Why US neobanks thrived while Europeans lost steam

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Consumers don’t normally notice interchange fees. The charges — which are levied by card networks on behalf of banks and other issuers whenever a store takes a card payment — are usually a fairly niche part of the payments system even for bankers, but they became front-page news last week when the FT reported that Mastercard was going to quintuple certain fees as a result of Brexit.

Unsurprisingly, few people were keen to publicly celebrate the move, given concerns that it will lead to higher consumer prices. However, many fintechs will be quietly grateful for the change. Mastercard powers almost all the major British fintech cards, and the higher fees will provide a much-needed revenue boost to firms like Monzo, Revolut and Curve.

The European rules at the centre of last week’s story help explain one of the most striking trends in consumer fintech over the past 12 months: why have neobank valuations in the US continued to soar while British and European firms — which were traditionally thought of as leaders in the space — have lost momentum?

The US market has some inherent advantages compared to any single European country, like a larger population and a banking market that is much less concentrated in the hands of a few major companies. However, even if two fintechs on either side of the Atlantic had identical customer bases, the European company would need to be much more efficient than the American firm to turn a profit on the same number of transactions.

Mastercard’s fee hike means that when a Monzo cardholder makes an online purchase from the EU, the bank will receive 1.15 per cent of the transaction value. That will impact more payments than you might expect — purchases from Uber and Amazon UK, for example, were previously routed through the EU. On everything else they will receive just 0.2 per cent, due to a fee cap that was introduced by the EU and has been adopted by the UK post-Brexit.

In contrast, Chime, the most popular digital banking challenger in the US, receives 1.5 per cent of the value on every one of its customers’ purchases. 

That income allows Chime, which was valued at $14.5bn in a fundraising last September, to avoid most direct customer fees and resist rushing into more complicated areas like lending. The company says “the incentive structure of our business is 100 per cent aligned with our members — we don’t make money off our members, and only succeed if they do”.

“Interchange is great in the US,” explains one envious executive. “EU fintech is at a disadvantage. Your choices are product diversity or lending. And most fintechs are doing neither.”

In their early days, some European fintechs did think they could sustain themselves almost entirely on interchange. Bo, the ill-fated neobank developed by NatWest, hoped to keep costs so low it would be profitable on interchange alone, but it closed within six months of launch. 

Monzo, long after becoming a bank, maintained that it wouldn’t bother building a substantial lending business. Today, the bank is hiring a swath of new credit specialists to strengthen its lending business. It has already hired a new chief risk officer with experience at Halifax, Santander, Nationwide and TSB. 

Besides lending and fee-paying services such as premium accounts, the other option is to go to where interchange is a sustainable proposition. It is no coincidence that Monzo, N26 and Revolut have all made US expansion a priority.

Still, while higher fees may make things simpler for fintechs in the US, there could be drawbacks down the line. Chime has to keep working hard to stay popular with customers: if people simply stop using their cards or switch to a rival, income can quickly dry up in a way that wouldn’t happen to a lender with a large loanbook, as some firms found to their dismay when lockdowns hit last year.

The risk is particularly acute for firms like Revolut and Monzo that intend to acquire their own banking licence — and the accompanying regulatory costs — rather than relying on partnerships. 

“Being a bank costs a lot of money,” cautioned one adviser who has worked with several large lenders. “The higher fees [in the US] . . . just give them a longer runway to build a broader bank.”

Quick Fire Q&A

Company name: Snoop

When founded: January 2019

Where based: Norwich / London, UK

Executive Chair: Dame Jayne-Anne Gadhia

What do you sell, and who do you sell it to: Using secure open banking data and advanced analytics, the app provides data-driven, personalised insights to help consumers save money.

How did you get started: An ambition to help people make their financial data work for them, overcome the loyalty penalty, and improve financial outcomes.

Money raised so far: £19m

Valuation at latest fundraising: Not disclosed

Major shareholders: Jayne-Anne Gadhia, Salesforce Ventures, Travelex Founder Sir Lloyd Dorfman, Havisham Group, Pierre Lagrange.

There are lots of fintechs out there — what makes you so special: Personalisation means every user’s Snoop feed is different and we estimate that the average household could save £1,500 each year.

Further fintech fascination

To the moon: Unless you have been living under a rock, you probably noticed it was an unusual week for financial markets, as semi-organised retail investors used fintech platforms to wage war on Wall Street. Online broker Robinhood raised capital twice in four days to help it deal with the increased demand. In the eyes of many retail traders, it went from folk hero to villain over the course of the week. Read more about the dilemma facing the company and its quest to “democratise finance” here, and delve deeper into what has been going on in the wider market with the FT’s “Runaway Markets” series.

Wirecard fallout: Speaking of financial villains . . . It emerged last week that criminal prosecutors in Germany delayed requesting an arrest warrant against former Wirecard COO Jan Marsalek, a day before the Austrian executive — who is now on Interpol’s most wanted list — disappeared. The fallout from the Wirecard scandal continued to spread on Friday as the government pushed out the head of Germany’s financial watchdog and his deputy.

Visa and Mastercard report results: Full-year results from Visa and Mastercard on Thursday highlighted the impact of the coronavirus pandemic, and particularly the slowdown in global travel. Revenues fell at both companies, thanks in large part to falling cross-border payment volumes. Investors were pleased that the revenue declines slowed in the fourth quarter, but executives were cautious about the outlook. 

Nubank raises $400m: The US isn’t the only part of the Americas where investors are keen on digital banks. Seven year-old Brazilian start-up Nubank is now one of Latin America’s most valuable financial institutions after a Series G fundraise led by Singapore’s sovereign wealth fund GIC.