Borderless Banking – The Beginning of a Whole New World?

April 9, 2018

MONTHLY ANALYSIS

Imagine if bank accounts were not restricted to your home country. What if there was a way for businesses and freelancers to internationally manage their money as easily as if they were local in each country? Once at scale, how would that change the way we work, commerce, and banking as we know it?

It would be a revolutionary product that our traditional, banking-trained mindset may not easily comprehend. I was really amazed when I started tracking it. Before I dive into some example, it is worthwhile to unpack why it will be difficult for (traditional) banks to compete.

For example, consider TransferWise, which offers borderless personal and business accounts. It rolled out a debit card (only by invitation at the time of writing) to accompany what is called a borderless digital account. The borderless digital account allows users to hold and convert 28 currencies at the real exchange rate, with local bank details for the UK, US, Australia, and Europe.

It is important to remember that TransferWise started with a focus on fast, low-cost international transfers. By designing and building their company around international payments (and making a name for themselves), they already solved and had customer trust in the market. It is also how their business is designed to make money. Therefore, adding a multi-account option is less of a net-new business but rather a new go-to-market strategy for exchange and withdrawal fees.

The second important ecosystem impact – which we’ll explore in full another time – is borderless accounts only requires one bank partner per country. For example, TransferWise uses Barclay’s in the UK and Wells Fargo in the US.

This is part of a broader trend in the FinTech-bank partnership. As others copy this model, more banks will be involved but, in the end, how many banks are really necessary? Right now, banks are happy to gain net new revenue and, obviously, hold the keys to the kingdom with regulation – that is – until they don’t. Soon you can imagine borderless loans and other technology-driven solutions that create competition for favorable business environments, not banking environments. What will regulators do then?

In July 2015, Revolut launched a debit card allowing customers to spend foreign currencies at interbank lending fees.

  • Cards (both physical and virtual) are offered in both Mastercard and Visa variants.

  • Personal users can have up to two physical cards and five virtual Revolut cards per month, while business users can have unlimited physical cards and 20 virtual Revolut cards per month.

  • Can be used to pay abroad and withdraw up to 200–400 GBP with no fee charged.

  • Customers can physically hold 16 different currencies on the app.

  • Customers can pay, receive, and transfer in cryptocurrency to their Revolut contacts with 1.5% upfront fee.

  • If the card is used remotely without permission, then the card can be blocked using the app, a cardholder will be liable for any further fraudulent transactions.

A different cross border offering is deposit products

Raisin enables European savers to access savings products from banks across Europe through a single platform. So you could be in the UK and open a deposit account in Germany. Users can compare interest rates filtered by many factors, including geographies and currencies. A single verification takes place at the time of customer onboarding by Raisin. On maturity, funds are transferred back to Raisin account, from which they can only be transferred to the reference account.

The referenced account, the bank account you specified during registration, is your normal current account (such as your salary account) held at a bank in your home country. This reference account is the only account that you can use in combination with your Raisin Account (both for incoming and outgoing payments). Transfers made from accounts other than the reference account will be rejected and automatically after 30 days send back to the originating account.

The Raisin Account is a current account accruing no interest at Keytrade Bank, serving as your central online transaction account. When you select a deposit, the customer’s Raisin Account is debited, and the respective amount is credited in the Deposit Account.

Another company called Deposit Solutions offers a bank-focused platform. It serves as the middleware through which banks can offer third-party deposits from across Europe to its customers, without the customer having to open a new bank account. It also offers ZinsPilot, which is similar to Raisin’s product.

Enabled by harmonized regulations across Europe:

  • Harmonized deposit guarantee scheme

  • Passporting notification allowing banks to provide cross-border services without a physical presence

  • Single banking interface, a one-time customer identification using eKYC

  • More than €3 billion invested with Raisin

  • Receives a commission from partner banks; free for savers

  • Customers can see the various interest rates on offer and make the investment decision on their own

This made me thinking what if someone like Raisin could publish an API to all the banks in the world! What if I am in the US and make a deposit in India where the interest rates are much higher?

Security and safety features offered in some of these apps are interesting. E.g., Revolut offers:

  • **Location-based security: **Allows users to turn this feature on or off through app; if the feature is on, phone’s location is used to determine if the card is compromised, i.e., if the phone and card are in different locations, the transaction will not go through.

  • ATM withdrawal: Enables users to turn off ATM withdrawals via the app.

  • Magstripe payments: Enable users to turn off magstripe payments via the app, and use Chip-and-PIN technology only.

  • E-commerce transactions: Enable users to turn off e-commerce transactions via the app.

This is a pretty revolutionary set of offerings by a handful of companies that is garnering a lot of interest from investors globally. Some of these companies, like Revolut, are growing at a very fast pace. If we extend the concept of harmonized Europe, where does it lead us to? I think that trend could cross continents with global borderless accounts and the beginning of a more global and harmonious system. That’s topic that deserves an entire post, so we’ll get to that soon!

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