Cash is problematic for digital-only banks and a barrier to larger-scale expansion of the business model. However, this challenge is becoming less critical as the increased use of mobile, and mobile innovation, are offering digital-only banks more options for managing cash.
Cash poses a problem for digital-only banks; unfortunately, the world still runs on cash to a large extent, and so the ability to make withdrawals from and deposits into a bank account is a core function that customers demand. Banks existing only in the virtual world have traditionally made agreements with other banks to allow their customers to use branches and ATMs. For many digital-only banks, this is not a problem given that they are often just another brand of an existing bank: 1822direkt, for instance, is a fully owned subsidiary of Frankfurter Sparkasse, a regional savings bank based in Germany. Some banks, such as UK-based First Direct, which is owned by HSBC, have also partnered with post offices. There are also those banks such as Fidor that have chosen to totally ignore cash deposits.
The extent to which cash poses a barrier to the expansion of the digital-only business model in banking is diminishing, mainly led by the increased use of mobile in banking. Number26, a digital-only bank from Germany, announced a few months ago that it had created the Cash26 application, which allows the customer to pay into and withdraw cash from their bank account with their mobile phone at supermarkets. Number26 created the application with Barzahlen, a German start-up. Cash26 resembles M-Pesa to some extent, with the difference that Cash26 is not tied to a sim card or an operator. In the Cash26 application, the customer selects the transaction (withdrawal or deposit); the application then generates a barcode that is scanned at the merchant's POS; and the customer either gets money or, in the case of a deposit, pays money in. The minimum deposit is €50, and the maximum is €999. A customer can withdraw a maximum of €300 per barcode, up to €999 within 24 hours. The service is available at stores including Penny, Rewe, and Real, although a number of other large chains do not offer the service yet.
This kind of increased mobile functionality for managing cash transactions in and out of accounts has the potential to level the playing field between start-up banks and the long-established banks. The cost of establishing a new bank is much lower with innovations such as Cash26 taking place because new entrants will not have to invest in a physical presence. Although the Cash26 application is, for the time being at least, only available to Number26 account holders, it is not the only application available for managing cash with mobile. Another German start-up called kesh has made people into walking ATMs by allowing users of its mobile application to make cash withdrawals from one another, and M-Pesa, with its millions of users, has changed the world of banking in Kenya.
Customer experience drives retail banking IT spending in 2016,IT0003-000677 (December 2015)
Noora Haapajärvi, Associate Analyst, Financial Services Technology
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