Bunq, Without (Much) Interchange or Lending, Is Profitable. But Can It Conquer America?
Bunq, Without (Much) Interchange or Lending, Is Profitable. But Can It Conquer America?
Zurp's Got Issues, Are "Dark Patterns" Abusive, Fintech Funding Jumps (but don't get too excited)
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Dutch Neobank Bunq, Without (Much) Interchange or Lending, Is Profitable. Can It Conquer America?
Bunq, a fully licensed digital-only bank based in the Netherlands and currently operating in 30 countries in the European Economic Area (EEA), has filed an initial application with the OCC and FDIC for a national bank charter and deposit insurance.
While readers in the US are likely familiar with other UK/European neobanks, like Revolut, Monzo, and N26, bunq may be a less familiar name.
In some ways, bunq is the rarest of creatures — no, not a unicorn (though it is that as well) — a profitable neobank. Per company press statements, it reached breakeven at the end of 2021 and turned a €2.3 million pre-tax profit in Q4 2022. It expects to continue to be profitable in 2023.
This is all the more surprising, given that the main source of revenue for American neobanks — interchange — is substantially lower in the European Economic Area (EEA).
Debit transactions in most of the EEA typically generate 0.20% interchange, and Maestro/Mastercard, which dominate the market in bunq’s home country of the Netherlands, generate a flat €0.02:
For ecommerce transactions, which drive higher CNP interchange for issuers in the US, many Europeans use account-to-account payment methods, bypassing card rails altogether.
For instance, in the Netherlands, iDeal bank transfers account for a whopping 70% of online payments:
Unlike most of its American counterparts, bunq is a fully licensed bank, meaning it can directly hold its customers deposits. In a typical business model, a bank would deploy those deposits as loans and collect the difference between interest paid to depositors vs. interest charged to borrowers — the net interest margin (NIM).
But bunq itself doesn’t really do a significant amount of lending. At the end of 2020, nearly half its deposits were parked at the European Central Bank. With negative eurozone interest rates at the time, bunq paid the central bank nearly €2 million in 2020 and €2.3 million in 2021 to hold user funds.
Bunq has reduced its reliance on storing funds at the central bank by acquiring mortgages in the secondary market, partnering with mortgage brokers Tulp Group to originate mortgages, and through its acquisition of Irish SMB lender CapitalFlow.
As eurozone interest rates turned positive — now 3% for the ECB’s deposit facility — what had been a drag on its P&L has turned into a tailwind, as it passes along just 2% to depositors, though that’s still substantially higher than incumbent banks.
Still, how has bunq managed to turn a profit, when no American neobank has done so?
On the revenue side, one word: fees. The bank generated €23 million in net fee income in 2021, more than doubling its fee income from 2020. Unlike in the US, in most European markets, the idea of a “free” current [checking] account doesn’t exist. Consumers are more accustomed to paying fees for everyday banking services.
On the cost side, bunq spends significantly less on two key categories: staff and marketing. In 2021, bunq spent about €12 million on personnel, or an average of about €50,000 per employee.
For comparison, US licensed neobank Varo spent an average of $137,291 (€126,000) per employee in 2021.
When it comes to marketing, bunq spent €9.6 million, or about 23% of revenue, in 2021; that year, Varo spent about $123 million, or 163% of revenue generated, on marketing expenses.
While bunq is likely to realize some synergies with its existing European business, and may be able to leverage less expensive EU-based employees for some functions, it will need US-based staff for roles like operations, marketing, customer service, and compliance, and it will be battling to acquire users in the highly competitive and expensive US ad ecosystem — meaning its operating costs are likely to be higher in the US than in Europe.
Can bunq Get A US Charter?
The track record of foreign neobanks seeking charters in the US isn’t promising for bunq.
While Monzo and Revolut launched and continue to operate in the US, both did so through bank partnerships. German-licensed N26 also made a go of it in the US, launching via a partner bank, but failed to gain traction and quit the US market.
Monzo applied for but ultimately withdrew an application for a national bank charter in late 2021. It has not filed an updated application.
Revolut generated a wave of headlines in early 2021 by announcing it had filed a draft application for a California state license, but has yet to officially apply for such a license. The UK-based neobank has been dogged by allegations of an aggressive work environment, delays in filing its accounts, an embarrassing public spat with its own auditors, and repeated issues with EU regulators.
In its license application, bunq demonstrates that it knows its audience at the OCC and FDIC.
Bunq’s filing says all the right things — discussing how it built its own core vs. relying on one of the four major core providers, describing itself as a “digital community bank,” its nod to “relationship banking,” and an emphasis on a “traditional,” low-risk business model; it quotes both CFPB Director Chopra and OCC Acting Comptroller Hsu.
“bunq is actually like a community bank, and its community is primarily made up of digital nomads” — bunq’s bank charter & deposit insurance application
Cognizant of the recent collapse of SVB, the filing includes an analysis of bunq’s interest rate risk and liquidity prepared for the Dutch central bank, “demonstrating that bunq has interest rate risk (“IRR”) and liquidity risk management policies that are appropriate for its business model and investment strategy. bunq US Bank will implement the same safe and sound IRR and liquidity risk management policies as its Sponsor.”
Still, while bunq seems to view having built its own tech as a positive, regulators may not see it this way. While the market dominance of the “big four” US core providers may lead to anti-competitive practices, they are known quantities with established regulatory track records.
Further, the uneven performance of Varo — the first neobank to acquire a de novo license in the US — is likely to make the OCC think twice before granting bunq a license.
Asked about bunq’s prospects of obtaining a de novo charter, Jonah Crane, partner at financial services advisory firm Klaros Group, said:
“The strongest point in bunq’s favor is the fact that the European business is now profitable. That provides credibility to the claim that the business model can work. But they will have to show how it can work in various interest rate environments (are they profitable now only because interest rates have gone up substantially and deposit rates haven't kept up?).
The biggest challenges will be assembling a credible team and putting in place a risk and compliance program that will meet the OCC's exacting standards.”
Bunq’s application and business plan will need well thought out contingencies on what happens if it’s unable to achieve the targets set out for its first several years of operations.
Does bunq Have A Lane in the US?
Perhaps more important than the charter is whether or not bunq has a lane in which to compete in the US. Fellow Euro imports to the US Monzo, Revolut, and N26 have largely failed to target specific customer segments or differentiate themselves from the large group of domestic neobanks.
Bunq describes its target market as European expats in the US and digital nomads:
Target segment: a community of expats and digital nomads
bunq US Bank’s primary community will be made up of people with personal, professional, or leisure ties to both the US and the EU. They will range from European expatriates (“EU expats”) living and working in the US to domestic entrepreneurs who are active across borders. People in the bunq community work, connect, play, communicate, shop, and even find ways to better their world all online. This community of “digital nomads” will benefit from the convenience of a highly accessible online bank that can meet the financial needs of its members on both sides of the Atlantic.
bunq believes that within this community there is a demonstrated demand for simple, traditional bank products—deposit accounts and payment services—while, at the same time, less sensitivity to cost.
On the one hand, bunq has a clear target customer in mind — and one that skews higher-income vs. the customers of domestic neobanks like Varo or Chime, which have struggled with low ARPU.
One can imagine bunq assembling a product stack catering to this audience — yes, daily banking services, but also invoicing, acceptance of card payments, foreign exchange/international payments, accounting, travel support, tax preparation, insurance and so on. But bunq’s existing European business doesn’t offer such features, and it’s unlikely that the initial launch of an American product would either.
On the other hand, the prospective customers bunq is targeting are already well banked, either in the US, their home countries, or both — meaning bunq will need to offer a compelling reason to switch, particularly given its stated intention to charge fees, where many of its US competitors do not.
European expats or American digital nomads likely already have a “finance stack,” and bunq will need to convince them to it’s worth the effort — and the cost — to switch.
Additionally, upper-income American consumers tend to prefer credit cards — and their rich rewards schemes — as their payment mechanism of choice; bunq’s application explicitly states it won’t offer credit products, at least during its de novo period (though it does mention ‘linked charge cards,’ which sounds akin to a secured/credit-building card.)
Bunq’s profitability in its home European markets is a notable accomplishment, particularly given its minimal lending and low interchange in these markets. But the United States is a different beast altogether, both from a regulatory and consumer behavior/preference perspective — something bunq will surely continue to learn as it navigates its launch in the market.
What the Zurp? Six Obvious Problems With the Gen Z-Focused Startup.
You know, I was really hoping that after Blue Ridge, and Evolve, and others, that maybe — just maybe! — fintechs, their VC funders, and partner banks would take legal/regulatory compliance a bit more seriously.
But, apparently not, as demonstrated by recently launched startup Zurp, a spending account with rewards designed to appeal to Gen Z users, like festival passes, “exclusive” sneaker drops and, er, helicopter rides?
But a cursory review of Zurp’s site and terms and conditions reveals a number of potential risks:
While the site repeatedly describes “banking” features and explicitly refers to the product as a “bank account,” it isn’t actually a bank account — it’s a secured charge card. Zurp opens a “cash account” on behalf of users at First Pryority Bank, a $380 million asset bank in Pryor, Oklahoma. The limit of users’ Zurp charge card is equal to the balance held in the cash account, in which Zurp holds a first priority security interest.
The site prominently advertises a 5% APY. A footer disclosure on the site clarifies users must conduct at least 5 point-of-sale transactions or receive one direct deposit each month to obtain the 5% APY rate. The site does not mention that the 5% rate is only for the first $2,000 in funds; a user would need to drill in to the 43 pages of terms and conditions to learn that the rate on funds above $2,000 is 4.27% APY. Further, Zurp warns it may change the interest rate at any time, without notice.
While Zurp promises “no credit check,” in agreeing to its terms and conditions, users enable Zurp to obtain information from “one or more consumer reporting agencies, governmental entities, check verification services, and other third parties, including, but not limited to, the Program Manager, for the purpose of considering your application – and continuing eligibility - for a Card or any other purpose permitted by law.”
Zurp’s site makes frequent use of the FDIC logo and language but fails to clarify in a clear and conspicuous manner consistent with FDIC rules and historic state and federal regulatory enforcement actions that Zurp itself is not a bank, and that banking services and FDIC coverage is through its partner, First Pryority.
Perhaps less impactful to end users is Zurp’s claim that “setting up an account takes less than 1 minute,” which it clarifies in disclosures buried in the footer of the site that “Sign up time of less than 1 minute is based on the best case.” Basing a marketing claim on the “best case” (as opposed to likely or median) scenario increases the likelihood of the claim being deceptive.
Lastly, and perhaps more annoying than deceptive, is Zurp’s promise of “access to ATM’s [sic] fee-free.” While it’s true that Zurp itself doesn’t charge fees for domestic ATM usage, unlike other neobanks, Zurp doesn’t appear to contract with any ATM operators — meaning, in practice, it’s likely nearly impossible for a Zurp customer to use an ATM without incurring a fee from the ATM operator.
Are “Dark Patterns” Abusive? CFPB Releases A Policy Statement Clarifying The “A” In UDAAP.
While most all professionals in consumer banking have heard of “UDAAP,” some may be less familiar with the three components that make up the regulatory framework: unfair, deceptive, and abusive practices.
An act or practice is “unfair” when:
(1) It causes or is likely to cause substantial injury to consumers;
(2) The injury is not reasonably avoidable by consumers; and
(3) The injury is not outweighed by countervailing benefits to consumers or to competition.
Whereas an act or practice is deemed “deceptive” when:
(1) The representation, omission, act, or practice misleads or is likely to mislead the consumer;
(2) The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
(3) The misleading representation, omission, act, or practice is material.
The “a” (the second one) was added as part of Dodd-Frank in the wake of the 2008 Global Financial Crisis.
Part of the impetus to add “abusive” was the nature of the mortgage products that contributed to the ‘08 crisis — specifically, the notion that companies that originated mortgages and immediately sold them in the secondary market could “win” even when selling unaffordable products to consumers.
An “abusive” act or practice:
(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
(2) Takes unreasonable advantage of:
A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
The CFPB’s Policy Statement on Abusive Acts or Practices, released earlier this month, provides a simplified summary that prohibited acts and practices include:
(1) obscuring important features of a product or service, or
(2) leveraging certain circumstances to take an unreasonable advantage. The circumstances that Congress set forth, stated generally, concern gaps in understanding, unequal bargaining power, and consumer reliance.”
It’s worth noting that an act or practice and be considered “abusive” even without showing substantial injury to consumers; rather, the measure aims to prevent conduct that “Congress presumed to be harmful or distortionary to the proper functioning of the market.”
Are “Dark Patterns” Abusive?
The policy statement doesn’t create new rules or risks, but rather serves to clarify and accentuate how the CFPB thinks about and may enforce prohibitions on “abusive” acts and practices.
One prominent example in the policy statement? A recent favorite villain of the CFPB — “dark patterns.”
The policy statement defines “dark patterns” as “design tricks and other psychological tactics to confuse and manipulate people into making choices they otherwise would not have made.”
It continues to give examples of UX features it considered to be dark patterns (emphasis added): “pre-checked boxes which default you into an option you didn’t want, hiding information behind multiple links, or making it difficult to cancel a subscription. This kind of obscuring is not only annoying — as the policy statement describes, it can also be illegal depending on the circumstances.”
The statement continues (emphasis added):
The prohibitions on unfair, deceptive, abusive acts or practices, were designed by Congress to address wrongful practices as business tactics and technology evolve. Digital dark patterns are new in the sense that they leverage contemporary technology to confuse people, but ultimately they involve the same type of obscuring that Congress has long been concerned about. Manipulating people is wrong, whether on paper or pixels.
Taking “Unreasonable Advantage”
While the first prong of “abusive” focuses on interfering with a user’s ability to understand relevant terms and conditions, the second prong could also have interesting implications for fintech.
The policy statement outlines three ways an entity could take “unreasonable advantage” of a consumer:
(1) A “lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.” This circumstance concerns gaps in understanding affecting consumer decision-making.
(2) The “inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” This circumstance concerns unequal bargaining power where, for example, consumers lack the practical ability to switch providers, seek more favorable terms, or make other decisions to protect their interests.
(3) The “reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” This circumstance concerns consumer reliance on an entity, including when consumers reasonably rely on an entity to make a decision for them or advise them on how to make a decision.
One can imagine novel product structures (earned wage access, income share agreements, fractional home ownership), situations of unequal bargaining power (loan servicers, debt collectors), and circumstances of “reasonable reliance” on third-parties (product comparison sites, roboadvisors, financial automation tools) that have the potential to run afoul of prohibitions on “abusive” acts and practices by taking unreasonable advantage of consumers.
FT Partners Monthly: Stripe Drives Funding Spike
While total VC investment in fintech saw a huge spike in March vs. February, much of that increase was driven by Stripe’s $6.5 billion round — a round that saw Stripe’s valuation drop by nearly half.
Other announced rounds driving the jump included India’s PhonePe ($200 million), Global Loyalty Network ($84 million), Till Payments ($70 million), and Thunes ($30 million).
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Other Good Reads
What I learned from three banking crises (FT)
Pay-in-4 BNPL Was Never A Product (Fintech Takes)
Jamie Dimon’s Letter to JPMorgan Chase Shareholders (Jamie Dimon)
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