is a phone company the future of fintech?

Think dreamy brands and French telecoms group Orange might not leap to mind. Last month its boss Stéphane Richard discovered he would be tried in a long-running fraud scandal dating from his time as a civil servant.

Nor does Orange, 29 per cent controlled by the state, stand for the kind of iconoclasm that has helped the world’s biggest technology groups make aggressive incursions into new sectors, including the fringes of finance.

And yet it is Orange that has launched one of the most audacious attempts to break into mainstream banking and challenge tarnished incumbents. A couple of months ago Orange Bank was launched with a mission to attract 2m clients and shake up the staid world of French finance.

The premise is simple. The shift to smartphone banking should put telecom operators, handset makers and the big technology groups in a strong position to go head to head with the traditional banks.

In Europe in particular, they will be aided by legislative change. This month, the EU’s Payment Services Directive 2 came into force. Arcane-sounding, perhaps. But it could be the revolutionary spur for consumer banking to gravitate towards our favourite consumer brands.

One of the most surprising legacies of the 2008 financial meltdown is that banks have successfully hung on to their customers despite a decade-long reputational drubbing, caused by crisis, scandal and poor service. Sure enough their brand values have slumped. Back in 2007, before the crisis took hold, there were three banking names in the Brandz global top 20 (Citigroup, Bank of America and Wells Fargo). By 2017, only Wells was left in this report that measures brand value (Citi was down at 59, BofA at 87) and the tech groups were dominant.

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Asian technology groups such as Alibaba and Tencent have exploited dissatisfaction with traditional finance, hoovering up large chunks of market share. By comparison the incursions made into financial services by US Big Tech are limited. Google, Apple and Facebook have moved into payments. Amazon has a booming SME loans business. But so far none of them has used its brand popularity as a launch pad into banking proper.

Conventional wisdom is that the wall of regulatory demands heaped upon the banks in the wake of the crisis will be sufficient to deter tech companies from a full-on assault on banking. The spoils just are not that attractive. Apple’s return on equity is consistently above 30 per cent, compared with a typical bank RoE of 5 to 10 per cent.

Of course, banks are still braced for trouble. The more bits of the value chain that tech companies large or small steal from the banking groups, the more those banks will be reduced to the “dumb pipes” of the financial system.

But Orange has breached the barricades — with some early signs of success. If the client accumulation rate of its first 10 days of operation in November has been maintained, it will have amassed some 200,000 customers by now — double expectations — and be on its way to a target of 2m, even before it has expanded its product range from the basics. Consumer loans and insurance are due to be added to payments and savings this year. Mortgages will follow at a later stage. “Orange Bank has what it takes to disrupt in our view, including a strong brand and already 28m mobile customers,” UBS analysts wrote in a note to clients.

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Our obsession with smartphones has helped Orange to number 62 in the latest Brandz ranking — far behind Apple or Facebook, but there is no French bank in the top 100.

For Orange, this is predominantly about client retention. The EU’s second payment services directive (PSD2), and the transparent architecture and greater competition it should foster, will prise open the traditionally long-term relationships between banks and their customers. Turning clients into combined phone and bank customers through financial inducements and other means should help Orange cement them for the long term. And the combined (phone) location and (bank) spending data will help them cross-sell other products effectively.

Buttressed by existing payments operations in Africa, Orange’s banking business should make €400m of revenue in 2018, although it is expected to be lossmaking for at least five years. Orange’s move into banking clearly is not founded on a trailblazing economic rationale that other tech and telecoms operators will inevitably want to copy. But if it succeeds in winning custom, it may establish a new model for long-term disruption.

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