February 11, 2020
The basic business model banking has not changed much since the beginning of formal commercial banking. Banks, for the most part, have stayed true to their original tradition of safety, trust, and, most of all, confidence.
Sometimes banking turns into a soulless dispassionate business where all that matters are the bottom lines, bonuses, margins, and ratios. One of the best dramatizations of traditional banking was in an episode of Game of Thrones when Stannis Baratheon visited the Iron Bank of Braavos requesting (if not demanding) to be loaned gold in order to challenge for the Iron Throne. After a hilarious exchange, one banker, clearly less than impressed by Stannis’ apparent abject status, concludes, “You can see why these numbers seem unlikely to add up to a happy ending, from our perspective.” But this happy ending, so to speak, is only for a lucky few who can impress the banks. Such drama happens in countless boardrooms of banks across the world, which is bad news for the countless budding entrepreneurs.
In the year 2019, there were over 1,300 new startups in India, which is in addition to about 8,900 already in existence (NASSCOM). If we go by the KPMG report released in early 2019, the number of startups in India had gone up from 7,000 in 2008 to 50,000 in 2018. The story of the increasing number of startups is not limited to India. Across the world, many entrepreneurs are trying to cut a niche for themselves and disrupting or adding value to different sectors every single day. All these startups need funding and are a tough competition with established businesses all vying for banks’ attention. But startups need more – much more than just a regular business loan and a current account.
The sad news is that only about 1 in 12 entrepreneurs go on to succeed in their business, according to Startup Genome’s Global Startup Ecosystem Report 2019. These are not particularly good numbers for a banker to look at and consider in making a lending decision. For this reason, banks are not keen on lending to startups as they consider this type of lending too risky and more suited to venture capital firms.
Once startups manage to weather these storms and actually open their doors, the harder part of staying afloat begins. Which is why they would need tailor-made financial services that will support their growth. Here again, the traditional bank would fall short as most do not provide these valuable tools. Startups do need capital, yet banks often insist on collateral or for founders to provide personal attachable property in order to secure the lending. Getting credit cards is no mean feat either, as sometimes these banks require that the founders provide cash cover.
Startups also expect a nifty, online, and always on-time delivery of financial services. It is, therefore, critically important that banks provide an easy-to-use platform with proper tools to run a business. A platform complete with expense tracking and invoice management, which is often hard to find in a regular bank or would require the bank to allow API integration to permit developers to install these tools and provide better checkout experience for startups that run online stores. Regular banks would balk at such requests and would most probably refer their customers to their restrictive online banking solutions. And it is not that these tools are not there; the challenge is that due to competition, banks have found it more profitable to operate in isolation, thus denying customers and especially startups the kind of financial interconnectedness that would provide benefits to the entire industry.
It is for these reasons that digital banks or FinTechs or neobanks have been emerging. And whichever way one chooses to call them, they are godsent.
There is an often-quoted book in FinTech circles by Brett King, titled Bank 3.0: Why Banking Is No Longer Somewhere You Go But Something You Do. Aside from being a great title for a book, it perhaps summarizes all that banking has become and explains how our relationship with the bank has evolved over time. It would be a safe bet to assume that one may not know their local bank branch manager by name, let alone having met him.
Banking has now become data-driven, and service delivery channels have been digital for the most part. Neobanks have taken advantage of this and have entered strategic partnerships with banks or acquired their own banking licenses and have become fully-fledged branchless banking service providers. The major challenge for neobanks is that the level of trust has not increased in tandem with its rapid expansion. The majority of consumers still prefer to have their money at a brick-and-mortar institution; people still need interaction with a human person to allay their fears and offer explanations when things go wrong.
The dominant model, though, is for these FinTech firms to piggyback on top of the traditional bank platforms and provide better user experience to their customers. This has become very beneficial to startups since some neobanks – like Azlo, which partners with BBVA in the USA to offer online-only, no-fee current accounts. They aim to create a community of like-minded businesses that can connect and mentor each other, thus creating opportunities for one another.
‘Coconut,’ which provides a powerful and user-friendly accounting system that small businesses and startups can use to file tax returns, track expenses, invoicing, as well as basic bookkeeping functions all in one place. It aims to remove the headache of accounting and tax administration so that entrepreneurs can focus on building their businesses.
The Finland-based Holvi aims to provide a business account in partnership with Mastercard and provides a free Mastercard-branded card. It is basically a payment service provider that rides on Mastercard’s platform to offer current accounts for small businesses. It also offers a mobile application to ease the process of bookkeeping and expense management.
‘Neat’ is a Hong Kong-based money service operator and lender offering business accounts designed for entrepreneurs. It provides tools to entrepreneurs to help monitor their costs, receive payments, and send funds worldwide.
Bangalore based neobank ‘Open’ aims to provide a full suite of services that any startup would require – right from sending & receiving payments to automating accounting & bookkeeping and offering expense management. Open allows small businesses to link all their bank accounts and manage them with ease from a single platform. This is in addition to providing all the services a regular bank would offer. All this with easy onboarding and an attractive UI. Open’s Co-founder & COO, Mabel Chacko highlights one of the most distinctive offering – the Founder’s Card – a credit card that is designed for startup entrepreneurs, allowing them to manage their expenses and vendor payments with ease.
What neobanking platforms offer is such utility and flexibility that a regular bank would not be able to provide. Open, for example, allows developers to use their APIs to develop and ‘enjoy fast and scalable growth’ by integrating banking into their business workflows. Once you combine data analytics, an easy & attractive user platform, and automate most mundane tasks like cash collection, tax returns, and other basic accounting processes, running a business for startups would become much easier, and therefore they can concentrate on their growth.
What’s notable is that most of these neobanking platforms such as Open are startups themselves and not banking behemoths that are hundreds of years old. This makes the neobanks use a common entrepreneurial spirit relatable to other startups. Instead of having to call Mr. John Smith’s secretary to seek an appointment in order to discuss your loan that is falling behind, you can just find a Johnny on Skype and have the matter handled. This neobanking professional is more likely to be wearing a t-shirt and a pair of jeans but will surely solve most of your startup’s banking problems.