How do Challenger Banks and FinTechs make money and are they profitable?

How do Challenger Banks and FinTechs make money and are they profitable?

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It's common knowledge that traditional banks make money, so why do we hear that FinTechs never make money and rely on investment?

Is the model of offering every service for free sustainable?

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The popularity of emerging challenger banks is increasing rapidly. Revolut, Monzo and Starling, to name just a few, have all developed a huge customer base in a short period of time.

Historically, in the world of startups, the main priority has been customer acquisition rather than profit. Luckily, FinTechs are generally able to maintain a lower cost-to-serve their users compared to traditional banks, generally by focussing on a digital-first proposition with no branches. However, now that they continue to onboard a growing number of customers, challenger banks now need to turn their attention to generating revenue in order to succeed.

HOW FINTECHS & CHALLENGER BANKS MAKE MONEY

Foreign Exchange

Foreign exchange services and international transfers are a profitable area for banks and FinTechs. While the exchange rates offered tend to be more attractive and competitive, compared to traditional banks at least, they tend to include a very small markup fee on the exchange rate in order to cover costs at the minimum. 

Interchange

Interchange fees are another way to generate income. For example, whenever you pay using your card, the company will receive a small revenue share on each transaction from the card scheme – Mastercard or Visa.

"Challenger banks now need to turn their attention to generating revenue in order to succeed."

HOW FINTECHS & CHALLENGER BANKS MAKE MONEY

Marketplace

Some FinTechs offer an aggregator business model by connecting customers with third party providers who offer different products and services. In return for that “matchmaking” service, the FinTech may receive a percentage of the transaction, which gets added to the revenue pool.

Current Accounts

While basic accounts tend to be free, many challenger banks have rolled out paid-for premium accounts that provide the cardholder with a range of benefits. These value-added accounts tend to have a monthly fee attached, therefore providing an additional revenue stream.

Interest Rates on Balances

Some challenger banks also encourage saving by providing credit interest on the balance customers hold in their accounts.

By building a large portfolio of funds held in these accounts, where the change in balance tends to be relatively low day-to-day, banks are able to use this balance to provide short term loans or overdrafts to eligible customers. They tend to charge a higher interest rate to these customers than the one they pay, with the difference being their revenue.

Lending

Many challenger banks are starting to realise that offering lending products, such as overdrafts, loans and mortgages, would be the most straightforward way to offset losses on their otherwise free services. Getting there however, may take a little time, especially with mortgage products. Mortgages are one of the more risk-free lending products, but they are also one of the most complicated ones to distribute digitally.

HOW FINTECHS & CHALLENGER BANKS MAKE MONEY - SUMMARY

While challenger banks are successful in attracting a large number of customers and are gaining momentum on the banking scene, many of them haven’t yet made a profit. However, with the right business model and by creating a lasting positive impact on their customers, challenger banks should be able to boost their profitability and make a permanent impact on the market.

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