Simple: what the challenger can tell us about FinTech and the US banking market

Simple was once the hero of challenger banks: it came to market well ahead of many other familiar neobanks and, for a long time, it was a truly world-beating bank. However, recently it has had some serious issues stemming from its acquisition by Spanish bank BBVA in early 2014. While initially Simple continued to enhance its offering, including adding joint accounts last year, the challenger has not been pushing the boundaries as it once did.

The real issue Simple has faced is the transitioning of its customers to BBVA, which started recently, and, as Buzzfeed puts it, made Simple somewhat complicated for customers. The problem is that Simple customers essentially need to open new accounts, and initially non-US citizens couldn’t even do this. Once accounts were opened, there were reports of other issues including failed card transactions and missed bill payments. To get a sense of the frustration of Simple’s customers you need go no further than the firm’s Twitter feed.

Despite the challenges with this transition and other financial concerns, BBVA remains confident that its investment will see returns in the long-term and points to the fact that it is still signing-up new customers. Indeed, the gamble might still pay-off. For now, though, the Simple saga tells us two really interesting things: 1) challenger banks have yet to find a sustainable business model that really works, and 2) it’s going to be difficult for challengers to continue to offer novel services in the US market.

Most contemporary challenger banks are dependent on investors who are willing to take the risk that the bank may never become profitable. Indeed, the biggest question in banking is: how do you make a challenger bank a sustainable business?

There are lots of options out there, from taking referral fees on financial products or monetising customer data, to white-labelling banking technology. The latter option is particularly interesting as it is the approach adopted by other high-profile challengers Fidor (UK and Germany) and Moven (US). Moven is particularly interesting case here as it came onto the scene at the same time as Simple, but has taken a very different path. It has white labelled its PFM tool and is working with TD Bank in Canada and ANZ in New Zealand to create solutions for their customers. This has helped it maintain its position in the US market and launch a PFM app in the UK, without a buyout.

Becoming part of a major bank, as Simple has, is another route. It can come with the benefits of scale, compliance expertise, and the option to distribute the major bank’s financial products that a challenger bank may otherwise struggle to offer. The downside is that the challenger bank risks becoming just a bank. In other words, it loses what makes it special and the risk is that the challenger ends up with all the downsides of being a big bank, such as clunky processes and off-pace innovation.

This leads to the second point: the US market is pretty tough for challenger banks, and, compared to their European peers, there is not an obvious force that will really make it possible for them to continue to offer things the incumbent players don’t. Indeed, from our regular monitoring of mobile and browser banking, as well as digital credit card platforms, it is apparent that the US market is improving in terms of digital provision. This is why FinTech in the US has focused so much on payments and investments technology rather than directly challenging incumbents in the retail space. Even the successful BankMobile is now going through the process of being bought by community bank Flagship.

The simple fact is that it is hard to create genuinely novel banking experiences in the US market – the obvious has been done and, without an open banking initiative equivalent to PSD2, it’s hard to see how challengers will be able to effectively disrupt the market further. Incumbent players in the US have been effective in their efforts to halt data sharing and open banking regulation, while simultaneously exploring how they can benefit from using APIs.  Therefore, the result is that in the US the banks can still control very carefully what third parties (and therefore challengers) can do, while in Europe the regulation will (theoretically) force a more open environment that stimulates innovation.

So, what does this mean?

In the US, market incumbents are in the driving seat. While they can control data and the use of APIs, challenger banks will struggle to continually reinvent themselves and therefore to develop truly sustainable businesses. Challengers will need to choose to either diversify their business to allow them to continue being banks (as Moven has done), or accept that they might have to join forces with the incumbents and face offering a less ‘simple’ customer experience.

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