In comparing multiple investment opportunities, I often use Return on Invested Capital (ROIC) as a key differentiator. This is widely used in the listed space, but can also be used while comparing private firms.
All other factors alike, a higher ROIC would mean a better run firm (operationally) with a better business model and a growth strategy. If the growth of challenger banks in the UK and in Europe is taken as a case study, I am quite sure the rise of Revolut would capture analysts’ attention.
Let’s take a look at the different approaches the top challenger banks have taken to their growth strategies.
Tandem, Starling and Atom bank took the conventional route to setting up banking services. They spent a couple of years getting their banking license, and then through various partnerships and intuitive/customer friendly services went on to acquire customers.
On the other hand Revolut, N26 and Monzo have taken a different approach to banking. Particularly Revolut went for a e-money license which was much quicker and cost effective to get regulatory approval for. With this, they acquired customers so quickly, thanks to their simple UI and a FX consumer space crying out for innovation. The cleverest and timely service they launched was the cryptocurrency exchange in Dec 2017. This service is getting them about 3500 new customers per day.
On the other hand Tandem, Starling and Atom bank took their banking licenses and then went for customer acquisition, mostly using their core banking services. They have been less successful and have ended up spending more money in acquiring customers when compared to the likes of Revolut.
This makes me wonder, if there is even a point in positioning as a challenger bank that provider standard banking products. It seems more efficient, focusing on the pain points of different values chains in FS like remittance, FX, insurance etc., where customers genuinely want better and more seamless solutions.
In doing so, the cost per acquisition of a customer is low as they genuinely have serious issues with their existing remittance and FX services. Once a firm has made a significant impact in one of these use cases, and acquired customers at a mind-boggling pace, it can provide current and savings account features.
This statistic, clearly demonstrates that Revolut have been better users of Investor capital and are gaining better traction in acquiring customers at a lower cost.
If that’s the lesson we take away from analyzing challenger banks, I would love to see where firms like Transferwise would fare on the above charts. They have a huge customer base through their remittance service and should be able to onboard existing customers into their border-less banking ecosystem.
The other significant point is how the go-to-market for techfins would overlap with this. Tencent, AliPay and Amazon are looking for positioning themselves in this battleground. N26 closed a funding round recently in which Tencent took part. If these challenger banks can position themselves for investments or partnerships/joint ventures with these TechFins, that would accelerate customer acquisition for the challenger banks. I believe that the data these TechFins have on customer behaviour would help challenger banks provide better contextual services to customers.
These are exciting times in the banking industry in UK and EU especially. The dynamics created by Challenger banks, huge fintechs like Transferwise and Klarna, entry of TechFins and the open banking revolution are all creating new business models, clever strategies but most importantly, better banking and financial services for the customers.
Arunkumar Krishnakumar is a Fintech thought leader and an investor.
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