Digital-only Pepper has quickly gained ground in its home market of Israel. It remains in the middle of two worlds, being an arm of Bank Leumi but maintaining a very separate brand and operation. Patrick Brusnahan discusses strategy and future plans with CEO Michal Kissos Hertzog
Pepper was launched in Israel nearly two years ago as a fully digital alternative to incumbent banks, despite being part of Bank Leumi.
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It is completely mobile and has no account fees other than for exceptional events such as a returned direct debit. Accounts can be opened within eight seconds, and other banking services such as loans and cheque books are offered.
Pepper CEO Michal Kissos Hertzog says the goal was to offer something “as easy as WhatsApp, as fun as Facebook, and as intuitive as Instagram”.
Customers coming in
According to Hertzog, the challenger has attracted “hundreds of thousands of customers” since launching; the real surprise, however, is where most of these customers have come from.
She explains: “When we started Pepper, we thought that 50% of Pepper’s customers would come from Bank Leumi. Actually, we see now that only between 25% and 30% of our customers are coming from there; this means that we are recruiting and acquiring customers from other banks. This is another fact that emphasises our success.
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By GlobalData“It’s not only the facts though. It’s the understanding that Pepper is just at the beginning of something. There was once a question of ‘why do you need a digital-only bank on mobile?’ I don’t think this question is being asked any more.”
Unfortunately, due to certain regulations in Israel, Pepper can only be a customer’s second bank account. This means you need to already have a bank account to open a Pepper account; however, new rules mean this restriction does not apply to younger people.
Hertzog says: “There is a new regulation that just kicked in two weeks ago, that actually allows Pepper to open first bank accounts to young people between the ages of 16 and 18. We’re the first in Israel for this, and the amount of onboarding of people between these ages is beyond our expectations.
“If you’re an adult, yes, Pepper will be your second account,” she adds. “Then our work will be to make you want to be active – to switch from your first account to your second account.
“It doesn’t really matter for me if you’re closing your first account or not, but I want you to use Pepper as if it is your first account. I want you to bring your salary into Pepper; I want you to take a loan in Pepper, to save, to use our credit card as your main credit card and so on.
So that means if you’re an adult, or if you are a teenager between the ages of 16 to 18, Pepper will be your first account. There is no question there.” While Hertzog would not share exact figures, she describes the number of active users as “more than expected”.
Startup or Incumbent?
While Pepper is linked with Bank Leumi, their core banking systems are not shared; Pepper’s are completely different. It did not want to “just be digital scale, like the other apps”, but “digital from the core”.
Building this ecosystem from the ground up gives Pepper something unique, believes Hertzog, especially given the number of other banks that are trying to do something similar.
She says: “We initiated our ecosystem versus, for example, the UK where the incumbent banks are not initiating anything, they’re reacting. RBS building Bó now is not initiation or innovation: it’s reacting to the fact that people are switching from RBS to Monzo, Starling or Revolut.”
So, does being a part of a bigger bank give Pepper the advantage over other startups trying to break into the market?
“I think there is a pro and a con,” Hertzog notes. “From the perspective of launching a brand, people are more cynical about a challenger bank that was built within an incumbent. It’s easier for Monzo or N26. For a challenger bank that was built within an incumbent, there is sense that we need to prove ourselves more.
“I think that the advantage is more than the disadvantage that I just mentioned, in that we are really using a lot of Leumi knowhow. In cyber, in compliance, in legal and in regulation, we are getting these kinds of know-how. You need the years of experience, and we actually know that this is our advantage because we have them.
“All the other stuff that needs to be new, different, innovative and breaking the status quo, that’s Pepper. This is the advantage that’s totally 100% Pepper.”
The relationship with Bank Leumi is not hindering Pepper in terms of launching new products. The mobile-only bank considers Leumi to be more of an “investor”; however, the key difference is that it is not similar to “a regular investor like Monzo or Revolut has, because there the investor is looking to get the investment back in three to five years,” Hertzog notes.
The problem Hertzog has with this kind of investor is that they “don’t really care about the value proposition, or being customer obsessed, or being the innovator leader”.
In contrast, Leumi places that as a priority. “Leumi understands that to be at the forefront of innovation, you need to be truly, truly digital,” Hertzog adds. “You need really to be obsessed about the customer. It’s an essence of your survival in the future.
“Pepper has to succeed. It’s not even a question, because Pepper is the future for Leumi.” She continues: “We are not dependent on Leumi. Our core system is Temenos, whereas Leumi’s core system is IBM mainframe. Our developers are different from their developers; we have our own. I’m in charge of my own developers, who are building different things. Everything is different; it’s not just the brand.”
Looking to the future, Pepper has distinct plans. Its priority is to up its scale in terms of products, and it is currently working on joint accounts and a third app, Pepper Invest, an offering that will focus on securities and investments. There are even rumours of Pepper launching its proposition in the US.
“We are working on being better, improving our proposition as we go,” Hertzog explains.
“When you have hundreds of thousands of customers, you have more needs that you hear from them. It’s constant: when do you have this? How you improve this? How do you do this? It’s constantly answering to demand and also to market change.”
Hertzog concludes: “We think we are dealing with a world where customers don’t like to handle their financials – either because they didn’t care, or because they were afraid, or they think it’s complicated, because we told them it’s complicated. I think we are there to help them.”
