Thoughts

Big banks can’t jump

May 4, 2020

RBS announced the closure of Bó last week, saying it was going to wind it down as a customer-facing brand five months after it launched. 

The reaction of the fintech and digital agency community is a repeat of the same bank bashing that has prevailed for years. 

They all say the same things - big banks simply don’t have the DNA for innovation, the chops to shape digital products, nor the sense of urgency. Praise for neo banks has been almost as emphatic as criticism of incumbents - fintech has grown from being a fragment of the financial services industry into something that is podcast, laptop sticker and t-shirt worthy over the last few years. 

They are totally missing the point. 

At some point, as an ecosystem of people that are passionate about reinventing banking, we have started to think that interfaces are financial services. They aren’t. A logo to represent spending trends does not achieve any financial outcomes for customers. Plus, it’s old now - at Monitise Create, we launched Santander Smartbank in 2014 with a “Monzo-like experience”, and even proved out voice command banking. 

Interfaces without compelling business models 

The UK neo bank landscape is very crowded now. It is a safe place to launch - a supportive regulatory agenda protecting customer deposits, a lot of ‘dry powder’ in the VC landscape for fintech, a great talent pool, and early adopting digital customers on tap. But it is much harder to survive post-launch than many give credit.

Even N26, one of the best-resourced neobanks, pulled out of its UK efforts earlier this year. Although they cited Brexit as a key reason for their departure, it's hard not to conclude that disappointing market penetration in terms of deposits must have played a part. 

Simply, interfaces without business models won’t survive. And if they do, it is venture funding that will allow that, not profits. A sad fact of banking is that the business model is to sell debt. If you don’t, then you better find other ways of making money. 

The cost of driving customers to download apps that aren’t primary deposit accounts and have no lending facilities outweigh the lifetime value. It’s that simple. Monzo announced that they make, on average, £4 per annum per customer (up from losing £15 per customer in 2018). That is excluding covering the fixed costs involved in running their business - that is revenue less the cost of servicing that specific account. They might yet become a viable and profitable business - but not without spending a lot of money to (you guessed it) sell debt.

Business models without compelling interfaces 

For those that don’t take the last decade’s approach of driving as many downloads as possible, then sorting out profit later, the market can also be tough. 

Expectations of digital experiences in banking are greater than ever. There is now hard proof that customers adopt digitally forward financial services over those that don’t offer any decent digital experience. Look at what’s happening in the card payments industry - Stripe, Adyen and Square are nailing it. The ISOs that take them on are still surviving, but find life comparably harder - charging less and still winning less of the market.

But interfaces aren’t hard to design and build. All of the case studies of design agencies merge into one. “We started with customer needs, really empathised, and created a set of digital screens that solve problems and don’t just sell products”. 

The fact is, designing business models is harder than designing interfaces. Commentators will view the death of nice interfaces as a failure of banks to support and nurture good ideas. This is bullsh*t. It is more accurately common sense prevailing. 

RBS probably got it right 

To bastardise a famous Sun Tsu quote: 

A compelling business model without a compelling interface is the slowest route to victory. A compelling interface without a compelling business model is the noise you hear before defeat.

It’s hard to say whether Bó would have been successful as a standalone business or not. It was clearly designed and built by the sort of people that built the other neo banks that it emulates. Non-compliant cards was a slip up but that is par for the course - Mon(D)zo breached a trademark, Revolut couldn’t figure out their risk policy and froze accounts willy nilly, the list goes on. 

But it wasn’t a standalone business, it was an innovation project, that's the point. And for banks, there are two types of innovation project that make sense:

  1. Those that validate a market need and find a viable solution by launching a new product or service, usually to a specific segment 
  2. Those that create a product or service in a new or unique way and in doing so new underlying assets, then syndicate or rollout assets and know-how internally for the core business 

The market need for nice banking apps with bill splitting and spend insights has been validated since 2014, so one would assume that the second of these objectives is true. If so, getting to market can be proof enough. 

Either RBS have seen that there is no space for another challenger-like banking app, or they have determined that they have seen, built and learnt enough to fold insights and assets into its core. Or they are admitting that neither are true. Any which way - why keep a product with no compelling customer economics and a separate brand to manage and drive consideration for trading? Either internalise the best bits or scrap it altogether. 

In different times (remembering that this announcement was a subset of a results announcement in which Alison Rose shared that profits were down 50%) the bank may have kept it in market for longer - but for now, this seems another very sensible call from a bank that is doing ventures and innovation very well. 

One person’s “strangling innovation” is another person’s common sense, and it looks like RBS is becoming the common sense bank - a better market position than any neo bank could ever hope for.