reached mass scale in a huge market.

Unlike some wounded Unicorns, Paytm recently raised a lot more money – $300m at a $5 billion valuation – which is a massive round for India.

According to Hindustan Times, Paytm transactions exceed combined usage of credit, debit cards in India.

Paytm is seizing the day with a new ad targeting demonetization that has ignited controversy (read, free media).

For a while, India was making all the right moves to foster innovation such as:

Digital Identity for the Unbanked

Payment Bank Licenses

Now, India has lurched towards control. They are not alone.

America goes after Coinbase

The IRS in America “has demanded bitcoin trading site Coinbase to provide the identities of all of the firm’s US customers who made transactions over a three-year period, because there is a chance they are avoiding paying taxes on their bitcoin reserves.” As this excellent Motherboard article explains:

“In bitcoin-related investigations, authorities will often follow the digital trail of an illegal transaction or suspicious user back to a specific account at a bitcoin trading company. From here, investigators will likely subpoena the company for records about that particular user, so they can then properly identify the person suspected of a crime.

The Internal Revenue Service, however, has taken a different approach.”

In short, regulated Bitcoin businesses have to help the tax collectors – “if you want a license, this is your job”.

Tunisia = nearly but not quite

In December 2015, headlines declared Tunisia to Replace Its National Digital Currency, eDinar, With Blockchain-Driven Monetas Currency

The romantic in me really wanted this story to be true. The Arab Spring began in Tunisia. When Muhammed Al Bouazizi’s attempts to earn a living in the streets of Sidi Bouzid in central Tunisia were halted by a police officer who seized his goods, his rage and frustration led him to set himself on fire in front of a government building. He remained in hospital for 18 days with severe burns and died on January 4th 2011. Ten days later President Zine El Abidine Ben Ali fled to Saudi Arabia and within another 10 days on #Jan25 the Egyptian revolution began.

It would be epic if Tunisia embraced cryptocurrency and became a hotbed of Fintech innovation and wealth creation in a poor country. This story touches on two themes we cover on Daily Fintech:

– Financial inclusion through mobile money.

– The mainstreaming of the Blockchain revolution.

Sadly, we learned that the December 2015 Press Release jumped the gun. It has not yet happened as described.

Maybe it will happen further south in Africa.

Zimbabwe – and then you win?

At the polar opposite of Switzerland is Zimbabwe – the country synonymous with hyperinflation in the modern era. There the government has almost given up on Fiat currency – the people certainly have. This could be the “and then you win” ending.

If money printing leading to hyperinflation is your monster from the deep lagoon, Bitcoin’s controlled circulation  (“they ain’t making any more of it”) could be your savior.

 BitMari (a Pan-African Bitcoin wallet provider) raised money for the Zimbabwe Women Farmers Accelerator and used Bitcoin to fund the effort.

BitMari has the delicious hash tag – #decoloniseyourlife – which Gandhi would have approved of.

This story seems to come from our AfriCoin science fiction fantasy from the summer of 2015.

If Bitcoin can be used as a local currency, it enables remittances via Bitcoin, a long held dream that has been killed by the off ramp regulatory problem

So we reached out to William Nyamukoho, the Fintech Genome moderator who is based in Zimbabwe, to find out what he is seeing on the ground. This is what he told us:

“Zimbabwe last had its own currency in 2009. It then adopted a multi currency system which was dominated by the USD. In 2016 Zimbabwe finds itself with a cash shortage as demand grew larger than supply, mainly because the Reserve bank of Zimbawe was not allowed to print the USD to ease the cash crisis (no financial easing was possible). Recently Zimbabwe has been moving to a cashless society dominated by plastic money and something called “bond notes“. These bond notes are designed to ease the cash shortage, are legal tender only in  Zimbabwe and trade at parity with USD.

This history has paved way for Bitcoin to be adopted in Zimbabwe, even though people are sceptical about any new developments in financial engineering after the recent history of hyperinflation.

 Bitcoin seems to be a good way to protect wealth from the bond notes, which only work in Zimbabwe.”

Those who are moving in the same direction with the rest of the world, who  believe that autarky is not an option in this modern globalized era, are starting to store their wealth in Bitcoin” 

China and control

When it comes to control, the Chinese Communist Party wrote the manual.

Asian countries learned to love capital controls during the Asian Financial Crisis of 1998. Those without capital controls – such as Korea, Thailand and Indonesia – suffered deeply as hot money fled at the click of a mouse. Those with capital controls – such as China and India – escaped relatively unscathed.

Today the problem is the other way round. The boom and bust cycle in China has a simple explanation. Chinese people can only invest in China. So they ride investable assets up to crazy heights and sell fast and hard when it starts to go down. In a free economy we still have booms and busts – but we have options that smooth the cycles to some degree. If we think one market is overvalued we can move capital to a market that is undervalued. China arresting short sellers does not seem like a good solution.

The Chinese people, faced with this problem, have turned to Bitcoin as one way to get money out of China. The government is vehemently opposed to Bitcoin. China is still very much in the “then they fight you” phase (and governments do win sometimes despite Gandhi’s famous phrase).

Regulatory competition

Winning hearts and minds of entrepreneurs was not on the job description of regulators when they signed onto the job, but now they are getting mixed messages from their political masters:

A. Control the money supply and tax collection process and stop bad actors


B. Open up to innovation as that drives productivity and well paid jobs and that is what our citizens want.

Since this post in January 2015, we have seen many moves on the Fintech innovation front by regulators in UK, Singapore and Switzerland and we expect this trend to continue as governments seek the magic quadrant – enough control while also fostering innovation.

Bitcoin miner next to spinning wheel

Gandhi was into self sufficiency. While deeply spiritual, he was also very practical. So I suspect that a modern Gandhi would have a Bitcoin miner next to his spinning wheel (as long as mining does not become something only giant data centres can do, which is another story).

Image Source

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

The future of Blockchain and Insurance one year later


During January 2016, we published What does the future hold for blockchain and Insurance?

About one year later, this post looks at what happened during 2016 and what is likely to happen in 2017.

The January 2016 post explains the value thesis of Blockchain in Insurance. It also mentions 5 pioneering ventures. In this post we take a “whatever happened to” look at what those 5 companies.

One trend we did not foresee in January 2016 was the big move by Reinsurance into Blockchain. In this post we explain the value thesis behind this move and describe what happened on this front in 2016.

Beware the bleeding edge of technology risk. In January 2016 we, like many others, were excited by the potential of Ethereum, but it was a difficult year for that platform. This left many ventures that were counting on Ethereum in a difficult spot.

The 5 Blockchain Insurance pioneers in January 2016

These were the ones we profiled in our January 2016 post:






Sadly I did not find any funding announcements for any of them (if we have missed any announcements of funding other progress please tell us). They might have been too early. Another factor may have been that investors saw what the incumbents were far from asleep at the switch.

Enter the Reinsurance dragon

This was our journey of discovery:

Feb: we interviewed Oliver Werneyer at Swiss Re. Takeaway: Reinsurance could provide a platform for innovation.

In April we explained why Blockchain may transform Insurance before Banking. This was where we described the 3 layer stack and the put some color on the idea of Reinsurance as a platform:

  • Layer # 1: Brokers. Their job is to gather premiums from customers.
  • Layer # 2: Insurance Companies. Their primary job is claims processing. They take in premiums via brokers, invest the cash flow and pay out claims when needed.
  • Layer # 3: Reinsurance Companies. They are the payers of last resort. They insure the insurance companies. Their job is to have enough capital to pay out claims, even if the models did not predict the volume of claims.

May: we described how claims could be paid out automatically based on smart contracts

This holds out a win/win promise. Customers know that payout is automatic and immediate (no more hassling for payout during the most stressful times when the bad event has actually happened). Insurance companies get two benefits:

  • Elimination of fraud. The Insurance company does not rely on the customer’s version of truth. There is independently verified data.
  • Elimination of claims processing cost. This is a consequence of elimination of fraud.

For this to work, it has to be binary simplicity. An algo has to make a yes/no decision instantly. Something with complexity (such as who is at fault in an accident or whether a medical procedure is covered) needs human intervention.

September: we reported on one real live use in catastrophe swaps insurance

October: the B31 Blockchain initiative is launched by 5 Insurance companies (Aegon, Allianz, Munich Re, Swiss Re and Zurich).

November: at an event in Zurich, presentations by SwissRe and Accenture taught us that the average time for claim to cash is about 4 months. This is where we learned about Settlement Latency in Insurance and the huge payoff from adopting Blockchain

If settlement takes 4 months (from claim to cash), then all the companies in the process have to manage counterparty credit risk and all the associated processes.

Even bigger than this is the big pay-off for consumers. This is missing from the move to real time settlement in the capital markets. Going from T+ 2 or T+3 to real time is good but going from 4 months to a few days is massive. Imagine putting in an insurance claim and getting a message a few hours later saying “your claim has been approved, with some deductions detailed below, you will be paid tomorrow”. When you have suffered a tragedy that kind of immediacy is critical.

This becomes feasible because we move from a consumer defining the event (crash, fire, hurricane etc) to those events being validated data events stored on the Blockchain. Then the consumer simply says “policy # xxx suffered a loss of yyy in event aaa”, with each of those being verified data points in an immutable database that all have access to.

All the participants – customer, broker, insurer, reinsurer – will apply their processes to those data points.

No amount of improved mobile front end will make much difference to the full lifecycle experience, but bringing the time from claim to cash from 4 months to days or hours will be a total game-changer. That is why we envision Blockchain getting its first big use cases in Insurance (before we see big rollouts in banking).

2016 was the year when Insurance started serious work on Blockchain. I believe that 2017 will see sme significant rollouts.

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Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Scaling a challenger bank from the back to the front

Challenger banks start from a pretty grim position – most of them don’t have any customers. So how are they scaling? Well, whatever they do, it’s important they consider the word scale from both a backend operational perspective and a frontend on-boarding perspective.

My view is the most brilliant challenger banks won’t look at either in isolation. In today’s world, scaling a challenger bank relies even more on the tech at the frontend working hand-in-hand with the tech at the backend. If they don’t, then what is promised won’t be delivered. And with switching bound to become easier and more prevalent amongst consumers and businesses, failing to execute here will be a challenger banking death knell.

Scaling the backend – the engineers view of the world

I’m not an engineer, but I’m around them enough at Tyro to know that a microservices approach is helping unlock scalability at the backend.

For the uninitiated, microservices allow companies to build software applications made up of many individually developed components. Proponents of the architecture point to the increased resilience of the overall application – should one component fail it can be replaced, without the need to redevelop the application as a whole.

Challenger bank Monzo (formerly known as Mondo) in the UK are fairly vocal about their use of microservices in the technology stack. Anyone interested in learning about their story should read Building a Modern Bank Backend.

Tyro in Australia are also big microservices advocates. Graham Lea talks about Tyro’s journey in Microservices at Tyro: An Evolutionary Tale.

Microservices champions also point to the fact they are truly reengineering the banking core, rather than prettying up the UX only. This is not a trivial matter, as only when you attack the core and its native extensibility can you actually build product that is truly disruptive and different.

A must read from Dave Tongue on this topic can be found on Medium. His article, ‘Why Mondo will blow Atom out of the water’, takes a look at the UX-ing banking approach verses the re-imagined backend approach when comparing these two challenger banks side by side.

The reality is, no one knows the future, or what services banks will need to build to remain relevant. So building what you think people will want in 5 – 10 years is redundant. Instead, you’re better off building a stack on which you can respond to what people want and need as it arises. Today microservices is one of the best shots you have of being able to achieve this.

Scaling the front end – the on-boarding approach

Scaling at the front end can’t ignore the unavoidable reality of banking – KYC and risk assessment. Today many banks are unprepared to do anything with a customer until they are fully KYC’d and they meet a minimum risk benchmark. This can create a high barrier to full product adoption and the banking equivalent of ‘cart abandonment’.

Smart challenger banks might look to offer lightweight versions of their services or products depending on the degree of KYC achieved and/or the customer’s risk profile. If the backend (which stores this information) is dynamic and in-sync with the front end (which on boards customers), then a truly reimagined banking experience can be delivered to a prospective customer.

Dreaming up fabulous marketing campaigns isn’t hard. On-boarding is. If challenger banks are weak here, then an on-boarding bottleneck will become the biggest throttle on growth.

For me the biggest ethos change that challenger banks will herald is that customers will come to expect banks to deliver products that truly serve their owners. Products that serve up helpful information in a timely manner, and that respond dynamically to economic environmental changes in a consumer or business owner’s life. But shifting market expectations means challenger banks need to scale fast in order to move the ethos needle and force the hand of incumbents to up their game. Not all challenger banks will win in this regard. But those with a laser like focus on making scale a core feature of all their systems will be in a good position to outrun their competitors.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.