A Digitally Born Neobank Can Also Be Local

Local brick and mortar branches are closing while global, digital-only neobanks are raking in the customers. However, the neobank Lunar Way from Aarhus is suggesting a third format: a scalable digital bank that has made the conscious decision to not be ‘born global’ but to ‘bet local’ instead.

If you grew up in a small, rural village, you were probably able to deposit the coins from your piggy bank into the local branch of a local bank. That opportunity has diminished in the past few decades – and not simply because coins are declining in popularity.

During the past decade, the number of local bank branches has been halved – from 1962 branches in 2007 to 805 branches in 2017. At the same time, the industry has undergone a massive consolidation – from 146 to 65 banks.

Since the start of the millennium, only foreign banks have seen an increase in the number of branches in Denmark – from 20 to 27. While physical branches aren’t the trademark of the modern digital bank, the rise of international banks’ presence in Denmark might very well be a sign of what’s to come from digital neobanks.

“Incumbent banks are largely national or regional because they had to set up a large retail network which took a lot of time – similar to how supermarket chains are largely national or regional. One of the amazing things about the internet is that it allows companies to sell to customers all over the world, which means more competition and, therefore, better products and lower prices for consumers. So, I don’t expect the same dynamics to play out with the neobanks as it did with incumbent banks,” says Bjarke Staun-Olsen, principal at the leading European early-stage venture capital firm Creandum.

Hyped neobanks with global plays like Monzo, Revolut and N26 are very much paving the way for this development. They all deliver a relatively uniform banking product to customers across multiple markets.

However, this might not be the only way that a neo­bank can succeed. At least, the Danish challenger bank Lunar Way is doing things a bit differently.

The deep and local approach

A total of 85.000 customers have started banking with Lunar Way since its interception in 2015. It all began in Denmark, but the neobank recently launched in Norway and Sweden as well. However, unlike well-funded, g­­rowth-hungry global competitors like Revolut and N26, the neobank from Aarhus does not plan to enter additional markets anytime soon.

“Our ambition isn’t to create a simple, wallet-like product. In order to really challenge the established banks on their playing field, we want to become our customers’ everyday bank. And if we want Norwegians to choose us instead of DNB, we must be really present in their local market,” says Peter Smith, head of banking for Lunar Ways.

Instead of offering a simple solution aimed at the widest possible audience across as many markets as possible, Lunar Ways focuses on a deeper banking experience for the markets it knows best.

”We use the same providers across the markets to ensure scalability, and we know the markets and customers really well. We would rather do what we’re very good at, and that is catering to the Nordic markets. We have a smaller customer base, but of course we hope this base proves more profitable,” Smith says.

A customer isn’t just a customer

‘Wide & Global’ or ‘Deep & Local’ are two very different strategies. So far, to a large extent, investors have bet on neobanks that have millions of customers and a simpler product.

However, Staun-Olsen, says that a customer isn’t just a customer.

“There is a massive difference in the value of different users. The value depends both on how many services that user buys from a neobank – loans, mortgage, investment vs. just having a pre-paid card that a neobank can earn interchange on – and also on who the user is,” he says.

However, he doesn’t see any reasons for not going for a pan-European neobank. Though national governments and the EU still heavily regulate financial services, neobanks can relatively easily passport their banking licenses across the EU – an ability that investors find more attractive.

“What ultimately matters is the size of the market that a company is targeting. If a company targets the US then “global first” doesn’t matter much, because the US is such a big market. Global first is important when you start in a small market like Denmark. And that is what is driving higher valuations for those Danish companies that go after the world as opposed to those that only go after their home market,” Staun-Olsen says.

Subtle distinctions are crucial

Lunar Way admits that it could have gone for Germany – and a far bigger addressable market – instead of Norway and Sweden.
“With the streamlining of regulations inside the EU, there are not really any limitations for us. It’s a business decision. Unlike our competitors, we would rather build something specifically for the Nordics. The Nordics is a lucrative market – and we know the infrastructure and the ­customers better, which gives us the competitive edge,” Smith says.

Peter Smith, Lunarway.

Moreover, he insists that this journey requires the neobank to focus on only a few markets – similar as they might be – so that the neobank is more relevant than the competition.

“Even though the markets are very similar, there are some subtle distinctions we have to address if we want to compete with the established banks. We use Mobilepay in Denmark, Norway is using Vibs and Sweden has a third provider. We want to support those distinctions that matter locally – not just be a European superbrand,” Smith says.

The Nordic focus helps Lunar Way avoid spreading its efforts too thin. Moreover, it has proven to be a viable strategy thus far, though it might not have given the company a unicorn investment.

“Our approach might not be as sexy, but I think we’re experiencing a pretty decent demand from investors. The Nordic is a profitable banking market – more profitable than other markets. And it’s not always what’s sexy that gives investors the best return on investment,” Smith says.