Confused about ‘Fintech Banking’ jargon? Here’s a quick guide
Following the emergence of new actors are the creation of new definitions and classifications. This consolidation process is time-consuming, leading to the proliferation of confusing terminology.
You might have seen how different terms such as ‘neobanks’, ‘challenger banks’ or ‘digital banks’ are used interchangeably –here’s an example-. On other occasions, they are clearly used to express very specific and different categories. After reading a new report on ‘Challenger Banking’ published at Devie Mohan’s Burnmark -a research company specialised in Fintech topics-, I thought it could be a good idea to further clarify and define some of the current terminology buzzing around the Fintech banking scene. Let’s start with the very basics.
- Traditional Bank
- Traditional Challenger
- New Challenger
- Infrastructure bank
This general term encapsulates all financial technology firms leveraging the power of IT to ‘attack’ any of a bank’s verticals, encompassing everything from wealth management and FX to mortgage lending. The majority of these players do not have a banking license, instead falling under the rules governing Payments Institutions, and therefore they still need to rely on a bank to operate. Besides, it’s important to keep in mind that not every finance-related firm with a website or a digital app falls under the Fintech umbrella -see ‘The impressive rise of “FinWeb” companies… or is it “Finfake”?’–
via CB Insights
However, inside this category, we have witnessed a series of new players competing on the ‘core’ banking product -i.e. on the provision of the bank current account service- or even on the same provision of back-end banking infrastructure. Some of them are called ‘challenger banks’ or ‘neobanks’, as opposed to traditional banks. Let’s start there.
- Traditional institutions with a banking license
- They offer their own ‘closed’ full-suite of products to their clients-.
- These players are now starting their digitalization, with hundred of branches.
Examples: In the UK there are the ‘Big Five’, i.e. HSBC, Barclays Bank, Lloyds Bank, The Royal Bank of Scotland and the UK subsidiary of Santander
Main source of confusion: Nothing to note regarding these actors, although some of them try to avoid this label.
- Like their cousins in FinTech, they do not have a banking license (i.e. they rely on a partner bank to operate, so technically they are NOT a bank).
- The product they offer is the current account (which is a ‘core’ banking service);
- The attractive feature of Neobanks is that their current account products are usually improved by additional features as Personal Financial Management tools, bookkeeping tools, etc.
Examples: Simple, Moven, Holvi, Monese.
Main source of confusion: These type of fintech players are confused pretty often with the below-explained ‘new challenger banks’. This is perhaps due to the fact that the label neobank might be misleading since as I mentioned, they are not technically a bank.
- Acquired a banking license pretty recently, so they are pretty young compared to centenary banking institutions.
- However, their business model is very similar to traditional banks -full suite of products, etc. They also use their own balance sheet to lend money.
- They are not fully digital -i.e. They still have some physical branches-.
Examples: UK’s Aldermore, Close Brothers, Metro Bank, OneSavings Bank, Shawbrook Group and Secure Trust Bank, etc.
Main source of confusion: My perception is that many fintech writers usually don’t refer to these type of player as ‘challengers’ (e.g. Burnmark’s Challenger Banking report call them ‘Pseudo Challengers’). That being said, it’s still possible to find some studies classifying them as ‘challenger banks’ (see PwC’s ‘A new landscape: Challenger banking’ report). For this reason, I left them under the ‘traditional challengers’ category.
- Non-existing banks which have obtained a banking licence in the last 3-5 years or are in the process of procuring a banking licence
- Have digital as the only or predominant channel for engaging with customers.
- They challenge either the products, the user experience or the business models of both traditional banks and traditional challengers.
Examples: Monzo Bank, Starling Bank, Tandem, N26, Atom Bank, Fidor Bank.
Main source of confusion: Some people like to make a distinction here between those banks that actually challenge traditional banks’ business models and those that do not. For example, Monzo and Starling Bank are following a marketplace strategy (focused on developing their current account offering while partnering with third-party providers for the rest of their products). On the other hand, Atom Bank puts their focus on disrupting the user experience while following a more traditional business model in term of products (and is building a balance sheet to lend). Again, since all these players are digital natives, people usually include them under the label of ‘challenger banks’ (that’s why the Burnmark report call them ‘Real Challengers or, just, challenger banks’).
- Hold a banking license and are usually defined as modular banking platforms;
- Their customers are not retail individuals, but companies that need a back-end banking infrastructures;
- Such digital firms coming to the ‘infrastructure bank’ platform, can develop new products and financial solutions in partnership.
- They offer a full range of transactional services, compliance, capital financing and loans through a range of non-bank fintech organizations.
Examples: Solaris Bank, Fidor, RailsBank.
Main source of confusion: These banks refer to themselves as platforms, or Banking-as-a-Platform. This term should not be confused with the ‘marketplace’ and ‘platform’ business models.
Anyway, after reading many articles on the topic,this is just my understanding of today’s fintech jargon. I would also recommend Huy Nguyen’s ‘Thesaurus of Banking 2.0: from Challenger to Neo Banks’ and StarlingBank CEO’s Anne Boden’s ‘Full-stack banking’ articles. However, there is so much happening right now in the Fintech world -with so many new players and business models coming into play- that it looks pretty likely that this language will keep evolving in the short term. I’ll update this post accordingly.
And by the way, please leave a comment if you think I’m missing any specific concept or any specific feature of these definition.
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