While digital services such as Uber and Airbnb have swiftly turned entire industries on their head, the banking sector has so far been resistant to this level of change.
That may not be the case for long, however.
“It feels like we are at a tipping point where the entire industry is teetering on the edge of a cliff and it is about to give way,” says Tom Blomfield, CEO of Mondo, one of a new breed of mobile-focused banks emerging since financial regulators relaxed rules for new market entrants two years ago.
He believes that the pace of innovation being witnessed in retail banking will create upheaval for the industry, and particularly its established players.
“We have seen it other industries: Blockbuster when Netflix came in or Kodak when digital took over from film, or Spotify with music. A lot of print journalism went the same way as well.
“So I do feel like there is an Uber moment for banks.”
Blomfield created Mondo this year after leaving another startup bank, Starling, setup by former AIB chief operating officer, Anne Boden, taking three senior staff-members with him.
It is Oxford graduate Blomfield’s third startup venture. He also founded successful fintech firm GoCardless, an online payments company handling direct debits. “I have a background in financial technology – I know how the plumbing works,” Blomfield says.
It has now begun its banking licence application process, taking the first steps with the Bank of England last week, and is eyeing a launch next year.
Mondo's mobile banking app (pictured) will be available as a trial in two to three months
Taking on the big banks
Unlike the established lenders, Mondo will provide services almost entirely via a mobile app and cash card.
According to Blomfield, Mondo’s technology platform – which it has built from scratch - has allowed the firm to create the functionality demanded by digital-savvy customers. This offers an advantage over existing banks, which are held back from innovating by creaking infrastructure.
“Mondo arose out of, not just mine, but the entire team’s frustration with the existing banks,” he says.
“In the 21st century, when you can order an Uber at the click of a button or sign up for Amazon Prime and get one hour delivery of almost any item in existence, the idea that banking hasn’t changed in decades and decades is extremely frustrating.”
Offering innovative personalised services through mobile devices is central to Mondo proposition. The company intends to incorporate cutting-edges features such as biometrics and geo-location services from the very start, as well as detailed notifications about spending.
“Lots and lots of banks are talking about these kind of features like they are science fiction. I think we have actually built it now,” he says.
“It is about giving customers minute by minute control over their finances.”
For instance, this means sending alerts when an account is being used fraudulently in a different city. “You can use the geo-location chip in the phone to do some really interesting things,” he explains.
“We might know that your phone is geo-located in London, but we get a point of sale card present transaction that comes up in Manchester. We can send you a notification and say we have flagged this for fraud.”
Users can also receive notifications to the Mondo app when they are about to go overbudget, using real-time data and past purchase information. “We can tell you very, very quickly if you are going to go overdrawn, and let you turn off your account. Or we can offer to lend you money.”
Starting from scratch: Mondo has created a bespoke 'full stack' technology
The ability to provide these features is due to its bespoke banking technology platform, says Blomfield. “We are doing it based on 21st century technology that we have built in-house and we absolutely trust. I think that is what differentiates us.”
While creating a startup bank is no small feat, it is not an insurmountable task from a technology point of view at least. Mondo has decided to build its entire banking platform in-house, from scratch, in just a few months.
“The approach we are taking is very different from basically every other bank and startup bank out there. We are not taking a package 'off-the-shelf',” he says.
“We looked at all the packages and frankly we couldn’t find any that are fit for purpose. The real problem is that they are designed to do everything – from SME lending to mortgages to derivatives trading. We are almost offering a Gmail account for your finances, really, really focused in on the current account.”
He contends that Mondo's technology platform will allow it to adapt quickly to providing new services in future.
"This year it might be wearables Apple Watch. Next year it might be Google Glass that becomes de rigeur, or embedded technology in your wrist, or even voice or thought activated technology. Because our key competency is our tech, it lets us stay really current.
"We are not building on someone else’s platform, we don’t have to put in a change request and wait for six months for stuff to be auctioned. We can come up with an idea and build it on the same day and be trialling it with users that evening."
Batch processing vs real-time data
Blomfield claims that by building a modern banking platform it can create more reliable services than the incumbent banks too. This means relying on real-time data rather than batch processing which has been the mainstay of banks since the inception of mainframe computing.
“Batch processes are a legacy of when branches used to literally shut their doors at 5.30pm and gather up all the pieces of paper during the day and then go through them one by one applying them to accounts,” Blomfield said.
“One of the key ideas is that we don’t want to be reliant on this overnight batch process. That is very often what you see bringing the banks down: a lot of the technical outages you see at some of the big high street banks are because of failures in the batch.”
To create a more reliable IT infrastructure, he says that Mondo will rely more on the technology approaches of the internet giants, rather than the traditional banks. For example this means it a microservices architecture that allows computation to be spread around a number of servers – a more efficient and dependable method of processing information.
“We use technology from Google and Twitter – stuff like Mesos and Marathon which are basically a way of distributing your applications amongst a number of servers.. So lots of individual components that just sit there doing one thing really, really well. You plug them altogether and you get a fully functioning bank.”
Can the big banks keep pace with innovation?
Taking on the big banks with decades of experience in the sector, talented staff and huge IT budgets is an immense job for a startup. However, it is precisely their size and lack of historic investment in technology which could make it tough for the established players to keep up, says Blomfield.
Many of the new threats to the banking sector are highly specialised - such as peer to peer lending, payments or mobile-focused current accounts. This makes it difficult for banks to innovate at the speed of so many varied startups, each trying to encroach on the edge of the banks' offerings.
“The big banks are full of really smart, innovative people who are unbelievably frustrated because: ‘a’ their legacy technology cannot keep up, and ‘b’, just the internal politics and culture of getting stuff done is incredibly difficult.”
Throwing money at the problem is unlikely to have the desired effect either, says Blomfield.
“Most of the high street banks have over a billion pounds a year spent on IT. That is crazy. We could build a hundred banks for that, and they still can’t get stuff done.
“Replacing that tech is just so risky that no one else is going to try to do it. It is a multi, multi billion pound project that is going to take five to ten years, and even then risk failure.”
Neither does he believe that the banks launching a subsidiary is a viable proposition - leading to what he describes as the "innovators dilemma".
"The banks are pretty profitable right now and what they need to do is come in and undercut their own business, they need to devour their own business. It takes a pretty brave executive to say ‘we are going to fund this internal project, which, if it is successful, will have our revenues’.
“But if they don’t, someone else is going to come and eat their lunch.”
Blomfield (third from right) meeting the Bank of England during the start of Mondo's banking licence application
Funding and future plans
Mondo has so far received £2 million investment from Passion Capital – an investor in Blomfield’s previous endeavour, GoCardless. He expects the firm will need another £15 million to meet capital requirements before the bank would be able to launch – somewhat less than the £75 million reportedly cited by one of its competiting startups, Atom, which was recently successful in gaining its own licence.
But accessing funding is just one challenge for a startup bank. Knowledge is also key. “You need to assemble a team with relevant experience. So you need not just technology, payments, marketing and customer expertise, but retail banking knowledge. Do you know how the system works? Do you know how to run personal lending and how credit cards work?
“It is a bit different from most other startups because there is the licence that you need and the [access to] capital – so this is not a business you can start in a bedroom with a couple of friends.”
Going forward, a trial of the mobile app will begin in three months to get feedback from customers on the mobile app, prior to a proposed full launch next year.
“Twelve months without launching is a long time for a startup. The biggest risk you face is you are not sure you are making something people want - are we just fooling ourselves?
“Our ethos is always just to engage unbelievably early with the customers to solicit their feedback to ensure that we are building something that they want.”
Blomfield expects that despite the focus on innovation and modern technology, Mondo will not adhere to a stereotype of ‘millenials’ being its only audience.
“We are targeting a type of behaviour and a mindset more than an age group. We are targeting the type of person who lives their life on their phone, who can’t be away from email or Facebook or Twitter for more than a few minutes or they get a little bit twitchy.
“You can say that most of those people sit in the age range of 18 to 30, and perhaps they do. But I know 50 or 60 year old who meet that description too.”