Like the 15th-century European explorers, colonising the US remains a tantalising prospect for European fintechs.
Boasting a big credit-hungry population some of whom are dissatisfied with incumbents, the US offers the UK and European neobanks an opportunity to pocket sizeable profits.
German neobank N26 might have retreated from the US, but UK-headquartered neobank powerhouses Monzo and Revolut are still in the race.
Other European fintechs like UK card aggregator Curve and German savings fintech Raisin are also aiming for US glory.
Huge market but fragmented
“It is a huge market but very fragmented, “ Sid Jajodia, the US CEO of Revolut tells The Fintech Times.
Huge it is and the US digital banking market is set to top $800billion by 2026, according to industry figures.
But achieving success in the US requires navigating choppy waters and, in the case of Monzo and Revolut, it’s not simply a case of xeroxing their European success in the US.
There are challenges left right and centre. Slow adoption of contactless payments, a decline in debit card use, and an ultra-competitive and fragmented US banking market.
Not only that, US regulators are a tough nut to crack and cultural differences between the US and Europe negate some of the neobanks strengths in Europe, such as erasing cross-border payment fees.
Neobanks following different paths to cracking the US
In the US, arch-rivals Monzo, which has 5.8 million customers globally and Revolut, over 20 million customers globally, are -for the time being- plotting different courses.
Last year, Monzo withdrew its US banking licence application, saying “it isn’t the outcome” it initially set out to achieve.
Monzo would have been hoping that garnering a UK banking licence would have stood it in good stead in the US but it wasn’t to be.
Instead, Monzo it seems will follow the path of its US peers like Chime and piggyback on its partnership with a US partner bank, the US community bank Sutton Bank, to access its banking services and issue its debit cards.
In a public announcement earlier this year, Monzo said it had moved out of beta to a public launch and had onboarded “ thousands of new customers “ and processed “millions of dollars of transactions” in the US over the past 18 months.
While lacking a banking licence is restrictive for Monzo- restricting its lending capacity, for example- high US interchange card fees mean that revenue sharing with a licenced bank is a sustainable model.
Revolut targets US banking licence
Revolut, meanwhile, is waiting to see if its application for a US banking license is successful, allowing it to operate throughout the US as an independent bank.
Revolut is hoping its country-by-country approach will be successful in the US, where it launched n 2020.
At the moment, it offers financial services to retail and business customers and has been authorised as a licence broker-dealer in the US, meaning it can offer “commission-free” stock trading.
“We’re on a mission to build the world’s first global financial super app and offer our customers zero-fee banking, foreign exchange, crypto and stock trading,” says Jajodia.
With half a million US customers (and over 150 US employees), Revolut is hardly a runaway success in the US yet but Jajodia says there are millions in the US who could be drawn to Revolut’s offering.
US presents an “enormous opportunity” for Revolut
Jajodia said: “There is an enormous opportunity to build on the enthusiasm we’re finding for our products and services in the US, particularly among those who travel or have family or friends outside the US.”
On challenges in the US market, Jajodia said: “Payments and card systems are different in the US versus the UK and Europe. Banking is very community focused, making widespread adoption more challenging. It’s a huge market, but very fragmented.”
An alternative path to US glory
One alternative route open to Monzo and Revolut gaining a banking licence would have been to buy a bank with a US banking licence.
US mobile-first lender SoFi acquired Golden Pacific Bank as a path to getting a fully-fledged banking licence.
But Adam Davis, associate partner, Bain & Company, the management consultancy firm, said the acquisition-to-acquire-a-banking-licence could be a “can of worms”.
Davis points to the multitude of priorities that Monzo and Revolut have in many markets.
He said: “The question is do you want to go all in on acquiring another bank in the US, trying to integrate that bank into your current processes?”
He says this could be a “can of worms” that could take up to five years to sort out.
Instead, he sees the value in European neobanks piggybacking on an existing licence.
He said: “If you look at the economics, and how quickly you can get up and running on a prepaid debit proposition off the back of using those third party partners, and the money you can make on interchange as a result then you start thinking ‘is this a third-party ecosystem play that could actually be a sustainable business model in the US?’”
Challenges are plentiful
Americans like British imports: think cars, pharmaceuticals and Harry Styles but whether this fondness will translate to their financial arrangements is a moot point.
Zilvinas Bareisis, head of retail banking research at Celent, the technology research firm said: “I don’t think there is an inherent aversion to British names and British brands in the US. I would say it’s quite the opposite actually.”
But an acute challenge facing Monzo and Revolut, says Bareisis, is the sheer weight of competition.
For example, he points to the millions of dollars poured into their digital capabilities by the US megabanks, such as JPMorgan Chase & Co, Bank of America and Wells Fargo, which are now “best in class”.
There is little doubt the US banking market is super-competitive. It is not just the big incumbent banks but also the community and regional banks while payment companies, like Cash App, are also increasingly looking at moving into the banking space.
Davis says a key challenge is that community banks currently serving the UK neobanks target market are offering a top-notch “personal” customer service, which will be hard for neobanks to match.
Do Americans want a super app?
Revolut co-founder Nik Storonsky thinks the future of banking is a super app or a digital one-stop shop, so US customers can get their fix of Bank of America, Robinhood and Chime in one place.
But Bareisis is not convinced there is a mania for an all-encompassing Alipay-style app in the US, where customers do everything from a single app from ordering flowers and taxis to booking a plumber.
But he points out that several financial providers in the US, like PayPal, are betting that bundling financial services within an app will be a success.
Davis, meanwhile, highlights a potential stumbling block being that in the US neobanks, unlike in the UK, are not aspirational for middle and high-income groups in the US, but are more the preserve of lower-income groups.
Minority market neobanks
One potential avenue to explore for tomorrow’s Monzos and Revoluts is betting on a particular audience demographic.
The likes of Daylight, focused on the LGBTQ community, and First Boulevard and Greenwood, both focused on serving black American consumers, are creating waves in the US.
These upstarts are making bets that their branding and tailored offering will prove more enticing than the wider range of services offered by big banks.
Analysts believe that securing IP for a target market could in theory prove fertile ground for UK and European fintechs in the UK.
Will the UK neobanks be successful in the US?
Davis says it is a “possibility” that Monzo and Revolut will be successful in the US over time, despite the headwinds.
Bareisis says: “The US market is a really difficult one to crack. But then I think every company will look at their strategies, will look at their portfolio, and which markets they want to operate in.
“Especially now, when it’s a harder environment for all fintechs and banks to operate in, so everybody is looking at what they’ve got and trying to bet on where biggest returns are likely to be in the future.”
Two case studies of fintechs looking to crack the US
What services is Raisin offering in the US? What services might Raisin offer in the future in the US?
Raisin US CEO Marcel Bock said: “We offer an efficient digital platform for raising retail deposits for US banks and credit unions, allowing these institutions to expand their reach and source deposits from savers nationwide.
“Our platform delivers the full deposit value chain – from marketing and KYC/AML to reporting and customer service — reducing partners’ ‘bricks and mortar’ and other administrative costs.
“With our proprietary direct-to-consumer channel, SaveBetter.com, we provide savers across America with access to a curated suite of savings products from our network of financial institutions through the convenience of a single account that can be set up in minutes.”
Can you update us on Raisin’s ‘savings as a software service’ in the US? What is the size of the business? How many customers?
Bock said: “While we can’t give exact customer or Asset under Administration numbers, we are happy to report that the size of our business has tripled this year as we have seen a considerable shift in the savings market and strong tailwinds by the Fed’s policies.
“The US is also one of the key growth markets for the Raisin Group, who passed €25billionn in assets under management this month.
“The platform now has 28 different types of high yield accounts for customers and we also welcome our first credit union; SkyOne, this month.
What is the size of Raisin’s team in the US?
Bock said: “We have a team of 30 based in the US, with additional support from colleagues based in the UK and Germany – making us a global team.
What has been the biggest challenge in the US market?
Bock said: “Naturally, building our business in a low interest-rate environment. However, we have secured a number of financial institutions offering market-leading rates that have allowed us to increase our customer base during this period.
“In addition, banks have required less funding given the Federal Reserve’s loose monetary policy, but this has now changed with the Fed’s interest rate hikes and tapering.
Why are you so confident the US savings market needs shaking up?
Bock said: “We are here to challenge the status quo and break down barriers to savings for both banks/credit unions and consumers and in doing so, created a unique proposition for both.
“For customers, usually you’d need to set up individual accounts with each bank or credit union that you want to save with.
“Our platform makes it easy to access a range of market-leading savings products through one single account. We also offer access to an array of mission-driven institutions such as community banks that usually would not offer their products through online channels
“For banks and credit unions, we make it as easy as possible to digitally raise retail deposits nationwide. Traditionally, raising retail deposits requires significant operational infrastructure and vast marketing resources. We deliver the whole deposit value chain seamlessly end-to-end.”
UK card aggregator Curve is launching in the US, shortly coming out of beta.
With its US headquarters in Brooklyn, it has 18 US staff and two product teams in the UK helping out, meaning it has approximately a 35-strong overall US team.
The “financial super app” allows users to combine all debit, credit and loyalty cards into one.
It expects to launch Curve Flex, its BNPL proposition, within the next 12 months in the US and also has a crypto rewards programme, where users can earn cash back in dollars or crypto, which it thinks could be a major play in the US.
Amanda Orson, Curve US CEO, said: “Your product proposition will be strongest for an aggregator where the market is most fragmented and it is most fragmented in the United States.”
Orson adds that paytech is what Curve “does well” and thinks Curve will be a hit in the US as it is solving the “inconvenience of having money distributed around your bookmarks and your mobile device by being able to see everything in one place, by being able to spend in one place, by being able to earn in one place.”