The financial crisis of 2008 led to the banking sector being faced with a series of challenges: customers now view them as greedy, non-transparent and not customer-friendly. In 2013 the Bank of England responded to this with an easier process and lower capital requirements for setting up new banks. It aimed to bring in new competitors and to fill the gaps in the existing banking industry.
Since this time, new types of challenger banks that focus on customer needs have obtained licenses. They are built on new technologies, are entirely mobile, provide greater transparency and analytics, utilise AI, real-time balance information, predictive banking, free transfers, no or low fees, higher savings rates, and they listen to their customers.
The challenge for the new entrants is that they have to go beyond just creating an attractive app for their customers - they also need to create superior products. What is more, they have to be fully licensed, get FSCS protection, earn customers’ trust, be safe and reliable and convince customers to switch from existing providers.
As described by Tom Blomfield, the CEO of Monzo bank, the new digital banks are pursuing two types of strategy: the first is an ultra-efficient balance-sheet model, where banks attract deposits and lend them out through innovative and low-cost products. The second, is the creation of a marketplace or an aggregator bank, that offers a selection of products sourced from various financial institutions and FinTech companies via a single mobile application.
It’s still early to know how these challenger banks are going to perform, but all the emerging players claim to have an answer and to create value for their customers. Let’s see who the current players are in the UK digital challenger bank market - we’ll look briefly at 4 banks: Atom, Starling, Monzo and Tandem.
In the last couple of weeks we have seen some exciting news coming from UK challenger banks:
- Atom has completed another round of financing, raising £83 million
- Starling has launched its current account in beta, announced a partnership with TransferWise and has become the first UK licensed bank to have a public, open API.
- Tandem has lost its banking licence after failing to secure funding from a Chinese investor
- Monzo raised £19.5 million from VC investors and closed its crowdfunding campaign having raised £12m five times oversubscribed.
The challenger banks are growing their customer base, but at this stage becoming a dominant player is still long way off. The question is, which one out of the 4 will be the fastest growing challenger bank of the future and which model will customers prefer?
Atom Bank
So far Atom has chosen to follow the first of the two strategies and to date has launched its Fixed Saver products, digital mortgages through selected independent advisers and business lending. It expects to follow up with current accounts, overdrafts, instant savings and debit cards sometime in 2017. According to Finextra, in the period between Atom’s opening in April of 2016 and the end of 2016, Atom has collected over £110 million in deposits via their fixed saver accounts. According to Techworld, Atom bank, unlike some of its competitors, has not built its own software, but has used existing systems from FIS as a basis for its infrastructure. Customers can log in to the app using voice and facial recognition, gaining access to 24/7 customer service, better savings rates and lower borrowing rates. The bank is planning further digitisation and use of artificial intelligence for its services.
In contrast, Starling, Monzo and Tandem are pursuing a marketplace strategy, that would offer financial products from various providers within their apps.
Starling Bank
Starling is the first UK licensed bank with a public open API and is a pioneer in Open Banking. On March 16 2017, it launched a beta of the app for its current account outside of private testers and has announced a partnership with Transferwise for international money transfers. Starling started with offering a current account where its customers could sign in to a bank account (via restricted license) where they were identified via biometric IDs, and could set up direct debits and make payments in and out of the account, including via the Faster Payments network. On top of that, the bank provides its customers with real-time notifications within the app, gives an option of turning its card on and off and interacting with customer service via chat or messaging. Starling has chosen to build a full-stack bank and created most of their IT systems from scratch.
Monzo Bank
Monzo (originally Mondo) is striving to build the “best current account in the world” via a mobile app. It would like to be the Facebook of banking, with millions of users worldwide and a “portfolio bank”, where in addition to the “best current account” it would be possible to obtain products from other financial services companies, such as Funding Circle, TransferWise, etc. It was granted a banking license by the FCA and PRA with restrictions in August 2016. It launched its app in public beta in March 2017 but won’t launch a current account until later in 2017. Its app is backed by a contactless pre-paid Mastercard, provides real-time notifications, zero fees, free transfers, 24/7 customer care and intelligent budgeting. Monzo is expecting to launch full UK free current accounts, overdrafts and will be covered by FSCS scheme later in 2017 after its license restrictions are fully lifted. It uses technology employed by Google and Amazon and is building its own systems from scratch.
Tandem Bank
Tandem was the second UK digital bank to be granted a license in June 2015. Tandem expects to gain customers’ trust by helping them manage their spending. The bank launched its app in beta in November 2016 and plans to offer credit cards some time in 2017. However, it has had to delay the launch of its accounts and loans services due to losing its banking license, which occurred because it failed to obtain the required capital committed earlier this year by House of Fraser. This in turn was due to capital restrictions from House of Fraser’s Chinese parent. Tandem plans to make money from a combination of interest margins on their own products and fees from helping customers to switch/choose products from other suppliers. Tandem has used off-the-shelf existing technology for its infrastructure rather than building a system from scratch, thus shortening its time to market.
The overall market share of challenger banks is still tiny. It is too early to talk about real disruption of incumbents, but challenger banks are certainly managing to attract attention of younger millennials and venture capitalists.
If you are interested in finding out how they are doing this, please watch our full interview with Tom Blomfield, the CEO and co-founder of Monzo Bank.