As the dust settled on the 2008 financial crisis, the Bank of England started a process that would eventually open the door for a new type of bank to enter the market.
In an attempt to introduce more competition into an industry that was seen as a black box from the outside and which had lost touch with its customers, the Bank of England revealed a simplified two-step process with lower capital requirements for setting up new banks in 2013.
Two years after these changes the Bank of England reported a visible change in the market. It said: "We expect this trend to continue over the next few years, particularly where there is a gap in the market – whether it be the service they provide, the customers they target, the products they sell or the technology they use."
A YouGov survey from 2013 shows just how far the public's trust in the banking industry had eroded. Eighty-four percent of respondents agreed with the statement "bankers are greedy and get paid too much".
This is where the challenger banks come in. These new banks can start afresh from a reputational and technological standpoint. Not only have they not been tarnished with the financial crash but they can build their IT systems from scratch, saving on the costs of maintaining sprawling legacy systems, not to mention a network of expensive brick and mortar branches on the high street.
Fast forward to 2016 and this new breed of bank is starting to get licensed. These banks are looking to appeal to modern customers with an entirely mobile, digital banking experience, with greater transparency around where your money is going and how they operate internally.
They promise to offer digital products that live on your phone, with potential features like real-time balance information, deep-dive spending data, biometric security, open API integrations, no foreign exchange charges, simple money transfers and artificial intelligence layering for more predictive banking.
Let's not get carried away though. However good an idea a new type of bank sounds, it is far from simple to execute. First they have to acquire a licence, then they have to create a product that is so much better than the incumbents that it drives people to switch their bank, something consumers don't tend to do.
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Lastly there is the issue of trust. It is mildly annoying when Uber crashes and you lose a taxi. There's much more at stake when you make an important transaction. So these new banks know full well how important a reliable service is when trying to convince people to trust a new type of bank with your hard-earned cash.
As experienced fintech commentator Chris Skinner told Techworld.com: "People talk about "the Uber of banking." There is no Uber of banking. There won't be one, and anyone that has the ambition to be one will hit a wall."
Skinner wasn't all doom and gloom though. He added: "Some are starting with the idea that they want to be a cool tech-based digital bank but they don't have a clear idea of where their customers will come from. Some are more seasoned and understand the customer propositions, and those are the ones I have more confidence in."
My (entirely arbitrary) criteria for ranking these new digital banks, in descending order of importance is: Do they have a licence, funding to date, people (the pedigree of both the internal leadership and its investors), breadth of banking products, user experience of the mobile app and branding/marketing.
So, the banks, in order:
1. Atom Bank
The only bank on this list based outside of London, the apparent beating heart of fintech, comes out on top: Atom Bank from Durham in the North East of England. Atom was authorised to take customer deposits as long ago as November 2015 and launched in full after its regulatory authorisation restrictions were lifted in April 2016, when it launched its mobile app.
Atom Bank app for iOS
Atom Bank started providing two-year fixed rate residential mortgages through selected independent advisers in December 2016 to join its two Fixed Saver accounts and SME lending product. Customers can track any changes to their mortgage progress after receiving a decision in principle (DIP) through the Atom app.
The current process doesn't exactly sound game-changing though. Atom says: "Customers can find an intermediary who is able to discuss Atom mortgages via our customer support team," via email or phone. Atom works with 800 mortgage providers and will make all providers searchable once this process becomes available on the app, with the bank unwilling to share a timeline for this functionality at present.
Atom also told Techworld that it is working on a mortgage tracking service, similar to that offered by startup mortgage brokers like Trussle and Habito, but again provided no timeline.
Atom will be launching a full suite of banking products throughout 2017, including current accounts, debit cards, overdrafts and instant access savings, all of which will be managed via the app.
Unlike Starling or Mondo (more on them later) Atom hasn't built its core IT systems from scratch, instead building on commoditised banking software from FIS before layering integrations within the middleware and building a unique front end (the mobile app) on top. Atom will offer a full repertoire of banking products, from current accounts and savings to loans and mortgages for both personal and business customers.
Chief innovations officer Edward Twiddy explained the motivation behind this approach to Techworld: "From our perspective the core engine needs to be bulletproof, located in a bullet proof environment. It doesn't need to be fancy." Twiddy explained that the core systems that facilitate the moving of money need to integrate with a number of legacy systems, and regulators and credit unions would be more comfortable integrating with an established, commodity software.
Atom bank has an impressive pedigree at board level, with the co-founder of an established challenger Metro Bank, Anthony Thomson, as Chairman, and CEO Mark Mullen was hired from HSBC's internet and telephone banking division First Direct.
Being from the North East allows Atom to present a good, honest northern front, much like BT did with its marketing of PlusNet as "good honest broadband from Yorkshire," after acquiring the small internet service provider (ISP) for £67m in 2007. In Atom's words: "Based in Durham in the North East, we're a passionate bunch of people who want to make banking better. We're building a bank, with lots of heart and plenty of soul."
Funding: Atom Bank has raised £135m in capital so far and is reportedly looking to raise another £100 million.
2. Monzo Bank (formerly Mondo)
Set up by Tom Blomfield following his controversial exit from rival challenger Starling (which he co-founded with Boden after exiting another fintech company he founded, GoCardless, in 2013), it is not surprising that Monzo is seemingly founded on similar principles to the above. Namely: a full-stack approach to the technology and a user-friendly, data driven approach to personal finance.
Update 26/08/2016: Mondo officially changed its name to Monzo following an undisclosed legal challenge.
The company was granted a restricted banking licence by UK regulators in August 2016. This means the now-official bank can hold customer money and start to test out products like current accounts, as it seeks to prove to regulators that it can operate as a fully functioning bank, after which the restrictions will be lifted.
Blomfield is openly critical of challenger banks that are building off of established, commoditised banking IT systems: "If you just want to see the same old products then go ahead and buy the pre-existing products, but if you want to be adaptable and deliver 21st century expected experiences, then you need to own the stack. If you were to ask Google or Facebook if they could have delivered on a generic back-end and built a nice front-end they would have laughed."
Monzo wants to make it possible to open an account without a human conversation, in under a minute and with as much starting capital as you want. As Blomfield puts it: "I'm not asking people to get married on the first date. So deposit fifty quid and we'll give you a card and you can see how it works, and if you have a problem see how we deal with that."
Thanks to being one of the most open in its approach, Monzo's app is the one we know the most about from a features perspective. There is a real-time breakdown of your spending habits, quick mobile money transfers, integrations with the likes of Transport for London, Uber and fellow fintech company Nutmeg, some AI layering to better predict your banking habits, zero foreign exchange rates and possibly biometrics for security.
Blomfield feels that a challenger bank will have a truly disruptive impact on the industry and become one of those can't-live-without home screen applications, saying: "There will be bank started this decade that will be the size of Google or Facebook."
You can also keep up to date with what Monzo is up to through its product roadmap, which is a publicly available Trello board.
Funding: Monzo raised a £19.5 million investment round with Thrive Capital, Passion Capital and Orange Digital Ventures in February alongside a £2.5 million crowdfunding round on Crowdcube (the Crowdcube site crashed due to investor demand from Monzo's previous £1 million round). This brings total funding to £22 million.
3. Starling Bank
Founded by Anne Boden, the former chief operating officer of Allied Irish Bank, Starling received its initial license with restrictions in July 2016 and started accepting beta customers to open current accounts through its app in March 2017.
Where Atom Bank has built its core banking systems on commoditised banking software from FIS Global, Starling is building its IT systems from the ground up, in-house, something it refers to as a "full stack" approach. For a fuller explanation Boden’s blog post on the subject is pretty succinct.
The app will offer alerts for smarter money management, helping to avoid customers incurring unwanted fees. You will get a real-time picture of your accounts and spending and money transfers should be seamless.
Head of marketing Terry McParlane told Techworld.com: “We’re trying to flip the banking model on its head. Where banks have used data against their customers, our approach is taking the opportunities of the technology and open APIs to empower customers on how to use their money.”
Funding: Starling has raised £70m to date, led by angel investor Harald McPike.
Tandem received FCA and PRA accreditation on 30 November 2015 but received a setback in March this year when its banking licence was suspended after investor House of Fraser pulled out of supplying a proposed £29 million of funding due to “uncertainty about whether China’s State Administration of Foreign Exchange would approve the transaction”.
The challenger bank needed the funding in order to take deposits and offer basic retail banking services. CEO Ricky Knox told the Financial Times that Tandem is still planning to unveil its app in the coming months, but “we will no longer be launching savings accounts in the short term", he said.
In November it launched its app in beta for what it calls a community of "cofounders" to open a savings account. Credit cards, loans and current accounts are due to be rolled out sometime in 2017.
Tandem has opted to use off-the-shelf technology to provide its core banking software and infrastructure with Fiserv’s Agiliti platform, which it developed in collaboration with Atom Bank. This allows Tandem to go-to-market quicker than building the core system themselves.
CEO Ricky Knox told The Memo in 2016: “A really cool mobile app is great, but it’s not what is going to drive mass customer uptake.” Where Tandem is looking to stand out is in its proactive approach to money management, helping customers make their money go further instead of the bank looking to sell products that will make them money. This will come in the form of notifications if you miss a payment or approach your overdraft, as well as preferred rates for alternative savings and investment services, both with Tandem and third parties.
Tandem appears to be focusing its marketing on millennials, as well as distancing itself from the sort of banking institutions the public seems to have lost trust in. Tandem therefore is a “good bank” and a “new bank built by people like you,” as shown by its Twitter cover image of people in casual clothing, some with beards, some without.
Funding: According to the FT Tandem has raised more than £100m in capital ahead of launch.