Conor has founded and led multiple high-growth internet start-ups. His primary focus is IP development in financial services, specifically core-banking and lending platforms. Founding his first “Banking as a Service” business back in 1998, Conor had been in fintech for more than a decade before fintech existed. Today, he heads up Leveris, the world’s first end-to-end, software defined core-banking platform, with retail banking customers all over the world.
Leveris has been growing for six years from a base in Dublin. What is the fintech scene like there?
Ireland is a hotbed for innovation. There are some great fintech companies there, and a superb quality and culture of software development. It is, however, a base for a lot of the large American corporates and the cost of talent can therefore be quite high. We have around 250 employees, but only about 50 are in Ireland – the rest are in other locations where it’s more cost-effective to run the development side of the business. But our strategic corporate, product and infrastructure teams run from Ireland.
There is also great support for fintech from state bodies in Ireland – we have ourselves benefited from it. For example, Enterprise Ireland has been a huge advocate for us, a great help not only on the funding side, but also in business development. They’ve opened their global distribution network and introduced us to clients as far flung as Australia and China. So there’s incredible support and a very strong community.
What’s the problem with legacy, traditional banks today?
They’re expensive to deploy, run, and change. They run monolithic, non-real time systems, running batch processes. And by the nature of their tech, they’re product oriented, so they are built in product silos like deposit accounts or loans and never benefit from a full, single view of the customer.
Leveris is a cloud-native, real-time, core banking system which solves all these problems, allowing banks to launch new retail products at speed, revise products on the fly and target customers with individual accuracy.
It also reduces the operational cost of the technologies needed to keep a bank running. A traditional bank’s operating cost-to-income ratio is around 70%. By applying technologies that are standard in other industries today, we figure we should easily be able to achieve cost-to-income ratios of 25%-35%; which of course is the most effective way to increase margin.
In the world of Leveris, those “technologies that are standard in other industries” means:
- Event driven (real-time when a customer or the bank makes a change), rather than old-style batches of transactions
- Software-defined: you never need to write code to change interest rates or develop new products
- Cloud-native and run as-a-service
It’s designed for any bank: new digital banks, or standard traditional banks wanting a more efficient platform.
We think that, even including the control functions, in the future it will take around 30 full-time employees to operate a 1 million customer bank, and 40 full-time employees to operate for 2 million customers.
How are legacy banks doing at refactoring their technology stacks? Goldman Sachs’ Marcus brand, for example, was a benchmark in maintaining legacy systems but implicitly admitting that it often makes sense to start from scratch…
We concur with that. Legacy banks will have to start again at some point. The challenges I mentioned – monolithic, product oriented, and non-real time – aren’t just technology challenges; they become commercial challenges. If you want to cross-sell, upsell, and provide better customer service, you need a single view of the customer. The only way of achieving that today is an expensive, inefficient and complex data management layer across the product silos. And keeping that up to date is both a nightmare and has never been proven to be efficient.
There are more tech specialists employed by banks than all the tech companies combined. Banking is the largest tech centre in the world, because their cumbersome technologies are so difficult to maintain. If you want that customer view, everything must be modular, internally and externally extensible, so that you can connect third-party innovations from other companies through an API interface. All that stuff is very difficult to do in the legacy setup.
When we build from the ground up, we can create an operational single view of a customer – all their products and all their transactions in one place. And as well as cost savings, it is better from a data modelling perspective: we can mine, access and manipulate that data much more efficiently, creating new revenue streams.
We think that, even with all the control functions, in the future it will take just 26 people to operate a 1 million customer bank, and 40 employees to operate for 2 million customers. Similarly, in our world, we can stand up a fully-functional instance of a bank for 1 million customers in under 24 hours. Whereas management consultants, McKinsey, suggest that, on average, it takes between three and five years to build the technology for a legacy bank – and even then, two thirds will fail, usually at switchover.
But then how will banks differentiate themselves from competitors? Will future banks primarily become marketing organisations which will just handle customer relationships?
The short answer is yes. It’s up to the banks to create what they want with our software. With a program like Microsoft ‘Word’, some of us will write Mary Shelley’s “Frankenstein”, others will write a letter. What you author when you have a vast configuration system ends up being completely unique, so in marketing terms, technology is opening up new banking opportunities.
What makes one loan product different from another is a combination of interest rates, customer experiences and other variables that financial services companies package up into a marketable product.
All of those can be configured in our system. Better still, you can launch individual products for micro customer sets. In our world, the customer themselves can change their products on demand. For example, (within the regulator’s boundaries) our loans can be reconfigured by the consumer whenever they wish, so I can pay less this month or pay more next month.
For instance, for us, giving COVID-19 mortgage holidays was merely a change in our configuration files. All of the interest recalculations needed from an actuarial point of view to implement the mortgage holiday are automatic. For a legacy bank, that three month holiday is a coding challenge.
So you see the future of banking targeting individual customers. You can then use my data to both refine the products you offer and perhaps also reduce the risk to the bank as well, because you understand me and my credit profile…
That’s exactly it. But there’s one further interesting element. Today’s digital banks make their money through fees and charges. I haven’t seen any digital bank effectively monetising lending.
But for a legacy bank, interest income is the primary revenue stream, because fees and charges are becoming a commodity; customers now expect free banking and will only pay for value-added services.
Digital banks therefore need to drive significant deposits so that they have money to lend, and thus to earn interest. But the digital banks are not driving significant deposits because consumers are not moving their net worth or life savings into their digital banks. Their aggregate balances per customer are actually quite low.
We therefore think that after fees and charges, and interest, data itself is the third potential major revenue stream for banks. They can use that data to advocate more heavily for their customers – to save them money, make them a profit and give them a better basis on which to make decisions. In future, your bank might help you ensure you don’t miss your mortgage payment, give you buying choices or spot problems up ahead to help you make more judicious and fiscally prudent choices.
But more usefully, the quality of customer data at a bank is extraordinary. Google has built a world class business on data because they understand ‘ intent’. Yet a bank’s data is higher quality than Google’s, banks don’t just understand intent, they see what actually transacted– transaction data is hugely reliable as a signal of future intent, and with the addition of comparable data from other people probably creates a more forensic profile of an individual than can be found anywhere else. It’s just that banks have only ever used their data for Business Intelligence (BI) or to store data securely for 7 years for regulatory purposes, – their data isn’t organized from a customer centric perspective to be used in such a way.
The value of that data could eventually drive the cost-to-income ratio of a bank down to zero. In that scenario, transactions could be sponsored, or supported by targeted, relevant advertising, for example and value can even be passed in part back to the customer. There’s a report by Accenture called “The Everyday Bank” which figured out what the average American family generates for Google AdWords per year. The answer circa $3,600 in value. If that were delivered back to consumers through their bank, it would be a significant amount of money that could change peoples’ lives for the better.
Legacy banks cannot unlock this potential. They perceive data as a commercial liability, because the regulator forces them to store seven years’ worth of data at huge cost – and because of the legacy composition of this data, it is virtually unusable from the warehouse. Change the technology and we can alter the model for incredible benefit.
The quality of data inside a bank is extraordinary. Google has built a world-beating business on data and understanding ‘intent’. Yet a bank’s data is vastly superior to Google’s – transaction data is hugely reliable as a signal of future intent, and there is no better forensic indicator of the psychographic make-up of a consumer as their transaction data. What a person chooses to buy says a lot about that person.
But isn’t life getting harder for neo-banks? Interest rates are low. They compete on functionality, but customers don’t know what they want or need in terms of functionality…
I don’t believe in the long term value of neo-banks, because as far as I can see, there’s none that generate real revenue. They’re almost all entirely driven by client acquisition effectiveness. They’re acquiring customers faster than traditional banks, and an acquired customer is worth roughly €1000 on the balance sheet today. That’s how they’re driving their value. Long term, that’s not sustainable. They’re going to have to figure out how to become viable, and I haven’t seen evidence of that.
As I said earlier, they could offer credit, but most neo-banks don’t have the deposit base to be effective lenders. And fees and charges don’t stack up because they barely cover operational costs.
One way a neo-bank can genuinely accomplish is to implement hygiene functionality well. That, in itself, is a fully differentiated proposition. The basics of doing everyday banking right, to the modern customers’ expectations. Traditional banks just don’t do the basics particularly well. Consumers pick up on the subtleties of real-time data, great communication, and seamless basics: transactions, payments and loans. So there’s a small window of opportunity for Neo banks to achieve something significant through beautiful execution of a modern digital bank. But even here, the legacy players are catching up. The future for both legacy and digital banks is a transformed business model.
What about the US? It’s the home of the “Mom’n’pop” bank – surely ideal for digital transformation?
The US is interesting to us because the segment that we can address most effectively is indeed what you call the “Mom’n’pop” banks: the 6000 or so community banks. They generally have assets of under $20BN, the larger ones may have 20 branches but many only have a single location.
These small banks have been under a lot of pressure to consolidate, because the regulator is worried that they are small enough to collapse in the event of a major economic shock. On a shared services model, we can handle their back office; essentially helping them to run separate, front-facing banks but behind the scenes combining the asset power of their balance sheets. Think of it rather like insurance: they are separate entities but with risk shared across a group.
Europe is one market; Asia is reasonably homogeneous too. The US is a challenge for regulatory and operational reasons. But it is a hugely interesting market for us and our peers. Now that we’re pretty mature in product terms, we will certainly be looking west in the next couple of years.