Their aim is to go head-to-head with themselvesMay 2nd 2019Print edition | Special report
AT THE ENTRANCE of the glass-and-chrome headquarters of Bank Leumi in Tel Aviv, look left and you will see Mani House, one of the city’s oldest buildings. From a balcony peers a statue of Theodor Herzl, the Zionist leader known as the Father of Israel. The marriage of historical and modern is fitting for Israel’s oldest bank, established before Israel itself, in London in 1902. For Leumi also owns Israel’s youngest bank, launched in 2017.
Pepper is Israel’s first bank aimed at “millennials and millennials at heart”, says Rakefet Russak-Aminoach, Leumi’s chief executive. It is also Israel’s first mobile-only bank, the first to charge no fees or commissions and the first to allow current accounts to be opened without visiting a branch. It consists of two apps: one that resembles a Facebook feed, showing transactions, money-management tips and articles related to the account-holder’s spending; and a second, Pepper Pay, for money transfers. A third in development, Pepper Invest, will offer a cheap, simple interface for researching, buying and selling stocks.
Pepper has not published customer numbers, but there are “tens of thousands”, says Ms Russak-Aminoach, and new ones are being added faster than at any other Israeli bank. That is despite the national regulator requiring Pepper customers also to have a bricks-and-mortar account, a condition it agreed to drop last month.
For Barak Herscowitz, one of Pepper’s earliest customers, the draw was the clear terms and conditions. Traditional banks “always surprise you with things”, he says, “and it’s usually a bad surprise—a new charge, a new regulation, paperwork that has to be sent by fax.” His salary is paid into what the regulator considers his primary account, but he transfers it to Pepper each month and uses the app for everything.
Though Pepper’s developers have designed the customer interface, behind it is software bought from Temenos. That puts Pepper on a par with fintechs and free-standing neobanks, and way ahead of mobile banking from high-street names, including Leumi, which run on mainframes. These update account records only once every 24 hours, so they cannot show balances or alerts in real time, or offer instant credit.
The plan is to move Leumi over to Pepper’s core software bit by bit. That will be a delicate business. According to Cognizant, a technology consultancy, a quarter of major upgrades of core banking systems fail, and a further half go well over time or budget. But since Pepper is already up and running, the risks may be lower.
“There’s always this question: are you cannibalising yourself?” says Ms Russak-Aminoach. But Pepper is taking customers away from all Israel’s incumbents, she points out. At 30%, the share of Pepper’s customers who hold Leumi accounts is fairly close to Leumi’s 25% share of the retail market. Moreover, she says, “if it’s possible to do something better than what we are doing, cannibalisation is irrelevant, because if we don’t do it, others will.”
Leumi is an early example of a new trend: high-street banks setting up digital “flankers”—new brands that compete in the same category and territory as the original, generally in the hope of attracting a different clientele. Most have a narrow focus, such as Esme by NatWest and New10 by ABN AMRO, which offer small-business loans. But incumbent banks are increasingly thinking of following Leumi’s lead and going head-to-head with themselves.
Two years ago the board of RBS, Britain’s third-largest banking group, concluded that wholesale disruption in the banking industry was coming, though the timing was unclear. If it proved imminent, there would be no time for the total overhaul the bank’s core systems would need to compete. As an insurance policy the bank set up Bó, a mobile-only bank that will go live later this year. If change proves slower, the new bank will help the whole group manage a smoother transition.
Even if neobanks take time to make profits, they have no trouble raising capital from investors, says Mark Bailie, Bó’s chief executive. Customers are being “trained by Amazon” to expect services to be delivered smoothly and rapidly on their phones, he says. And technology is developing fast: “Fifteen years ago if you wanted a new banking system you’d have to write a very large cheque to one of the major mainframe companies.” Now a mobile-only bank can be set up in 18 months for a few tens of millions.
Mr Bailie doubts RBS’s core computer system can be moved over to Bó’s, but thinks that RBS customers might move voluntarily. “Look at social media,” he says. “The young and the better-off are first, but over the next ten years everybody else catches up.”