Back before Elon Musk was building rockets and electric cars, one of his ideas was to create an internet bank. The year was 1999, and the plan was to build a 21st century financial service called X.com (he has always loved Xs), with bank accounts, person-to-person online payments, insurance, and investment options. X.com merged with PayPal and became one of the most successful companies to spring from the dot.com boom.
As successful as PayPal’s payment service has become, Musk’s ambition to create an Amazon for banking came up short. Some of his ideas may have been too radical at the time. But things have changed in the past 19 years: The PalmPilot has been replaced by the iPhone, a far more useful pocket computer. Bank branches are closing, and mobile phones have proliferated, generating unprecedented data and mobility for financial services.
Musk’s vision has been taken up by extraordinarily ambitious startups in Europe. Many of them, including Curve, Monzo, Revolut, and Starling, are based in London, seen as the fintech capital of the world. Another entrant, Berlin’s N26, just launched in the UK.
Ask any of these CEOs whether the goal is to create a Facebook-size giant—it would be Europe’s first—and the answer is yes, without any hesitation. Nikolay Storonsky, the Russian-born founder of Revolut, told Bloomberg that creating a global finance app is a winner-takes-all race that could be worth $300 billion.
Valentin Stalf, the CEO of N26, says the company’s goal is to have 100 million or more customers within five to 10 years (it has 1.5 million today). He acknowledges that the company—backed by Valar Ventures, a fund run by PayPal co-founder Peter Thiel—has a vision similar Musk’s ambition for X.com. ”The time is right for a global financial brand,” he said.
For most of these companies, the goal is regular interaction with customers through their smart phones. Their user data can be used to create a one-stop-shop app that suggests products and gives financial advice.
Younger Europeans increasingly expect cheap foreign exchange when traveling or transferring money thanks to these new breed startups. But their strategies vary. N26 says the key is to have a bank license because there’s more scope to innovate. On the other extreme, Shachar Bialick, Curve’s CEO, says it’s better to start without a banking license. His plan is to let customers keep their bank accounts and, like a Spotify for money, help them access the best financial services through the Curve platform.
In the race to get ahead, there are signs that at least one has been too aggressive at times. Revolut reported suspected money laundering to regulators, according to the Financial Times (paywall). The newspaper reported a claim that managers had bypassed compliance controls to reduce pressure on its customer support team. Quartz has spoken with two former Revolut employees who also say the company took compliance shortcuts in the past.
A Revolut spokesman said in an email the company would “never take shortcuts in such a fundamental area as compliance.” It’s inevitable, given its size across 31 European countries, that criminals would seek to launder money through the service, the spokesman added. However the company has “incredibly tight and sophisticated controls in place to stop this from happening, and we are constantly enhancing our infrastructure to stay one step ahead of criminals,” he said.
Will the new wave of online banks succeed? Europe’s startups used to lack the mega-round funding that allows companies to grow quickly, seize market share, and leverage the network effects that power the biggest tech companies. Europe has also not utilized stock-based incentives that helps minnows poach expensive engineering talent. Many entrepreneurs say a lack of risk appetite has held companies back, as did a shortage of pay-it-forward Silicon Valley-style entrepreneurial experience.
There are signs this is changing. Europe has internet success stories like Spotify, Skype, and a host of startups. The neo-bank fintechs are geared to burn cash and grow quickly: N26 has raised more than $215 million from the likes of Tencent, the Chinese tech giant, while Monzo has Silicon Valley venture funding. Curve’s Bialick says it will potentially take more than $600 million in funding—an amount comparable to what Amazon raised—for a startup to win.
US companies have similar ideas. Square’s CFO recently said people should expect the payment company to become more like a bank. Goldman Sachs has waded into online consumer finance, and JPMorgan has its own mobile bank called Finn. (PayPal, meanwhile, has the top ranked finance app in the UK, according to Apptopia.)
X.com and PayPal knew that rapid expansion through lots of funding were vital to success. Bialick agrees and says the competition will be decided in the next five or so years: ”We have to grow fast,” he said.
The future of finance on Quartz
- Bitcoin has fizzled as a payment mechanism. Instead, the digital economy is humming along on networks that pre-date the internet.
- Nonprofits are getting into the investing game through ETFs. BlackRock, the world’s biggest money manager, says environmental, governance, and social issues are becoming the No. 1 conversation with clients.
- Investors have never been more receptive to money-losing IPOs. The trend suggests investors are getting carried away with risk, or could simply be willing to wait for even bigger returns.
- Goldman says its Marcus UK savings accounts are off to a great start. The online bank launched without an app. 🤦♀️
- India’s rupee has had no respite. It is weighed down by global pressures including trade wars and rising crude prices.
The future of finance elsewhere
- It is difficult to beat the banks at lending. Peer-to-peer lender Funding Circle’s shares fell (paywall) after listing in London. In the US, LendingClub’s founder reached a settlement with the SEC last week.
- Wall Street veterans are planning a crypto exchange. ErisX is backed by major trading firms including Virtu Financial as well as exchange operator Cboe and retail brokerage TD Ameritrade.
- Credit Karma has expanded into auto insurance products. The company’s founder has said personal finance will eventually be autonomous.
- Crypto trading is rife with bot manipulation, according to the Wall Street Journal (paywall). US regulators are increasingly scrutinizing such behavior.
- What the &%$#@? After billions of dollars in fines, bank traders are so frightened of government watchdogs that they’ve stopped dropping the f-bomb.
Previously, in Future of Finance Friday
Sept. 28: A booming Stripe shows digital payments aren’t about to be replaced by blockchain
Sept. 21: The godfather of crypto has a plan to keep digital payments and messages private