Published: 31 March 2020
Author: Şebnem Elif Kocaoğlu Ulbrich
European FinTech unicorns have been planning to undercut the US ecosystem players for a while. Last year Monzo, N26, and Revolut announced a US market roll-out one after another, and Monzo and N26 launched a limited expansion (waitlist) within the last six months. Things have changed since then. The COVID19 outbreak forced many start-ups to evaluate their short-term strategies and plans. Many FinTechs started implementing cost-cutting measures and ceased the non-crucial projects, and experts expected the expansion strategies to follow a similar pattern. Revolut, however, caught the ecosystem by surprise with rolling out in the US, following its expansion roadmap despite the COVID19 mayhem.
Competition rule number one is, don’t be number two. Is peer-pressure the only explanation for the persistency to increase footprint in the US, though?
Monzo, Revolut, and N26 are among the highest valued FinTech start-ups of Europe. After a rapid scaling period in the region, it is only typical for these unicorns to look for new markets that have the potential to support investors’ growth ambitions. And what better market to test the waters than the US? US banks have been lagging behind the digital banking innovation, and the existing banks and FinTechs haven’t been able to fulfil the market need to the full extent. 2017 FDIC survey indicates that a total of 25% of US households are either unbanked or underbanked. Additional research shows that 30% of US consumers still lack credit cards. As opposed to the banking space, the payment market is quite saturated; however, the account and transaction fees make the experience less attractive for consumers. Consequently, the market is underserved, and there is room for new players in both payments and banking.
If these companies can tackle the cross-Atlantic transition, the likely next step would be an IPO, for which the US is a better steppingstone. After all, the most famous tech IPOs either happened in the US (Alibaba) or were initiated by US-based companies (Visa, Facebook, Uber). Although Revolut and Monzo still feel like it is far-fetched, N26 has already given the green light to an upcoming IPO.
Each of these FinTechs announced similarly ambitious growth goals for the market earlier, and the fact that the US hosts the highest number of FinTech start-ups doesn’t seem to intimidate them. Nevertheless, the US FinTech ecosystem is likely to hold particular challenges for the newcomers:
- First and foremost, neo-banking and digital payments are yesterday’s news to the US consumers. After all, the pioneers of these bits are coming from this region, with many new additions, and the European unicorns will need to step up their game to stand out. To make matters worse, Varo Bank, a local competitor, recently got one step closer to becoming the first mobile-only bank with a banking license. At this point, having a different edge like Klarna’s point-of-sale loan offering might help, but all in all, finding the right positioning takes time. Klarna has been operational in the market since 2015 and reportedly started adding half a million customers every month just last year.
- The area is also the turf of the BigTech companies that already took several steps towards payments and banking. BigTechs already know the market, possess customer data, and have strong lobbying, technology, and resource advantages. In addition to the BigTechs, big retailers such as Walmart and Target also expressed their interest in the space. All this competition naturally narrows the market share. An eMarketer report claims that Apple Pay is currently the most popular payment method in the US. Also, the word is that the Apple credit card roll-out was the most successful credit card launch ever, which puts pressure on all the new players.
- Monzo, Revolut, and N26 are planning to operate in the US through their US-licensed partner banks, which might be considered as taking a step back since it took years for them to secure a banking license in Europe. Until they get their banking charters, their US operations will be limited by the restraints of their partner banks. Once they are ready to apply for their license, they might have a hard time adjusting to the patchwork-like financial regulation, coming from a structured regulatory system. After all, it was a long road for the first FinTechs like Varo Money and Square to crack the FDIC charter. Dealing with different stakeholders and fulfilling particular requirements will undoubtedly increase European FinTechs’ operational and regulatory costs.
- Another topic to consider is that these start-ups have been bearding the lion in his den. Stepping up on their products’ distinctive edges, they got a foothold in their territories, without the interference of the brutal market opposition. N26 taking the necessary steps to leave the British market, a market way closer to home, and blaming Brexit for it has shown that growth within the same geography can become challenging. Now, the transition into a melting pot like the US, combined with the competition, might become riskier than expected.
- Last but not least, 2020 has proven to be a particularly challenging year to follow growth and expansion plans. Many FinTechs are already applying austerity policies since new investments are considered risky when managing and preserving liquidity in this chaos. Consumers do not have much appetite for experimenting with new financial products until the coast is clear. Naturally, neobanks’ primary domain, social banking, crippled during the times of social distancing. Therefore, entering new, unfamiliar markets at this time might expose the European neobanks to unforeseeable financial risks.
All in all, Revolut’s recent move can be considered bold, and time will tell if the other FinTechs will follow. Sooner or later, our beloved European FinTech unicorns will bring a breath of fresh air to the US ecosystem, yet, market dominance won’t be a sitting duck, especially in these circumstances. In the end, setting the course to the west might be the beginning of a massive global take-over for some of these unicorns, whereas, for the rest, the US market will be the ultimate test.
Şebnem Elif Kocaoğlu Ulbrich is an independent FinTech Consultant (Contextual Solutions) and Author, based in Berlin.
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