Digital-Only German Bank to Enter U.S. Market, Court Millennials

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LONDON — Fidor Bank, a branchless German institution known for experimenting with technologies most bankers won't touch, plans to enter the U.S. consumer banking market with a digital-only account aimed at millennials.

The bank recently announced an agreement with an undisclosed partner financial institution to offer a U.S. version of its Smart Cash Account. Used by about 65,000 customers throughout the European Union, the account lets users not only store money, but also buy foreign currency and precious metals, apply for low-value credit and participate in crowdfunding, all through a mobile device. And some 300,000 people use Fidor's platform to swap financial advice with one another. The bank plans to set up shop in the U.S. sometime this year.

"It's a bank with a proper bank license in Germany, but they launched with the idea of being for the post-Occupy generation that is disillusioned with the old system," said Chris Skinner, author of "Digital Bank" and chair of the Financial Services Club networking group in the U.K. "So they do lots of interesting weird and wacky things. They're very social media-oriented."

Like a number of startups and "neobanks" that have sprouted up to challenge incumbent retail banks, Fidor is positioning itself as a more consumer-friendly alternative.

"Banks are first of all solving their problems and [then] maybe the problems of their customers," said Matthias Kroener, CEO of Fidor Bank. "Just have a look at the products and their pricing."

Fidor, founded six years ago, clearly has its sights set on the generation born between 1981 and 2000. Kroener cited a research report that found 71% of millennials would rather visit the dentist than a bank.

While most U.S. millennials might not trade precious metals or foreign currency, a great many of them are digital natives who spend substantial time on social networking sites such as Facebook and YouTube. Fidor offers a savings account with an interest rate that increases over the course of the year depending on how many "likes" the bank's Facebook page gets. And customers can earn 50 euros (about $57) if they create a financial education video that Fidor posts to YouTube.

"The reason that a lot of very successful fintech startups are happening in the U.S. is not only because there are so many talented people setting up those businesses," Kroener said. "It is also because there is a huge gap and demand in innovative services."

One way Fidor has tried to fill that gap is by introducing a host of banking application programming interfaces for software developers to build on. A few U.S. banks, such as Citigroup, have been experimenting with giving developers APIs to provide access to some of the bank's code, such as a mobile banking platform, to help drive innovation.

And Fidor is one of the very few banks in the world to embrace cryptocurrency, working with startups including the German Bitcoin exchange and Ripple Labs. The bank's U.S. service will include a real-time international money transfer network, which could be implemented through the Ripple protocol.

Of course, the reputational and regulatory risks of these young technologies — particularly Bitcoin, which criminals have used to buy drugs online and collect ransoms — entail high compliance costs.

Fidor Bank has about 30 business clients that operate in digital currency, and "we have to overthink pricing for those accounts, simply because our supervisory and audit function is increasing driven by regulators," Kroener said.

But unlike some early adopters of cryptocurrency who seemed to live by the startup credo of "beg forgiveness rather than ask permission," Fidor prides itself on being compliant.

The bank is licensed to do business throughout the European Union, and said that when it expands into other regions it "relies on entrepreneurial and consumer-centric banking partners with stellar regulatory records to form fully compliant alliances"

Kroener said he is encouraged by what he sees in the U.S., where several states, including California, New Jersey and New York, are trying to regulate businesses operating in digital currency without stifling innovation.

"They all aim for proper regulation and not for a general ban. That is something we clearly appreciate," said Kroener. "As a fully regulated entity we are used to such environment and see lots of advantage in it."

Fidor eschews retail branches, for reasons that it frames in techie terms.

"Branches don't show me how qualified advisors are, whereas we show that in our chat rooms," Kroener told Skinner for the Financial Services Club blog in 2012. "Branches create a them-and-us position — servers versus served — whereas you would be unable to tell who are the customers and who are the employees in our bank. Everything we allow you to do online — managing virtual currencies, checking rates, using social connectivity — you cannot do in a normal branch. And branches are only open during certain hours."

Fidor is also pursuing expansion in other countries as well. The bank is already lending in the U.K. and is working to make its services available throughout the Eurozone.

"There clearly is a need for 'better banking' not only in Germany but all over Europe," Kroener said. Fidor is also looking to expand into the BRIC nations (Brazil, Russia, India and China) in the next few years.

Fidor Bank has 277 million euros (about $310 million) in assets.

Marc Hochstein contributed to this report.

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