Are you loyal to bricks-and-mortar? (Wells Fargo vs. Revolut)

Revolut is a digital invader in retail banking. Are established banks well positioned to protect their lucrative position? A heavy anchor of branch network can let them down.

A classical wild-west bandit will be disappointed visiting today a local bank. The potential inflow from the raid may not cover capital investments in guns and equipment. However, if he returns in 10 years will he find the bank itself?

Any operation that we do in a brick-and-mortar bank is an exchange of information by nature. The process of transferring the information flows to the mobiles, laptops, wires and humming buildings of data warehouses takes its’ toll from the traditionally respected profession.

The ultimate winner is the customer who doesn’t need to spend hours of life on meaningless trips and waiting in lines during rush hours. Along the way the banks that are flexible enough to become a faceless application and website will increase their market share. A number of wizz-kids with computer science diploma will make a fortune simplifying brick by brick the old system. Inherently brick-and-mortar businesses like restaurants will be happy to get rental locations.

Automate the boring stuff. The most obvious saving is thousands of lives of employees (that could be spent on something more exciting), barrels of cartridge toners and football fields of bullet-proof glass.

Let’s take a retail business example of the bank with the highest number of brick-and-mortar branches in the US – Wells Fargo and a promising start-up located in UK – Revolut. Wells Fargo has a large empire of 8050 branches, each of them burning money for rent and salaries. Revolut has a developers team and a bunch of servers. The model that is made for quick scaling.

Ultimate competition. Digitization, in this case, unleashes the power of the free market. Previously banks controlled access to the customer and now they don’t. You can negotiate a better rate or lower transaction fee seating in your armchair. That’s especially relevant for the high-value transactions such as mortgage or pension fund selection. Are you ready to sacrifice thousands of dollars being a loyal customer of the bank?

Who of two players under consideration is better positioned for such competition? In one hand the one that is able to secure lower borrowing rates – that’s most likely Wells Fargo. However, that’s a question of time when digital invaders, such as Revolut, will become big enough to get access to the Fed’s instruments. They are also agile and flexible enough to cooperate on that matter, critical for the long-term success of their model. Lower borrowing rates don’t give the full picture, however. The overheads of branch empire will be an especially big problem when price-sensitive customers can switch without effort.

Take it personal. Our personal data is becoming a very valuable asset. We’re seeing a remarkable transition from local branch manager making the decision about lending you money based on a one-fits-all scorecard to a sophisticated algorithm that can predict your actions sometimes better than you. That will reduce the risk of banks and thereby will reduce profitability. This virtuous cycle will end up with lower average rates and the best-behaving customers will benefit most from this. Banks that are able to predict which customer has a lower probability of bankruptcy is in an advantageous position.

That’s not quite right to say that Wells Fargo still adheres the scorecard procedure; most likely the bank doesn’t waste time developing the data-based risk-assessment muscle. Wells Fargo rather has benefit in the form of data about existing customers. However, this data is not fully owned by Wells Fargo because of the existence of credit bureaus. Besides the approach traditionally used for credit scoring uses a little portion of available information.

The agility of digital banks and their ability to focus on building effective models is an advantage. They also revealed themselves willing to be platforms for other services, such as insurance or even mobile carrier (an example is Russian digital bank Tinkoff) that gives them even more information for data-hungry models.

The fight between digital banks and old established organizations is just beginning. And considering the power of existing retail banks, their proximity to government and controlled resources. Besides they show the aptitude for changes – take the existing mobile application and website of the second largest bank Chase, praise by customers. It’s hard to predict what will be the name of the winner, it could be a familiar brand or maybe we haven’t heard the name yet.


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Student comments on Are you loyal to bricks-and-mortar? (Wells Fargo vs. Revolut)

  1. Great post Ivan! I think Wells Fargo maybe in a bit of trouble. I wonder however if the same can be said about other banks – I know that JPMorgan, for instance, is very active in the digital space. They have programs to seed startups that may complement their digital platform and use their large existing customer base as a competitive edge for market testing. Goldman Sachs perhaps took a page out of Revolut’s playbook and launched its own digital platform. What’s very interesting is that Goldman did not have a physical presence prior and used digital (and its collaboration with Apple Pay) to launch into the consumer market. I wonder if the fate of the smaller firms is acquisition by maybe the very Wells Fargo that is looking at its competitors and wanting to play catch up?

  2. Very interesting topic Ivan, I have never considered the questions of how banks instrumentalize data and would be very interested in learning more about the algorithm that could predict customers spending behavior. What do they collect? How much of the algorithm is based on spending habits corresponding to your demographic segment and how much takes into consideration external forces?

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