There really are rather a lot of these companies and I suppose that the really surprising thing is about them is that that a lot of them look very similar indeed. The list I surveyed is US centric and the companies concerned are in Clusters around the Bay area, Chicago and to a limited extent the East coast money centres. Whether they succeed or not is not really in question as some of the software that they develop is bound to be valuable to someone or other. In fact small banking operations have always been a feature of the US scene and the digital scene is just an extrapolation to that trend. Years ago you went two NYC and there were always a couple of new shiny branches along Avenue of the Americas which were not there two years ago. The model seemed to be a) form a bank b) get started c) get sold to Chase. I suspect therefore that the same thing is happening here. Does it really help? Watch this space but I suspect that very few will become household names.
It somehow didn’t seem fair to look at the United States and not see how the start up scene is looking here in Europe. Here as in the US there are a large number of companies that look very much the same and with the same types of characteristics. As in the US the fragmentation is perhaps the most dominant feature. Every week AltFinance News publishes news clips on how small digital banking activity companies have raised $ 5million here and $ 2.5million there without demonstrating how they are differentiating but the same thing will undoubtedly happen here as has happened in the US. The risk of course is huge in that there is only so much that you can do with financial services. Lending money is easy, sending it somewhere is also easy, keeping it secure is somewhat more challenging. There have been a few scandals so far. Expect a few more. I must say that I am impressed by the progress Oak North seems to be making as it appears to be addressing critical architectural issues such as compliance and is innovative in the world of credit science which must have a huge value going forward. As usual the elephant in the room will be COVID and the behavioural changes flowing from this has the capability of blowing everything away in its path.
HSBC is Europe’s largest bank and if it decides to charge customers for keeping their money then others will surely follow. At the same time the large banks in the UK are essentially pulling out of the bread and butter mortgage market and considering raising charges for other services. Meanwhile digital banks are lending as fast as their algorithms will let them. The big banks have one major advantage that they are big. Their biggest disadvantage is their cost base. Unfortunately ultra low interest rates and risk averse regulation is destroying their business models all over Europe. At the same time QE has caused a surge in asset prices. If you have assets you gain from this if you don’t you end up paying to keep your own money. In the longer term this is politically unsustainable. In the meantime the disrupters can make hay and the small depositors are protected from ill advised credit policies although larger depositors will recognise the risk they may be taking. Some banks are too big to fail others are not. In 2008 the US exported a systemic property crash across the whole of the western world. We have not yet recovered and are misallocating resources at a terrifying rate. At some point this is going to need addressing.
Howard Tolman is a well-known banker, technologist and entrepreneur in London,
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