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N26’s Sarunas Legeckas discusses the collective responsibility that challenger banks have in helping to reshape the Irish banking landscape.
In 2020, we continue to see major upheavals in the banking sector – and I’m not speaking of the pandemic, but of an issue that began much earlier and that is still occurring.
Irish banks are immersed in a process of imposing fees and using complex financial jargon and opaque practices, instead of finding ways to support customers and regain their trust. Increasing consumer frustration with an outdated banking system alongside the arrival of fully digital, challenger banks is slowly but surely turning the tide.
Traditional banks repeatedly claim they are not fazed by the presence of digital banks. But the first thing to know about challenger banks is that we see each other’s successes as a collective win, because the more customers we can win over with a better user experience, the quicker things will change for us all.
More than 1m people in Ireland have an account with a challenger bank and more and more people are opening accounts every single day. This gives us reason to believe that in the next five to 10 years, banking in Ireland will reach a tipping point where challenger banks are dominant players for the Irish population.
A change in attitude
Finance has become so complex that it’s one of the biggest causes of stress and anxiety in Ireland. According to our own recent research on financial wellness, Ireland is now the second most financially stressed country in Europe, behind Greece.
While they may not have been around for hundreds of years like the big banks, challenger banks are taking the burdensome infrastructures of the last few hundred years and modernising them into secure banking platforms. More importantly, customers are responding.
‘The arrival of challenger banks in Ireland has been a technological catalyst for the traditional banking sector’
The key to building trust in any relationship is regulated freedom and transparency. The days of hidden fees for maintenance, pin changes, online payments, the issuing of cards and commissions are numbered.
According to the Global FinTech Adoption Index 2019 published by EY, 27pc of users said they use fintech challengers because of more attractive rates or fees.
Our own research in the Irish market further demonstrates this, with as many as 67pc of those surveyed reporting that they’ve been hit by an unexpected banking fee. When our research asked what they would change about their banking experience, almost half (47pc) of Irish consumers said they would “scrap hidden fees and charges”.
The subscription model
Some of the most powerful industries in the world have revolutionised their sectors with a ‘freemium’ model. Everything from Spotify and Amazon to The New York Times is offering basic quality services for free, while giving users the option of paying for curated products or additional access, if they want to.
With companies such as Netflix or HBO in mind, a 2018 ING report suggests that European households spend an average of €130 a month on subscription services. Currently, that figure is only 5pc of the average total spending of a household, but according to the ING report, subscription spending is expected to grow.
Contrary to traditional banks, a challenger’s business model is first and foremost a commission-based model. Today, most of our revenue is driven by the activity of our customers (subscription to our premium products, interchange fees and revenue share model with our partners) rather than by our balance sheet.
This approach to revenue generation is sustainable for us, as our cost base is much lower than for incumbent banks. Therefore, we manage to generate a positive net contribution for every customer we add to our platform.
The future of banking
The arrival of challenger banks in Ireland has been a technological catalyst for the traditional banking sector, and the biggest banks are now pumping millions into digital transformation to get up to speed. This reveals the pivotal obstacle of the traditional financial system: technological innovation.
McKinsey believes that replacing a bank’s core banking system is the equivalent of performing “high-risk brain surgery” and would cost hundreds of millions to achieve for large banks. But on top of building an innovative banking experience, an ability to offer customers a genuine sense of transparency and freedom to choose the product that best responds to their needs and experience is what will define the winners and losers of banking in the next five to 10 years.
Challenger banks have collectively started a major change in how Irish people view banking and the different options open to them, which can only be seen as a positive. However, challengers still have a lot more to do in terms of keeping the pressure on traditional banking institutions and we have a responsibility to call out bad banking practices, call for more transparency and keep raising the bar in terms of customer service and care.
Sarunas Legeckas is the head of Ireland and general manager of greater Europe at digital bank N26.
