Opinion: FinTech vs High Street

If you’re a regular reader of this blog, you may have noticed that I have strong opinions regarding consumer financial services, particularly when it comes to Revolut, which I wrote about a lot by now.

I didn’t start writing about these services because of a professional interest, but rather because when I moved from Italy to Dublin (via Los Angeles), I felt like I stepped back ten or more years with the banking system. And while this improved significantly when I moved to London, there are still a few things baffling me from time to time.

But as I discussed in one of my recent Revolut-bashing posts, compared to Ireland the high street banking options in London are so much more interesting that I’ve effectively ditched Revolut for day-to-day payments. So why would anyone care about FinTech products?

I have been thinking this for a while, not just as a customer, but with an awareness that, if I decided to change my perspective in life and go for a riskier professional position, from my rather cushy one, FinTech appears to be the place to be right now. Particularly given the unfortunate experience I have gained in this field by now.

One of the issues appears to be one of branding, and trust. Quite a few people appear to have a dislike for high street banks because of their association with previous scandals or news. And that’s what makes it funny to see how high street banks appear to just want to enter the market with new brands.

Another thing that Monzo appears to capitalize on, in their tube advertisements, is the ability to receive instant notification of the money spent. And that’s something that I deifnitely can relate to. This is particularly important when you get to more shady stores, or to coffee stores with untrained staff, that may suggest that a transaction didn’t really go through, and suggest you to pay cash instead, charging you twice.

Indeed, this was one of the biggest advantages of using Revolut for me in Ireland. The “famous” Tesco Bank credit card didn’t really have even an online banking platform, and the only way for me to confirm whether a transaction went through was by looking at my Tesco points statements. But this is not something revolutionary: I had notifications of all online transactions, and card-present transactions over €50, on my Italian pre-paid card in 2006 (via SMS, not via app at the time, of course.)

While I feel Monzo is right to take a swing to most high street banks for not implementing these notifications, even in 2019 London it’s not true that you need to “go FinTech” to have this level of support. My American Express does the same, and you cannot say that AmEx is a new player on the market!

And it doesn’t stop at just sending me notifications for the charges: American Express goes one step further, and integrates with Google Pay so that you get the notifications even without having the American Express application installed.

Indeed, I have a feeling that, for the most part, customers would be happy if the level of support in high street banking was on par with American Express:

Their website lets you log in with a simple username/password combination, rather than the silly security theatre of “Give me the 1st, 2nd, 123th character of your password, and 1st, 5th and 6th digit of your PIN” (seriously, setting aside the random index selection, why on Earth do you need two equivalent factors?)
New charges on the card are notified immediately, either through app or through Google Pay (I don’t know about Apple Pay but I assume that’s the case there as well).
You can get your card’s PIN online, which is usually verified by a text message OTP.

One of the things that AmEx does not do, that I think all of the FinTech players appear to do, is freezing/unfreezing the card on the fly. A feature that Barclays has been advertising all over as if they had invented it.

It is pretty much possible, or certain, that some UK high street banks already started providing all of these options, maybe in different combinations. As I said, Barclays does appear to have the ability to freeze/unfreeze the card. Fineco does not mail out the PIN but rather has you requesting it online and delivers it as text message. And as I made as a point before, Santander has a credit card with no foreign transaction fees.

Many of the articles I read over the importance to FinTech startups imply that the main reason why big banks can’t be this flexible or “innovative” is that they have old, heavy and difficult to manage backends. From second hand discussions, I can believe that the backends are indeed as heavy and clunky as they are purported to be, but it does seem to me that many of the features involved can’t be that tied to the backends, given that most of the banks can provide those features already.

A number of features that I see being deployed throughout different banks is the ability to “budget” expenses. While they sound particularly interesting, this appears to be mostly a “frontend” feature. Santander has this feature, but somehow they decided to implement this on a separate Android app only, which I gave up on. Indeed, it does not allow you to correct their classification of expenses, which makes it pretty much useless, not just because some vendors are classified completely wrong, but also because sometimes the same vendor might be used for different reasons (Boots, CVS, Walgreens, and similar all provide both medicines and groceries; how you categorize their spend depends on what you bought!)

While Santander have already won me over as a bank customer, I do feel that they would win over more of my credit card expenses from American Express if they implemented “this one weird trick” of informing me of charges as they happen. Because small things like that are one of the reasons I use my AmEx quite a lot in the UK, even after I reach the needed spend to upgrade my Marriott membership to gold.

So yeah, my hope is that high street banks will finally see the competition from FinTech as a list of features that they should, opportunistically, implement, rather than an excuse for the branding and marketing departments to come up with new ideas to be “hip”.

Speaking of Foreign Transaction Fees

In the previous post about Revolut, I have left open a topic that I wanted to move to its own post: foreign transaction fees.

For those who are not acquainted with the terminology here, with foreign transaction fee I’m referring to the additional fee levied by banks and payment card companies when you incur expenses in a different currency than the one the card was issued for. Sometimes (particularly in UK and Ireland) this is referred to as an “overseas transaction fee” — which is confusing, particularly for Ireland, where the fee is applied for expenses in GBP (which is not overseas, but rather “up the road”), but not in EUR (which is mostly oversea).

This is a different cost incurred than the possible bad exchange rate that the financial institution may be applying, and it has nothing to do with the various DCC scams that you may run into when going to touristy destinations with a non-local card, although there is a link there: even online, services may suggest you to apply the charge in your local currency to avoid foreign transaction fees — as you can see in the linked post, that’s rarely a good idea, with a few exceptions (e.g. PayPal actually applies sane conversion fees in my experience, even if not the best ever).

These foreign transaction fees are set by the card issuers, and vary widely. I have seen cards with up to 6% “fex fees”, but that was back in Italy (why I say that will be clearer in a moment). In Ireland, with the exception of various fintech companies, the typical fex fees were of 2-3% — I was very happy with Tesco Banks‘s 1.75% fex fee (Tesco Bank no longer operates in Ireland.) In the UK, it appears most cards either have 0% fex fee, or 2.99% fex fee; there are a few divergences, but those two appear to be the most common options.

The reason why I am specifying this information with a country attached is that, in addition to telling you what the currency is, the mix of local-vs-foreign spend for the average person is also connected to the country. For instance, for my friends and family living in Italy, foreign transaction fees only exist when buying from foreign websites (or eBay), or when going on a “far” trip — Croatia and Switzerland being the closest countries that incur the fex fee. On the other hand, if you live in Ireland, you’ll probably have at least one recurring expense in GBP — depending on how Brexit is going to go this may change.

Indeed, for electronics you often need to look at the UK, rather than the continent — because of plugs, regulations, availability, etc. And quite a few eShops with presence both in the continent and the UK used to refuse you service from the European website, referring you to the UK one instead — this is another thing that may change after Brexit. There is a reason why, when discussing markets, most companies call it “UKI”.

I’m told that a similar situation exists for those living in Switzerland, and I can imagine this goes similar in the Nordics, given that Denmark, Sweden, and Norway have their own currencies as well, and likely a lot of services overlap.

In the UK (and again this may change after Brexit), you may very well never spend money outside of GBP because all the services exist within the country. Unless you’re an expat, in which case you’re probably still visiting the continent (Eurozone or not) fairly often, or may be paying for ongoing services (such as cellphone contracts) in that currency. This probably explains why the two sets of fex fee groups: if you’re part of the first group, you probably don’t need a card with no foreign transaction fees — while you really do in the latter case.

In my case, I have two credit cards: one from Santander, which I spoke of last time, with no foreign transaction fee, and an American Express with a 2.99% foreign transaction fee. I effectively spread the expenses on the two cards, depending on where I am — namely I try to use the Amex in the UK, and the Santander anywhere the other does not work. I could give up on the Amex, as the Santander is strictly a superset usage, but the perks provided by Amex are worth having. And that’s the most important thing: cards have perks, so you should probably consider those as well.

Thus the utility of fintech services like Revolut and Curve depend on the country you live in not just because it sets the band for foreign transaction fees, but also because they set the tone of foreign currency usage. In the UK, with the wide availability of debit and credit cards with no foreign transaction fees, their services are likely less useful than in other countries — except when it comes to perks. Indeed in the case of Curve, you would be able to keep most of the perks of a credit card, such as cashback, even if the card comes with a hefty foreign transaction fee. Except for Amex of course.

But is it convenient for you to pay for such a service? That’s another very good question. And to answer it, I’ll try to forget about the UK and go back to Ireland — mainly because here, as I now repeated a number of times, cards with no foreign transaction fee exists and you can just use one of those. Metro Bank has free current accounts with cards that come with cards without foreign transaction fees in Europe. Santander has a £3/month credit card with no foreign transaction fees, and 0.5% cashback. Halifax has a Clarity MasterCard that comes with no monthly fee, no foreign transaction fees (and of course no perks.)

But let’s go back to Ireland and take a look at the options. As I said the usual foreign transaction fee in the country was between 2% and 3%. In the case of Ulster Bank, the card I used to have had 2.75% foreign transaction fee. At which point would it have been cheaper for me to subscribe to Curve Black, at €9.99/month, rather than give Ulster Bank their fees? (And for simplicity here, I’m not talking about exchange rates; the exchange rate for their MasterCard is network-provided so it’s not at all bad, and in fact it’s comparable to Revolut’s.)

As most services would require a yearly commitment, we should consider the spend on an yearly basis too. This makes the cost €119.88, but we’ll call it €120 to make it easier to run umbers on them. Let’s just call the twelve cents a rounding error. If we’re ignoring the cashback options (as in Ireland there were none, beside Tesco Bank), the amount of foreign expenses you’d need to break even on Curve black with the foreign transaction fee noted above is about €4364 (divide the yearly cost by the foreign transaction fee). That’s the cost of fairly big vacation for a family (note that you can’t include flights in the vacation cost, as those would be billed by the currency of the country of origin, which is likely local).

If you have a card that provides cashback, then things become more complicated, because you’d have to include the cashback in the calculation. If you’re curious the following formula will give you the number, making S the yearly subscription cost of the service, F the foreign transaction fee percentage, and C the cashback percentage:

(S + (S/F) * C) / F

For Revolut Metal, with their variable cashback, figuring out the number is a bit more annoying. But we’re also talking about 1% in the best case scenario (all non-European spend). So the basic number (€5673) only goes down to €5616. The 0.1% cashback option of all European spend is so minimal that it’s not worth calculating exactly.

So what should you do if you don’t usually spend that kind of money on foreign transactions? You can still use the Revolut and Curve and other fintech services without paying for them, and grab the best deal you can until they go bust. Or if you don’t want to bother, you can just spend on your normal cards, get your usual perks and ignore the need for no foreign transaction fees.

Indeed, if your options are spending on Curve attached to a debit card with no cashback and no perks, or spend on an American Express Platinum Cashback Credit Card, you would need to spend more than £5330 a year in foreign transactions for it to be worth it — and that’s assuming you don’t qualify for the higher tier. And this is probably the worst case scenario for the UK, for a non-zero foreign transaction fee card.

A review of the Curve debit card

Somehow, I end up spending a significant amount of my time thinking, testing and playing with financial services, both old school banks and fintech startups.

One of the most recent ones I have been playing with is Curve. The premise of the service is to allow you to use a single card for all transactions, having the ability to then charge any card underneath it as it is convenient. This was a curious enough idea, so I asked the friend who was telling me about it to give me his referral code to sign up. If you want to sign up, my code is BG2G3.

Signing up and getting the card is quite easy, even though they have (or had when I signed up) a “waitlist” — so after you sign up it takes a few days for you to be able to actually order the card and get it in your hands. They suggest you to make other people sign up for it as well to lower the time in the waitlist, but that didn’t seem to be a requirement for me. The card arrived, to my recalling, no more than two days after they said they shipped it, probably because it was coming from London itself, and that’s all you need to receive.

So how does this all work? You need to connect your existing cards to Curve, and verify them to be able to charge them — verification can be either through a 3Dsecure/Verified by Visa login, or through the usual charge-code-reverse dance that Google, PayPal and the others all use. Once you connect the cards, and select the currently-charged card, you can start using the Curve card to pay, and it acts as a “proxy” for the other card, charging it for the same amount, with some caveats.

The main advantage that my friend suggested for this set up is that you if you have a corporate card (I do), you can add that one to Curve too, and rely on that to not have to do the payback process at work if you make a mistake paying for something. As this happened to me a few times before, mostly out of selecting the wrong payment profile in apps such as Uber or Hailo, or going over the daily allowance for meals as I changed plans, it sounded interesting enough. This can work both by making sure to select the corporate card before making the purchase (for instance by defaulting to it during a work trip), or by “turning back time” on an already charged transaction. Cool.

I also had a hope that the card could be attached to Google Pay, but that’s not the case. Nor they implement their own NFC payment application, which is a bit disappointing.

Beside the “turn back time” feature, the app also has some additional features, such as the integration with the accounting software Xero, including the ability to attach a receipt image to the expense (if this was present for Concur, I’d be a real believer, but until then it’s not really that useful to me), and to receive email “receipts” (more like credit card slips) for purchases made to a certain card (not sure why that’s not just a global, but meh).

Not much else is available in the app to make it particularly useful or interesting to me, honestly. There’s some category system for expenses, very similar to the one for Revolut, but that’s about it.

On the more practical side of things, Curve does not apply any surcharges as long as the transaction is in the same currency as the card, and that includes the transactions in which you turned back time. Which is handy if you don’t know what the currency you’ll be charged in will be in, though that does not really happen often.

What I found particularly useful for this is that the card itself look like a proper “British” card — with my apartment as the verified address on it. But then I can charge one of my cards in Euro, US Dollars, or Revolut itself… although I could just charge Revolut in those cases. The main difference between the two approach is that I can put the Euro purchases onto an Euro credit card, instead of a debit one… except that the only Euro credit card I’m left also has my apartment as its verifiable billing address, so… I’d say I’m not the target audience for this feature.

For “foreign transactions” (that is, where the charged currency and the card currency disagree), Curve charges a 1% foreign transaction fee. This is pointless for me thanks to Revolut, but it still is convenient if you only have accounts with traditional banks, particularly in the UK where most banks apply a 3% foreign transaction fee instead.

In addition to the free card, they also offer a £50 (a year, I guess — it’s not clear!) “black” card that offers 1% cashback at selected retailers. You can actually get 90 days cashback for three retailers of your choice on the free card as well, but to be honest, American Express is much more widely accepted in chains, and its rewards are better. I ended up choosing to do the cashback with TfL, Costa (because they don’t take Amex contactless anyway), and Sainsbury’s just to select something I use.

In all of this, I have to say I fail to see where the business makes money. Okay, financial services are not my area of expertise, but if you’re just proxying payments, without even taking deposits (the way Revolut does), and not charging additional foreign transaction fees, and even giving cashback… where’s the profit?

I guess there is some money to be made by profiling users and selling the data to advertisers — but between GDPR and the fact that most consumers don’t like the idea of being made into products with no “kick back”. I guess if it was me I would be charging 1% on the “turn back time” feature, but that might make moot the whole point of the service. I don’t know.

At the end of the day, I’m also not sure how useful this card is going to be for me, on the day to day. The ability to have a single entry in those systems that are used “promiscuously” for business and personal usage sounds good, but even in that case, it means ignoring the advantages of having a credit card, and particularly a rewards card like my Amex. So, yeah, don’t really see much use for it myself.

It also complicates things when it comes to risk engines for fraud protection: your actual bank will see all the transactions as coming from a single vendor, with the minimum amount of information attached to it. This will likely defeat all the fraud checks by the bank, and will likely rely on Curve’s implementation of fraud checks — which I have no idea how they work, since I have not yet managed to catch them.

Also as far as I could tell, Curve (like Revolut) does not implement 3DSecure (the “second factor” authentication used by a number of merchants to validate e-commerce transactions), making it less secure than any of the other cards I have — a cloned/stolen card can only be disabled after the fact, and replaced. Revolut at least allows me to separate the physical card from my e-commerce transactions, which is neat (and now even supports one time credit card numbers).

There is also another thing that is worth considering, that shows the different point of views (and threat models) of the two services: Curve becomes your single card (single point of failure, too) for all your activities: it makes your life easy by making sure you only ever need to use one card, even if you have multiple bank accounts in multiple countries, and you can switch between them at the tap of a finger. Revolut on the other hand allows you to give each merchant its own credit card number (Premium accounts get unlimited virtual cards) — or even have “burner” cards that change numbers after use.

All in all, I guess it depends what you want to achieve. Between the two, I think I’ll vastly stick to Revolut, and my usage of Curve will taper off once the 90 days cashback offer is completed — although it’s still nice to have for a few websites that gave me trouble with Revolut, as long as I’m charging my Revolut account again, and the charge is in Sterling.

If you do want to sign up, feel free to use BG2G3 as the referral code, it would give a £5 credit for both you and me, under circumstances that are not quite clear to me, but who knows.