Something strange happened to a few hundred customers of startup, app-only bank Number26 last week — their accounts started closing.
With no explanation other than to cite terms and conditions allowing unexplained account closures, Berlin-based Number26 emailed a clutch of its 160,000 customers to tell them their accounts would shortly be shutting down.
Many customers took to Twitter to complain. This, after all, is a bank that promised to be more like “Uber or Spotify” than a High Street lender.
Number26 told BI in an emailed statement that the account closures were for “various reasons”, including suspicious activity, but admitted at least some of the closures were for a very weird reason indeed — customers using their services too much.
…Essentially, Number26 let users withdraw money for free on the assumption that they wouldn’t really do it very much. But people did use it and it ended up costing Number26 too much money.
This odd incident gets to the heart of a key question asked over and over about the fintech (financial technology) sector — can any of these guys actually make money?
…Many startups have underpinned their promises with services delivered either at cost or with razor-thin profit margins. Think of TransferWise, which charges just 0.5% on top of the mid-market rate on many international money transfers, and Revolut, which lets people spend money at the best rate abroad on its card with no commission.
But these kinds of models aren’t exactly money spinners. While TransferWise’s revenues and total transfers are rocketing, the startup made a loss of £11 million in the year to March 2015, up from just £2 million the year before.
Even Funding Circle — the biggest UK peer-to-peer lender, which takes a cut of loans made over its platform — lost £10.8 million in 2014, the most recent year accounts are available for.
…But critics say many of the business models are unsustainable and simply being supported by the financial teat of venture capital money. The likes of TransferWise and Revolut can only afford to offer such cheap services because of a plentiful supply of free and easy cash from investors that subsidises prices, so the argument goes, not because of any real technical innovation.
…We could be about to see which side is right. VC cash is drying up —with investment in UK fintech startups collapsed 41% in the first quarter of the year. That could spell trouble for business models conceived during the boom times.