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September 3, 2021

Tighter compression around NII means that traditional providers should embrace innovation to generate revenues from alternative models

By GlobalData Financial

Traditional providers are unable to generate substantial revenue from alternative revenue models, mainly because successful models require the adoption of new platforms, the successful leveraging of APIs, and the use of open banking and advanced analytics, which have the potential to improve customer products and generate revenue growth and cost savings. On the other hand, neobanks are unable to make the same levels of revenue through retail and commercial lending. Still, more significant fintech players are generating most of their revenue through alternative models by leveraging the above.

While this is the case for some neobanks, UK-based Monzo has not yet mastered its alternative revenue model, given that the bank has tried and failed to build income through subscription fees. Monzo’s 2020 annual report revealed that its net interest income (NII) was down due to a decline in lending, while subscription fees were not yet playing a part in revenue generation. While neobanks are likely not generating revenue through standard models, they aim to do so through open banking and API leveraging. Investor confidence in fintechs has boomed, as Revolut, for example, is now valued higher than other banks such as UK-based NatWest, suggesting there is strong investor confidence in the growth of neobanks and trust in their alternative revenue models and their potential growth to come. However, Revolut is likely to continue spending everywhere and expanding in more markets, so its new funding could dry up quickly. It also remains to be seen if Revolut’s strategy will pay off and be a sustainable, profitable business in the longer term, which questions whether going down a crypto route longer-term is viable. Revolut has made the most of its revenue through cryptocurrency trading, which reportedly made up 10–15% of its revenues last year, making it an essential part of its top line for now. Simultaneously, the bank has devised another alternative revenue strategy for the UK market by offering travel services through its mobile app. Customers can gain cashback by booking holidays through the app. While the exact revenue details have not been made clear, it is assumed that partner airlines and hotels will be paying Revolut a fee to advertise themselves on the banking app and take advantage of Revolut’s customer base and vice versa. Simultaneously, Revolut has launched a new salary feature, whereby customers pay a small fee to receive half of their salary earlier.

Alternatively, Lloyds Bank in the UK is launching a rental housing service as an alternative revenue strategy. From an environmental, social, and governance (ESG) perspective, we have seen new ESG financial providers offer carbon-offsetting features in line with customer spending in the UK market. For example, Tred and YAYZY have launched and generated revenue through their ESG business models. YAYZY takes a fee of £0.00125 per 1kg of carbon offsets, and these fees are then reinvested in the development of climate technology.

Overall, given the tighter compression around NII driven by the low-interest environment, retail banks will need to keep pace with revenue targets. Therefore, they need to rethink their revenue-generation strategies. Innovation, for example, needs to be embraced by all levels and within all areas of traditional banks to maximize the opportunity that innovation can bring and the revenue it can generate. Regardless of whether banks innovate internally or acquire specialist capabilities, they must capitalize on their customer relationships and provide various channels to support customer communication, engagement, and productivity. Open banking APIs are still new and evolving, but adoption in these areas is growing fast. FS providers can increase their revenue through acceptance and the correct leverage of open banking to develop innovative products and services.

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