The world’s first bank was reputedly opened in 1397 by the industrious Medici family in Italy. Named after the benches on which these early bankers met with their clients (banca), banks have permeated society ever since. However, those 14th century bankers would have little difficulty in recognising their modern contemporaries. For too long banks, as institutions, have been compelled to inertia by their own success, afraid and unwilling to change. As the digital age truly comes of age however, the banking industry is facing revolution.
“For too long banks, as institutions, have been compelled to inertia by their own success, afraid and unwilling to change”
Revolut, our case study, is one of a myriad of digital banking only companies, which have sprung up since the turn of the decade. In April 2018 it gained the informal status of a ‘technology unicorn’, a name given to private UK companies which reach a valuation of £1bn. All this, for a company and a concept, which was given little chance of survival in 2015 when it came into being.
Revolut aims to provide a banking service without borders. Amongst a myriad of other functions, It offers free international money transfers, fee-free global spending and access to cryptocurrency exchange.
Their business model is proving to be stellar and sustainable. Having first broken even in December 2017, it has done so every month since. It isn’t plagued by ads or off-beat suggestions. Instead it offers premium services for those more active and discerning users who may, for example, exceed the monthly non-euro transaction limit. Indeed its founder has stated confidently that they “are living up to our reputation as the ‘Amazon of banking’”
These digital banks aim to tackle some of the traditional barriers and gripes associated with ‘regular banks’. This includes quick and easy transferring, splitting of bills and currency conversions. It takes the time and stress out of banking, making trips to the bank obsolete. A ‘trip’ to the Revolut-bank merely involves opening your phone - on a bus, whilst walking or at 2am - and conducting your business.
One of its core aims is to streamline banking across Europe. They offer free withdrawals and payments in 150 non-euro currencies (up to a certain monthly limit), which is a blessing for cash-strapped holiday-makers and gap-yearers - even more so when you consider most mainstream Irish banks charge 3.5% for such withdrawals. It also allows users to hold and operate different currency accounts within your overall portfolio with the app.
One of its handiest features is the Vault. This handy saving mechanism rounds up transactions to the nearest euro, with those extra cents being sent to a Vault. For example if I bought a coffee for €2.50, my Revolut account takes out €3, with the 50 cent ferreted away. It’s amazing how quickly these amounts add up and, unlike when saving physical small change, it never gets lost!
Many of these digital banks pride themselves on innovative and technologically-advanced security and fraud protections. Revolut’s include the ability to temporarily freeze a lost card (rather than cancelling it), enabling only certain types of transactions (e.g you can disable contactless payments to avoid fraud), and a geographical GPS-based system where payments will only be processed if your phone is within a certain proximity.
Although initially incorporated as a UK bank, the company has (understandably) moved to secure its pan-European status in recent months. The company was granted a full EU banking licence in December 2018 in Lithuania - which can be easily transferred to other EU countries due to EU ‘passporting’ rules . Passporting, drawn from the fundamental freedoms of the EU, allows a EU banking licence in one member state to be valid in other member states without requiring a subsidiary. The Capital Requirements Directive 2013, which governs the transferring of such licences, requires only that new licence holders must notify the relevant authorities within any member state where they wish to offer their services..
This application will also see deposits (up to €100,000) guaranteed in these countries under the European Deposit Insurance Scheme - if and when the Commission’s plan (first mooted in 2015) comes into being.
However whilst digital banks thrive in Europe they have traditionally struggled in the United States. The two biggest players, Simple and Moven have survived only by working with the established banks whose custom they initially sought to subvert. Indeed, Moven split into two in 2018, after 7 unimpressive years.
Furthermore, inertia on the other side of the Atlantic, set in sharp contrast to the active interventionist mindset of EU legislators, has prevented the success of companies like Revolut stateside. Whilst Washington has done little, the European Commission has actively encouraged innovation in the financial sector, with the publication of its FinTech Action Plan and its efforts to harmonise pan-EU guidelines in relation to transfers, invoices and credit conversion.
In Europe, the sector is controlled via EU Payments Service Directives, most recently PSD2. The net effect of this directive is that small start-ups and fintech companies, like Revolut, have greater access to payment data thus encroaching on areas of consumer finance which banks have traditionally dominated. At the time of its passing (in 2015), EU Commissioner Jonathan Hill commented that the legislation was a “step towards the digital single market”.
Digital banking alternatives have generally encouraged users to engage with their service with incentives - e.g free registration and first card offers, with rewards for sharing it with friends. This takes advantage of a modern person’s instincts (selfish and selfless) to create a circle of beneficence with the provider at its centre,.
“Standard economic principles of supply and demand are crystallising the dream of a new digital financial empire”
Although this system has been effective, it’s becoming increasingly evident that they don’t have to rely on it as they once did. Standard economic principles of supply and demand are crystallising the dream of a new digital financial empire all by themselves. The success of Revolut and others speaks for itself - they are speaking to a new wave of consumer desire thus far untapped by branch-based banks.