The emergence of Fintech has created some serious pressure on banks and the banking industry. As per a KPMG report, investment in Fintechs in Europe hit $1.66 Billion in Q3 2017 and the number of Fintech exits have been steadily on the rise. As the Fintech industry matures and sees sustained investments, some of its senior players are transitioning into digital banks.
Many global Fintech movers and shakers do not choose the glory of an exit but instead expand their capabilities to scale functionally into digital banks. They might have started as humble Fintechs in a Payments, Foreign Exchange or P2P lending space. The KPMG report also identifies an increase in UK Fintechs going for Banking licenses. Some have also chosen to acquire other banking entities to operate under an existing banking license.
The three stories that captured my attention over the past year or so are Revolut, Klarna and PayTM. These are all big names globally, and have made a significant mark in the UK, Scandinavian and the Indian markets respectively. These Fintechs have managed to scale (or in the process of doing so) their services to form digital banks. At the risk of hurting the regional symmetry (across the magical trio), Zopa is another name that we can add to this list.
Let me first focus on the first three, as I have had the pleasure of using their services as a end user.
Revolut: I first came across Revolut in 2016, and once I got started with the Revolut card and app, travel to Europe felt so seamless. Revolut launched as a debit card and an app that you could use in multiple countries (currently stands at 130) and exchange currency (about 26 of them) at interbank rates.
I could top up my account with some money and use the app to switch to the currency I was going to use the card for. Gone were the days when we would queue up at a post office for a decent exchange rate before a Europe trip. It felt unreal. So has the growth that Revolut has seen – an unreal explosion of user adoption.
In about two years they have over a million customers in the UK and Europe. Last year they raised a $66 Million round and applied for their banking license. They are looking to launch in Asia, US and Russia. If the user experience they provide on their digital banking services is half as good as their currency exchange account service, user adoption shouldn’t be an issue. However, keeping their services sticky and demonstrating sustained usage of their services will not be easy.
Klarna: Klarna is the Swedish Fintech giant, who about seven months ago went for a banking license. They started as a payments firm that rapidly expanded their services for 60 million customers and had 70,000 merchants. They provided payments on e-commerce sites, and offered users financing options to complete purchases on online.
Last year they managed to raise $225 Million at a valuation of over $2.25 Billion, which enabled them to set themselves up as Klarna Bank. And with the user base and the financing options they already provided, it was just logical to functionally scale to a digital bank.
Klarna has played a role in disrupting payments services for the better and now as a consumer-oriented, product driven and technology intensive bank, we have the tools to drive change in retail banking
Sebastian Siemiatkowski, CEO, Klarna
PayTM: They are one of the apps I hesitate deleting from my phone as I know I would need it during my next trip to India. They started as a simple payment app in Jan 2014 and by Dec 2014 had 20 Million users and hit 100 Million users by Jul 2015. PayTM dominated the Indian Ecommerce market in 2017 with 9.9% of all Mobile Wallet transactions. Paypal came second with 9.8%. PayTM has 170 Million users and about 6 Million merchants.
However, as the payments markets got competitive and crowded in India with the arrival of Google and Amazon, PayTM had to look beyond payments. With demonetisation driving the cashless economy agenda in India, the Reserve Bank of India (RBI) took the opportunity to bring in millions more into the banking system.
The RBI provided licenses to Fintechs and niche banks and allowed them to take savings deposits and remittances without permissions to lend. These banks were called “Payment Banks” and PayTM was one of the four to get this license. While 2017 was the launch, 2018 is expected to be the year of growth for PayTM bank. Thanks to the backing from SoftBank and Alibaba, PayTM are also setting up Insurance businesses.
The other player moving into the digital banking space is Zopa. They made their intentions (of becoming a digital bank) clear in early 2017 with a high level roadmap of offering FSCS-protected deposit accounts for savers, P2P investments, including ISAs, personal loans, car finance, and credit cards for people looking to borrow.
Scaling to become a digital bank after achieving growth as a Fintech focused on a niche proposition seems to be trending over the last year or so. However, we are yet to see if any of these players would give incumbent banks or even existing challenger banks any serious competition.
Arunkumar Krishnakumar is a Fintech thought leader and an investor.
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