European challenger banks step up

The fintech industry continues to flourish as recently created digital or mobile-first banks – providers of app-based digital banking services, including current and business accounts – begin to challenge incumbent banks. Both consumers and businesses, especially small and medium-sized enterprises, are increasingly using the ‘digital disruptors’ as alternatives to traditional banking services.

This is partly as a result of modern easy-to-use apps with features such as money-saving wallets (which round up each transaction and transfer the change to a separate savings account), no-fee ATM withdrawals overseas and options to purchase cryptocurrency.

While there are many examples of digital banks around the globe, including California-based nCino formed in 2012 out of Live Oak Bank, the majority of these banks engaged in cross-border investments are found across Europe. The UK has emerged as a hub for these disruptors with notable names including London-based rivals Revolut, OakNorth, Monese, Monzo and Starling Bank, while other competitors outside the UK include Berlin-based N26, Munich-based Fidor and Helsinki-based Holvi.

Since 2014, these eight companies have collectively undertaken 30 greenfield FDI projects in 18 different countries across Europe, North America, Asia-Pacific, Latin America and the Middle East, according to fDi Markets, a greenfield investment data service from the Financial Times. These projects amounted to an estimated $802m of capital expenditure, creating an estimated 1688 jobs.

The top three destination countries for these investments were Ireland, with four projects and $127m of capital investment; the US, with four projects and $30m of capital investment; and Spain, with three projects and $46m of capital investment.

This international expansion was ramped up in 2019, as eight greenfield FDI projects were undertaken in the first four months of 2019, compared with 11 projects for the whole of 2018, according to fDi Markets. Revolut, N26 and Starling lead this investment spree with four, three and one projects, respectively, which if sustained will lead to the number of greenfield projects in 2019 to be more than double 2018 figures. Compared with its rivals’ multiple investments into several countries, Starling has only invested $20m in one greenfield project into Dublin, Ireland. The country has emerged as a financial hub amid Brexit uncertainty over the continuation of European banking licences in the UK.

Founded in 2015, Revolut has been the most active investor, with 12 greenfield projects undertaken since 2017 from its London base, where 28% of its UK customers live. While most of these investments were made into capitals across Europe, in countries such as Ireland and the Netherlands in 2017, and Lithuania and Poland in 2019, there have been investments into both the US and Canada, as well as the setting up of Asian headquarters in Singapore in December 2018.

Revolut has faced some controversy over compliance issues. Amid the furore, chief financial officer Peter O’Higgins, a career banker who spent 12 years at JPMorgan, stepped down. Then an advert by Revolut in London led to complaints from the public, which the Advertising Standards Agency referred to the City watchdog, the Financial Conduct Authority.

Monzo, which is seen as Revolut’s main rival in the UK, has only undertaken one greenfield FDI project, with an estimated investment of $11.3m to open a customer support office in Nevada, US. While not under the limelight to the same extent as Revolut, Monzo has been scrutinised for is crowdfunding model, which has left its shareholders facing an overhaul of the terms of their investment.

Since its foundation in 2013, Berlin-based N26 – which boasts customers across 24 countries – has undertaken nine greenfield FDI projects, with an estimated $385.5m of capital expenditure, reports fDi Markets. In 2019, one of its three projects was an investment of an estimated $35.1m to open a Vienna office, which will hire 300 software engineers, product managers and IT specialists. These Vienna-based employees will focus on security, particularly to detect fraudulent activity, amid concerns over money laundering on its platform, which culminated in Germany’s financial regulator, BaFin, ordering N26 to strengthen its anti-money laundering practices.

Founded in 2011, Helsinki-based Holvi, which has been backed by Spanish banking group BBVA following an acquisition in 2016, made three greenfield investments totalling $70m of capital expenditure in 2014, according to fDi Markets. No further investments have been made since then, but there are plans to expand into Ireland, Italy, Belgium, France and the Netherlands following 60% year-on-year growth from 2017 to 2018, news outlet Finextra reports.

Risk concerns

Despite excitement over challenger banks and their expansion, a confidential stress test undertaken by the Bank of England (BoE) in June 2019 found that new UK challenger banks were not managing risk effectively in their aggressive pursuit of growth. The review of 20 fast-growing new UK challenger banks found that many new lenders were “overly optimistic” in their risk modelling, culminating in the BoE’s senior supervisor Melanie Beaman ordering chief executives in a letter to tighten standards.

“[Overall] 2019 is set to be an exciting year for Holvi. Having become the leading business banking service for microentrepreneurs in our home market of Finland, and rapidly growing in Austria and Germany, we are setting our sites on the rest of Europe,” Holvi CEO Antti-Jussi Suominen was quoted as saying by Finextra.

As the traditional banking industry continues to face disruption and lose customers to new app-based digital banks, time will tell if these relatively young operators can sustain their international expansion and overcome increasing controversy.