Neo-banks and iso-banks

For some years, we’ve been talking about an emerging category of what we’ve been calling “near-banking”. I remember using the concept in a couple of projects around the O2 Wallet. Remember that? It was a mobile wallet with a companion pre-paid Visa card. We used it in a Cabinet Office Alpha project with welfare benefit recipients and it worked very well indeed. But it was canned shortly afterwards.

It wasn’t well-received. It seemed like a patchwork of products, was not very user friendly and was essentially not compelling enough to persuade users to try it.

[From O2 Wallet: no users and too much competition. It had to go | Mobile Money Revolution]

This was not, to my mind, a condemnation of the concept. Only a few days after Telefonica shut down O2 Wallet in the UK, we see T-Mobile in the US launching essentially the same product: a pre-paid Visa card linked to a mobile phone number.

The company announced today Mobile Money, a free checking account service available to anyone with a T-Mobile phone number.

[From T-Mobile Mobile Money – Business Insider]

The concept wasn’t the problem. I never saw any marketing of the O2 Wallet. I don’t remember ever seeing a TV ad or anything in the mainstream press.

A key problem here, Holden suggested, is the failure of NFC to take off as a contactless payments technology.

[From What does the closure of O2 Wallet say about the future of mobile payments? — Tech News and Analysis]

I disagree. I thought the NFC thing was tangential. Yes, O2 were a bit hopeless in getting NFC up and running and yes they should have looked at HCE sooner and yes it is symptomatic of a structural flaw that even a telco can’t get SIM-based SEs sorted out. This isn’t because O2 were especially hopeless. Look at what happened in Spain, where Bank Inter launched HCE-based solutions even though they are an MVNO with their own SIMs! I notice, by the way, that Bank Inter have taken advantage of Google’s decision to add HCE to KitKat and put their Mobile Virtual Card (MVC) solution on that platform. I do have to confess that I found some aspects of the O2 customer proposition baffling though. I remember when I got an e-mail from O2 informing me that

As a result of recent changes in the law, we’re obliged to ask you about the source of your funds, once you’ve loaded more than £2000 a year on your Wallet. Unfortunately, if we’re unable to contact you after three attempts, or get an inappropriate answer, we may be forced to block and subsequently close your account.

I’m really curious to know what an “inappropriate” answer might have been, but when someone sounding for all the world like a sophisticated fraudster phoned me up claiming to be from some Gibraltar-based entity wanting details about my personal financial circumstances, I told them. I knew, of course, that this was pointless time-wasting money-wasting AML nonsense but I did wonder what a typical member of the public might have thought about it.

But I digress. I have to say that I rather liked the product as it ended up. With two teenagers in the house I found it simple and convenient. We kept the Visa card in the kitchen and when one of the boys went to get some shopping or had to buy something for school or whatever they took it and used it and I got the transaction confirmation immediately on my phone and I could top it up when necessary.

It was sort of like a bank account for our house.

When I spoke about the rise of “near-banking” at Payments 2012 in London in May of that year, I made the point that there is an opportunity for a spectrum of near-banks that target a potentially wide variety of specific niches (the example I used then was a “Sagabank” for older people), and I still think that this is one of the attractions of the model. The near-bank is not a new idea. In 1997, I wrote (with my then fellow Consult Hyperion colleague Mike Young) an article for Internet Research called “Financial Services and the Internet” (Volume 7, Number 2, p.120-128). In that article we wrote about the potential for the new technology to assemble a banking service depending on the customers’ needs.

Financial services customers use IT to build a seamless environment for themselves, “with the underlying best-of-breed products originating from a wide range of suppliers”; Financial services providers “retreat to a small range of products that build on core competencies, but supplied to a global market”.

[From You searched for near bank – Tomorrow’s Transactions]

This came to mind when I read an interesting post about the new market segmentation for retail banking by the Starling Bank CEO Anne Boden. Anne refers to “neo-banks”.

If you look at the US and some of the European markets, you can see another area of growth that is likely to hit the UK market soon, in the form of so-called neo-banks. These brands claim to deliver the best in class digital experience, with none of the risk of a balance sheet – so they effectively put a layer of information management over another banks’ product set… Simple and Moven are probably the most well known names in this space, with Number 26 starting to grow their reputation across Europe.

[From Starling]

She then goes on to talk about the O2 Wallet category that is centred around pre-paid debit cards, although I think I might argue that these categories have a great deal of commonality.

The grouping of brands that have the greatest potential to cause customer confusion have to be the pre-paid debit cards.

[From Starling]

This made me think about breaking down the “near-bank” category. There’s a difference, I think, between something that looks like bank but isn’t (e.g., Moven or Holvi) and something that doesn’t look like a bank but performs the same functions as a bank in the eyes of the consumer (e.g., Bluebird). In both cases the proposition is essentially a mobile app plus a pre-paid card, but their grammar is different. Therefore, I propose a new terminology standard: I propose that we call the first category neo-banks (as Anne did) and that we call the second category iso-banks. Are we agreed?

With this terminology, we can distinguish neatly between neo-bank (Moven) and iso-bank propositions (O2 Wallet). In business terms, the neo-banks are competition to the retail banks but the iso-banks complement them in specific niches. I have a Simple account instead of a conventional retail bank account, whereas I have my Caxton FX euro wallet as well as a conventional retail bank account. What do you think?