“Disrupting” retail banks. Maybe not.

The past few weeks have seen several launch and funding announcements in the consumer banking space. Recently, German-based NUMBER26 raised a $2M seed round from investors including Axel Springer Plug and Play (more here), while another German-based startup, Avuba, just graduated from TechStars London (more here). Across the channel, UK-based Osper raised $10M from investors including Index Ventures and Horizons Ventures (Li Ka-Shing’s venture capital arm) to target the youth market (more here). UK-based Atom Bank, also raised ‘a six-figure investment’ with the aim of launching in 2015 (more here). Closer to home, Moven just raised $8M from investors including Sberbank’s SBT Venture Capital, Anthemis Group, and Standard Bank to expand overseas starting with Canada and New Zealand (more here). Other notable US-based companies include Simple, which was recently acquired by BBVA in February this year for $117M; and GoBank, part of Green Dot Bank which has specializes in re-loadable pre-paid cards targeted at the unbanked). Click here to see other similar companies tackling the Consumer Banking space.

Startups in this space promise to offer an alternative banking experience centered around the mobile device — an app built from the ground up that promises to offer a better user experience in performing banking transactions (e.g. send money, deposit checks) and managing their personal finances. Users are provided with a Visa/Mastercard debit card and can access a network of ATMs (through partnerships). Also, these ‘next-gen banks’ have no bank branches, but pass on the operational cost-savings in the form of low or even no fees. While these startups offer a refreshing approach to retail banking, it is unlikely they would ‘disrupt’ traditional banking incumbents.

Before we continue, it is interesting to note that these ‘next-gen banks’ are not actually banks. These startups focus on the front-end user experience, while leaving the back-end and the regulatory compliance to partner banks (Simple partners with Bancorp; GoBank partners with Bonneville Bank; Moven partners with CBW Bank). Upon closer examination of Simple’s back-end, Simple is actually a debit card that runs on a prepaid platform. In addition to being part of the prepaid network, users are opening an interest-bearing checking account with the bank partner (the Bancorp Bank); that account is tied to users’ Simple debit card (source).

While the above partnership arrangement allows innovative startups to enter a heavily regulated industry, these companies are not exempted from regulation. For example, leaked documents from Simple suggest that the company is struggling to sign up active users as Know-Your-Customer regulation hinders the onboarding process (source). Considering the regulatory environment, it is no surprise that Moven is focusing on overseas markets, despite having only launched in the US four months prior.

In addition, it is not clear how feasible the business models are. While a branchless model removes the capital intensive aspect of the business, cost-savings are passed on to the consumer in the form of low/zero fees. Simple, Moven, GoBank do not charge users for debit card use or monthly fees (GoBank requests for ‘donations’). Would revenue earned from interchange fees and interest margins be sustainable, considering how they are split with partner banks?

Also, while a low-cost branchless model may make sense for a generation of customers who are performing more transaction on the go, recent surveys indicate that customers (even the young) still appreciate physical bank locations (source, source). Rather than a branchless scenario, banks of the future may sit somewhere in between — a superior mobile app experience, with some branches. Short of opening their own branches, these ‘next-gen banks’ may have to partner or be acquired by established banks with physical locations before they can gain widespread adoption (assuming incumbents do not copy those features). Currently, Moven’s approach in allowing users to connect multiple external bank accounts is indicative of a co-existence, rather than disruption.

Having said that, it is still early days. Apart from Simple and GoBank (launched 1.5 years ago), many other players were just launched or are still under development. It would be interesting to see how non-US startups perform in their home markets where regulation differs from that in the US. In terms of business models, the potential for high customer engagement through the mobile apps of these ‘next-gen banks’ may open doors to new revenue streams in the form of commerce/ mobile payments or allow these companies to upsell other financial products. Right now, however, the significant hurdles will not see incumbent banks being “disrupted” away anytime soon.