New European legislation is allowing Orwell's Ipagoo to rewrite banking by allowing customers to manage accounts in multiple countries and different currencies, the company's co-CEO tells Jane Cooper. 

If mobility is the ideal of the EU, then Carlos Sanchez would be its poster child. The co-CEO of Orwell Group speaks Spanish, English, French, Italian and Portuguese, and has lived in six European countries.

He has also experienced the frustrations of opening a bank account in each of these countries. And through his work at Orwell Group, a wealth management provider that he co-founded, he discovered his clients had the same problem. Although there is the ideal of a single economic bloc in the EU, the banking services that underpin this activity are still fragmented.

The reason for this, explains Mr Sanchez, is that the traditional banking model is inefficient and hindered by regulation.

A necessary evil

Banks’ main business is deposit-taking and lending (the credit function), while payments and current accounts (the cash management function) have been something of an afterthought and viewed as a “necessary evil”, says Mr Sanchez.

Lending and deposit taking are inherently riskier and hence more regulated. Banks have traditionally offered both the credit and cash management functions, but their expansion across Europe has been hindered because of regulations governing the credit function. If a large bank wanted to focus on cross-border cash management in Europe, for example, it would be limited because of the regulation of its lending and deposit business in every market where it operates.

But if the credit function is separated from the cash management, then suddenly it becomes a lot more efficient to offer a current account and cross-border payments across Europe. This is exactly what Ipagoo, the retail brand of Orwell Group, has done.

Ipagoo is not a lender and is able to offer cash management services in Europe without the same restrictions as traditional banks. In February 2015 it launched a digital cross-border current account for Europeans, who like Mr Sanchez, live, travel and work in numerous countries. After a single registration process, a customer is able to manage accounts in multiple countries, in different currencies, through the Ipagoo platform. Ipagoo has gone live in the UK, France, Spain and Italy, with plans to expand into Germany and the rest of Europe in the next two years.

Taking on tradition

European legislation has made this kind of solution possible. A package of reforms has been introduced in the EU, including the revised Payment Services Directive and the second E-Money Directive, which seek to increase competition in the industry and unbundle traditional banking – deposits and loans – from the payments function of banks. Previously, in some European countries, it was only banks – with banking licences – that were able to offer payment services, a stranglehold that the legislation has undone.

Ipagoo is licensed as an e-money institution, which means it can offer a solution that functions in the same way as a current account without being regulated as a bank. There are many non-bank payment service providers that have sprung up in the EU since these reforms were introduced, but this is the first time a provider has offered a cross-border pan-European current account.

As an e-money institution, current account funds are not protected by the government. However, Mr Sanchez points out that these funds are segregated from Ipagoo’s accounts, so if Ipagoo failed, customers would just get their money returned. Unlike traditional banks, those funds – and the ability of customers to make payments from their current account – would not be mixed with the banks’ assets and liabilities on its balance sheet. Therefore, says Mr Sanchez, this creates a “sanitised monetary system where the risk is separated and the risk is low”.

Breakthrough banking

“This is a breakthrough. This changes banking,” says Mr Sanchez. “I would not like to be portrayed as a digital bank – it is completely beyond that.”

Another advantage of not being a lender or deposit taker is that Ipagoo does not have any conflict of interest with other providers. The Ipagoo account has been designed so that other products can be plugged into it. Mr Sanchez likens this to the functionality of smartphones, where users can customise the device with apps that suit their lifestyle. Negotiations are currently under way with third parties to connect their services to the Ipagoo account so the platform is similar to a financial supermarket.

Next-generation digital banks, says Mr Sanchez, will have to be customisable in this way. The banking industry is witnessing the emergence of digital players who are taking slices out of their traditional business by focusing on a niche such as savings, loans or payments.

In the past, banks offered all banking products, but now that is under threat. “Banks cannot do everything in the chain,” says Mr Sanchez, “but you still need an aggregator”, a role that he hopes Ipagoo – rather than the banks – will play in the future.

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