Competitors, Regulators and Fraudsters: What Threatens Mobile Banking

[Carding Forum]

What problems do neobanks face when doing business?

What problems do mobile banks solve?
“Mobile banks are a real threat to traditional financial institutions,” - this is how FinTech conference speakers often begin their reports. Arguing for it by the growing importance of digital technologies in our lives and the need to be mobile.

Of course, neobanks combine these qualities. However, how long will this last? After all, their traditional competitors are actively introducing innovative services. And regulators around the world ask financial startups as many (and sometimes more) questions than their more experienced counterparts.

In this article, the PaySpace Magazine editors figured out what problems mobile banks face.

Mobile banks and regulatory issues​

There is a global trend in the banking industry: it is becoming more regulated. This means that banks need to comply with more and more requirements and comply with regulations in order to remain “reliable” in the eyes of the regulator.

The need to comply is directly reflected in mobile banking. After all, their activities involve rather atypical processes for identifying customers, signing contracts, maintaining documentation, etc. If until now such operations were treated loyally and many of these processes followed a simplified procedure, over time they will receive more and more attention.

• Licensing

Over the past few years, mobile banks that previously operated under licenses from traditional financial institutions (for example, N26) and those that used an EMI license for issuing electronic money (for example, Revolut) have received real banking licenses. They also include Atom Bank, Tandem Bank, Monzo and Starling Bank. On the one hand, this has expanded the range of services that banks can offer to their clients. On the other hand, it made them vulnerable to new requirements and regulations, which tend to become more stringent.

Neobanks that continue to operate with an EMI e-money license (such as Monese and Anytime) or are an authorized payment institution (such as Holvi) are not yet subject to banking restrictions. But in the future, you can expect new requirements for financial companies of this type.

• Open banking

Many European mobile banks have already opened their APIs, waiting to be able to exchange data with larger financial institutions, and therefore, to gain potential access to their user bases. Soon, neobanks will need to comply with the new requirements of the PSD2 directive. SCA (Strong Customer Authentication) regulatory technical standards will be introduced on September 14, 2019. Now, to confirm online payments and bank transfers, you will need to use at least two of the three parameters: password, phone, biometric. Neobanks that have moved all transactions to a smartphone need to be prepared for a new identification system.

• Anti money laundering

And yet, one of the main banking trends in 2019 was the fight against money laundering and the difficulties in working with offshore companies. So, now banks are preparing for a new edition of the money laundering legislation (AML, Anti-Money Laundering). European countries must implement the 5th Anti-Money Laundering Directive (5MLD) into their legislation as early as January 2021. This means that banks need to decide how they will implement the requirements of the new directive into their compliance systems. Among them - verification of the ultimate beneficiaries of companies, additional checks of clients from high-risk countries. Of course, these requirements will also apply to banks in a smartphone.

In addition, mobile banks that work with prepaid payment cards should take into account that the new directive provides for more thorough checks and new restrictions for such payment instruments. So, 5MLD sets a limit of 150 euros on the card balance. And 50 euros - for online transactions.

Also in the field of view of 5MLD were platforms that trade cryptocurrencies and online services of cryptocurrency wallets. And the intention to issue regulations for the crypto industry has already been announced by FATF President Marshall Billingsley. This is true for banks like Revolut, which has been offering its clients a cryptocurrency exchange service since 2021.

FATF will continue to respond to new and emerging threats. Financial innovations such as digital ID or virtual assets require the FATF to track risks in this area.

Since now many neobanks work with a banking license, they will be affected by all these changes in banking regulation. Moreover, there are concerns that neobanks are more vulnerable to criminal activity than traditional financial institutions. And they are not groundless.

In the summer of 2021, representatives of Revolut bank turned to British law enforcement agencies with a message that they suspected dubious transactions through the bank's systems.

In the fall of that year, the bank had to temporarily shut down its transaction monitoring system after it mistakenly recognized 8,000 normal payments as potentially dangerous.

These incidents have raised questions about whether Revolut is paying enough attention to compliance issues. BBC reporters spoke to informants from Revolut and found out that some employees are concerned about the company's methods of combating money laundering. One former employee generally described money laundering control systems as unusable. And he added that the management of Neobank is not ready to listen to employees' ideas for improving compliance policies.

“I’m not going to pretend that we’re perfect, but we are aiming for that.” Nick Stronsky, CEO of Revolut.
Over the past three years, two key risk management officers have left Revolut, as well as two employees who were involved in identifying money laundering cases.

German mobile bank N26 has also faced accusations from banking regulator BaFin (German Federal Financial Supervision Authority). BaFin officials said the fintech startup is not actively fighting money laundering and terrorist financing.

Experts believe that, unlike traditional banks, it is more difficult for mobile financial institutions to achieve AML compliance, to maintain a balance between rapid growth and security.
In addition, large institutions may simply allocate more staff and more money for compliance.

Compliance is not a matter of technology reliability, but a matter of corporate culture.

As you can see, the requirements of the regulators are getting tougher. In such conditions, banks will have to comply with the requirements on the one hand, and, on the other hand, offer their customers convenient functionality. And this task can be even more difficult.

Development problems of mobile banks​

When Neobanks first appeared, their service was truly innovative, and their service fees were unexpectedly low. However, with the development of technology and awareness of the trend of movement in digital, serious competitors began to appear for mobile banks. And the service prices had to be raised, because every bank, even without branches, has expenses.

• The problem of monetization

All tech startups face a common problem. First, they gather an audience, including through price dumping. And then they think about monetization. Revolut, which originally entered the market as a bank for profitable international money transfers and travel, today is forced to implement hidden fees. This provokes customer churn. Ukrainian Monobank entered the market with a double cashback rate against credit funds. But later this option had to be canceled because the bank was spending too much on customer loyalty.

• Increased competition in digital banking

Large financial institutions have more resources for more than just dealing with compliance issues. They are willing to invest in the development of their own digital channels. And if they wish, they can deploy a separate digital bank based on their license. For example, JP Morgan Chase, a financial holding company, launched its own mobile bank Finn last year. The latter, however, turned out to be insufficiently competitive and a year later closed without offering customers anything unique. But the threat is obvious: the more players there are in the mobile banking market, the more difficult it will be for them to surprise their client.

Digital banks and fintech companies.

This will create a threat to growth - banks will not be able to entice customers from each other because of the same functionality. And the conservatism of the majority of contributors will limit the attraction of the audience from the outside. After all, loyalty to a traditional bank is still much higher than to a mobile one. Polls show that less than 10% will pay attention to a mobile bank when they need to open an account.

Also, the threat can arise from financial companies. While neobanks continue to increase the pool of services, fintech companies from the investment and lending sectors decided to go into banking. For example, investment startup Acorn recently offered debit cards to its customers to store funds. In just four days from the moment of the product presentation, Acorn received 100 thousand orders from its users.

Mobile banks should move in the same direction, offering value-added services to the customer. Experts believe that mobile-only financial institutions should develop in the field of analytics and artificial intelligence, collecting information about transactions.

The real value lies in what data you get by analyzing behavior

Mobile bank Simple is now working to add artificial intelligence to its bill payment service. This will allow you to predict the future expenses of the client, and offer him advice on the effectiveness of payments.

• Security

Mobile banks must be well protected. After all, they cannot afford to suspend customer service due to technical failures and hacker attacks. And they cannot be avoided. Dmitry Kovalevsky, security and risk specialist at monobank, said that on the first day of the launch of the project, the employees of the mobile bank managed to find 15 hackers at once.

The first major risk a bank faces in a smartphone is hacker attacks. For offline banks this is not so critical, because they can say: "Our site is down, please contact the branch." We cannot explain to clients that we have any technical problems and in 20 hours we will restore everything

It is also necessary to protect the mobile bank from internal leaks - often fraudsters turn to employees directly with a proposal to "drain" the database.

How it happens: a customer support employee receives an offer to separately record the phone number and e-mail of clients with large amounts of funds. This information and are ready to buy a third party. Thus, during the analysis of the database, we cannot identify leaks, because there is no such leaks.
Dmitry Kovalevsky
monobank specialist

Monobank solved this problem by using a notification system about unauthorized actions of operators. it is triggered if a bank employee enters the client's card without a request from his side.

The larger the Neobank business, the more seriously it will be necessary to build protection systems against failures and fraudsters.

So far, the question of who will take a large share of innovative mobile banking - independent neobanks or digital divisions of large financial institutions - remains open. The biggest challenge neobanks face is gaining consumer confidence and attracting new users. As they grapple with this challenge, traditional banks have a chance to carve out a niche by leveraging their brand and customer confidence. Independent mobile banks must be mindful of the new threat and plan for new business models.