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. 84 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.
Listen - The UK Tech Weekly Podcast discusses open banking and switching accounts:
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. One of only two banks on this list to have its actual banking licence, Atom was authorised to take customer deposits in November 2015 and launched in full after its regulatory authorisation restrictions were lifted in April 2016.
Atom Bank app for iOS
Updated 6 April 2016: On first glance the app is highly influenced by the Unity gaming platform is has been built out from. Everything is personalised with your name and the design resembles a mobile game, centred around various floating balloons on the screen. The security is through integrated biometrics, logging in via facial or voice recognition.
Current and saver accounts are still only available in beta for invited members. By the end of 2016 Atom will offer fixed savings, current accounts, overdrafts, debit and credit cards, instant access savings and residential mortgages, through its app.
Unlike Starling or Mondo (more on them later) Atom hasn’t built it’s 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.com, saying: “From our perspective the core engine needs to be bullet proof, 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 lets Atom 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 their 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 has raised £135m in capital so far.
The only other new bank to have acquired a licence is Tandem, which announced that it had received FCA and PRA accreditation on November 30 2015. Tandem is keeping its product closer to its chest than Atom and its website has less information on what it is up to than the competitors. What we do know is that Tandem will launch with a broad range of services, starting with current account, credit card, savings and loans.
Tandem has opted to use off-the-shelf technology to provide its core banking software and infrastructure with Fiserv’s 'pay-as-you-grow' Agiliti platform, which it developed in collaboration with Atom Bank chairman Anthony Thompson. This platform allows Tandem to go-to-market quicker than building the core system itself.
Earlier this year, founder Ricky Knox told The Memo: “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 not.
Funding: According to the FT Tandem has raised more than £100 million in capital ahead of a launch which is expected towards the end of 2016.
3. 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 Mondo 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 has 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 backend 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 £5 million in a seed round with Eileen Burbidge’s Passion Capital and is currently looking to raise £1 million in crowdfunding through Crowdcube (Update: The Crowdcube site crashed due to investor demand on the day of launch before completing the fastest raise ever on the platform). Blomfield told Techworld.com that he needs to go out and raise another £10 million this year ahead of launch.
Founded by Anne Boden, the former chief operating officer of Allied Irish Bank, Starling is well funded but is yet to acquire its UK banking licence, with the bank hoping to acquire its initial authorisation this year.
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.
Starling, like Tandem, is keeping its cards close to its chest for the time being, with details about its banking products and the app itself under wraps. What we do know is that Starling will start out by offering a limited selection of services, centring around current accounts. 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 £70 million to date, led by angel investor Harald McPike.