Open Banking, which in simple terms is the opening of bank customer databases and payments systems to third party applications, is up and running in Europe. This development has already attracted a large number of startup companies using innovative business models. It is still early days for all of these companies, but the signs are encouraging. Some of them are building on the “platform” model that companies like Facebook have benefited from – i.e. they provide a free basic service to a large number of participants in a network and then generate revenue from advertising or from the sale of ancillary services. The more participants on the network, the more value is created for all parties. Facebook has a European licence for e-money and for payments, which might throw a spanner into the works of some startups, if not banks. How platform models might translate across financial services is still unclear, but there are some interesting start-ups that are describe themselves as “banking-as-a-platform” services, and these largely depend on Open Banking to drive their proposition.
In the first instance, many of the new businesses have to focus their ambitions on personal financial management services. The basic version of this business model is that of the aggregator – where customers can get a comprehensive view of all their financial accounts across different providers whether that be savings, mortgages or insurance. Aggregators have been trying to make headway for a long time – at least since the first dotcom boom – mainly by using screen scraping as the means to gather information in one place. Open Banking APIs make this much easier, if the customer has given permission, and in fact screen scraping will no longer be allowed.
The personal financial management services which have recently been launched in the UK build on the aggregator model and show that more innovative approaches are possible using technologies like machine learning. These include Bud Financial, Cleo AI, Emma, MoneyHub, Oval Money and Plum Fintech. In addition, an aggregator called Money Dashboard, which has been in existence since 2010 using screen scraping, is transforming itself using the new Open Banking standards. Startups are not the only entities attracted to this space. ING has also entered the UK personal financial management market with a service called Yolt. Two other companies have not been able to establish themselves as independent entities: Pariti which has been acquired by Tandem, and Ernest which closed with the technology being acquired by Moneyfarm. The financing history of some of these startups is as follows:
- Money Dashboard launched its first service in 2010. Since then, the company has signed up more than 150,000 customers for its personal financial assistant. In January 2018, the company had a successful crowdfunding of £1.2m bringing the total equity raised to around £10.0m and valuing the company at £13.9m.
- Oval Money has launched an app which they say will help users save money and find the best financial products to make their savings grow. The service was created to “help bring inclusion, education and fairness back into personal finance”. Oval Money has raised a total of £3.2m which includes a crowdfunding in February 2018, valuing the company at £5.6m.
- Bud Financial describes itself as a “plug and play financial services platform” connecting multiple financial products together in one place. Started in 2016, the company has already shifted to a B2B business model, providing the technology behind a new service for HSBC. Bud has raised £2.1m of equity, including an investment from HSBC, and at its last fund raising was valued at £7.2m.
- Plum Fintech was established in 2016. The Plum app analyses a customer’s financial transactions to identify regular income and expenditure, and then using a “smart algorithm” works out how much savings to put aside. These savings are deposited into a protected account managed by MangoPay on behalf of Plum. The company has raised a total of £1.1m which included a seed round of equity and then a crowdfunding of a convertible loan instrument in July 2017 which valued the company at £5.0m, conditional on further financing.
- Cleo AI connects to a user’s bank account in order to scan the transaction history and analyse spending trends and habits. It is essentially a smart “personal financial management” system which uses artificial intelligence to provide insights to the user. Cleo has so far raised only £0.6m and achieved a valuation of £2.0m.
Note that consistent data is not yet available for Emma and MoneyHub.
The amounts raised by these startups are relatively small compared to some other fintechs like the digital challenger banks. For example, as of May 2018, Monzo had raised £94m and Starling had raised £48m. Tandem, another digital challenger bank which has raised £43m, acquired a personal financial management start-up called Pariti for an undisclosed amount. Valuations so far are relatively low. Oval Money and Bud Financial have each had 3 funding rounds and are valued at £5.2m and £7.6m respectively. Compare that to the insurtech Neos, which started in 2016 and has raised £6.2m over 3 funding rounds, valued at £20.6m.
So how will these services make money and provide a return for investors? According to Cleo, they will offer their own “faster, fairer and cheaper financial products” but will not sell any customer data. Oval will also be offering other products, from which they will most likely make a commission. Plum is following a model established by Digit in the United States, and aims to benefit from holding customers’ savings deposits, based on the automatic savings they are collecting from customer accounts.
The idea is fine, but the big challenge will be to build these companies up to a significant scale. Yolt, from ING, is claiming over 250,000 registrations in less than 12 months of operation. However, this is still very small numbers for a platform business model. In contrast, Clearscore, which provides a free credit scoring service in the UK and has recently been acquired by Experian for £275m, was able to sign up 6 million users before its acquisition and makes money by offering other financial services to these customers.
The experience from other personal financial management tools offered by the major banks is that customers have relatively little interest in tracking spending and making budgets. Will the new services be able to offer something substantially better in order to attract enough customers? The potential benefits for users have been set out by Oval which is targeting 18-44 year olds, many with variable incomes due to the nature of their work. At the time of its fund raising in February 2018, Oval claimed that in the previous 6 months, on average, customers were saving £110 per month and growing their savings by 15 per cent per week. Time will tell whether these businesses are sustainable as independent companies but there is no doubt they are bringing innovation to the market and forcing incumbents to adapt and respond.
(Adapted from an article written for Financial World magazine in 2018)