The Profitability Challenge for Challenger Banks

I was able to chat via messages in-app. But each time I did, the support person asked me to upload photos of supporting documentation to prove my own other bank cards were in my possession, that sort of thing. I duly did so, and then there would be acknowledgement followed by silence at the other end for hours. Eventually the person would log off (their status is visible) and the system would show that it was "waiting" for someone to become available to handle my query.

That "waiting for someone to become available" would typically last some 6 hours or so.

Then I'd get someone, and we'd go through another loop, going nowhere, and them going silent on me.

I read somewhere that this can go on for a week or more, which had me really worried because I'd put in about £1000 just before they locked the account, which I needed sooner than that.

I also read that their Twitter and Facebook teams are much more responsive than their Customer Service.

So I reached out on Facebook. Someone replied quickly that they'd asked somone in Customer Service to deal with my query, and... my account was unlocked about 15 minutes later.

So, all credit to Revolut's Facebook team....

The legacy banks all seem to be moving to voice-recognition IVR systems which primarily exist to provide the same service as the website/app, but in a more frustrating manner.

If I had a problem that could be solved on the website, I wouldn't be calling in the first place...

What I don’t understand however is how the other challenger banks didn’t see this coming. Like how do you decide to build a bank and take millions of VC funding without a reasonable path to profitability? Also I think Monzo could’ve done well had they not taken VC money and spent it all - they do have a good product, they could’ve charged a token amount for it (1£/month?) and at scale it would’ve been decent revenue (they’re at 3 million customers now).

In the US retail banking is a cash cow: most of the country does not have enough money in the bank which means customers periodically pay overdraft fees.

> - consumers have been used to free banking for decades (at least in the UK)

In the US most of consumer banks have a service fee, some as high as $15/mo.

> - the "legacy" competition are some of the most well captialised entities on the planet

Legacy competitors are carrying branches in the most expensive real estate markets in the world.

The problem of the upstarts is that they do not want to attack one issue and do what MCI did to AT&T ( pick one - lower overdraft fees/lower service charges/do not waste money on stuff (real estate), instead they want to completely destroy the business model by making banking free, wiping out overdraft fees and still wasting money on real estate ( headquarters/staff in the most overpriced cities etc ) and after that they wonder why they don't make money.

Here, a brilliant idea: take BoA fees, cut them in half, don't put everyone in San Francisco, issue debit cards and hire a pile of people in Ohio to do customer service a-la Discover. You will make money hand over fist and every time BOA matches your fees you make yours $0.05 less - MCI did it to AT&T and it cleaned Death Star's clock as long as it continued to do that non-sexy stuff.

I'm actually thinking in next 5-10 years we will have the likes of Capital One, Discover and Amex clean up on the banking side.

You’re not buying that though. You’re buying the customer base. Getting another couple of million customers isn’t something to sniff at.

I’m currently heading a project to set up such an institution so I’m into this stuff up to my neck.

Unfortunately, I think you need to be licensed under the PSD2 even to send money from your own account - you can do things like attaching receipts to transactions to view in the app, or pulling transaction data in real time, though.

(I deliberately avoid the word "stable" because everything in this space is still in flux.)

Semantically OB is a bit like OAuth. The end user authorises an OB provider to conduct [some] operations on their bank account, and the OB provider exposes their chosen functionality to the user. Due to the unit economics[ß] it will likely be quite some time before OB for retail customers can take flight.

I would have personally expected that the first uses of OB for retail customers would have been personal accounting services, because those could do with read-only authorisations. But the challenger banks exposed this natively in their apps, adding sufficient friction for third-party services to take hold, and in fact made it such an attractive feature that legacy banks have had to race to implement similar functionality.

ß: Businesses do a lot more transactions than individuals, so the overhead per retail customer remains high.

But they cost 9 eur a month, they don't have a serious free tier. Still, I use them because I think their offering is worth what I pay for it.

(It‘s also why Robinhood in the US initially got in trouble for its checking & savings account, because as an investment broker it is not subject to the FDIC but the SIPC, which does not have the same exact guarantees.)