TransferWise co-founder Taavet Hinrikus must be smiling
. Yesterday, The Guardian ran an expose
of the huge profits banks make from international money transfers. The report included an internal Santander memo leaked to the newspaper that details how nearly 10 per cent of its global profits — €585m out of €6.2bn in 2016 — came from international money transfers, and that the bank charges six times more than newer rivals such as TransferWise.
None of the above will likely come as much of a surprise to readers of this newsletter, and it should be said that TransferWise isn’t the only startup undercutting the banks and Western Union (see my Azimo story
). However, what I like most about the Santander memo is that it manages to capture what is happening in fintech in a single line:
The banking model is built on cross subsidization. New entrants can attack the most profitable slices without offering all services.
Of course, by ‘cross subsidization,’ what the Santander employee really means is cross-selling from one potentially loss-making banking service to a much more profitable one. What we are seeing — at least in the first phase — is startups unbundling financial services and in turn picking off the lower hanging and sometimes most lucrative fruit. But it won’t end there.
In an article I published this week on Meniga
, a London-headquartered startup that provides digital banking technology to some of the world’s largest banks, I summed up how incumbent banks are being attacked on multiple fronts:
From having some of the most lucrative and low-hanging parts of their business unbundled by upstarts, such as TransferWise (money transfer), Nutmeg (savings), and PensionBee (pensions), to out right ‘challenger’ banks that are re-inventing the current account and will lend out customer deposits in the form of overdrafts, a business model at the core of traditional banking.
And then there is the biggest elephant in the room: big tech companies. If fintech is really about monetising access to a consumer’s financial data — access that the banks are being forced to provide by upcoming EU and U.K. open banking regulation — the likes of Google, Facebook, and, to a lesser extent, Apple and Amazon, can’t afford not to jump onboard the fintech train.
With all of that said, whilst fintech startups and tech companies clearly have the innovation and far less technical debt, the banks have the customers and sit on a goldmine of data. It really is theirs to lose.
Bonus: Which founder of a fintech startup recently told me I was too old to understand why users would want to interface with a chatbot to manage their finances?