Digital challenger banks, a new breed of banks that aim to give customers a simple, transparent experience mainly through a mobile app, are starting to grow to maturity.
As a growing number acquire their banking licenses under new, more relaxed regulations since 2013 these "neo" banks have been quietly launching products, from saver accounts to mortgages, as they seek to draw disgruntled customers away from the traditional banks.
Atom Bank, based in the north east of England, far away from the fintech hub of London, has the jump on many of its rivals, launching its app in April 2015 and announcing that it will be offering a mortgage product earlier this month.
In a candid interview, Atom Bank CEO Mark Mullen ran Techworld through its product pipeline, explaining why it is getting into mortgages before current accounts as it plans to shake up the banking sector in 2017.
Atom Bank started providing two year fixed rate residential mortgages through selected independent advisers in December 2016, joining its two Fixed Saver accounts and SME business 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."
Atom works with 800 established mortgage providers, and will underwrite mortgages on its own balance sheet, making all providers searchable in a single, transparent way once this process becomes available on the app. However, the bank won't currently share a timeline for when the entire end-to-end mortgage process will be available through their mobile app.
Mullen believes that there are ways new banks like Atom, and smaller players like startup mortgage brokers Trussle and Habito, can remove some of the more tedious elements of the mortgage process with technology like robo advice and chatbots. However, fundamentally there is "no machine-only answer, that's not how you buy mortgages," he said.
"Here's the thing, the mortgage market is highly regulated for affordability and suitability and 80 percent of the current deals flow through traditional brokers and intermediaries. That is driven by the regulatory environment. It is an advised sales journey, so you have to have an accredited advisor to ensure you can afford the repayments and that it is stressed for if interest rates change."
Digital Mortgage by Atom Bank
Atom will continue to tweak and develop its mortgage product, as it does with all products, but Mullen says he is "pretty happy that the process we have built today gives us a strong foundation".
He wants to further digitise Atom mortgages and bring artificial intelligence into the process for greater personalisation. In the end everything will be "driven by regulator comfort levels, the interest of the customer and what the customer's emotional journey is, so where they need help and reassurance."
Digital mortgage brokers
Tom Blomfield, CEO at fellow neo bank Monzo told Techworld that the mortgage process doesn't have to be "entirely computer driven" but that banks should be using technology to make the process better for the customer. He said: "It doesn't matter if you type to a person or pick up the phone, what people don't want is to fill in 15 pages of forms and wait two months for a decision."
Daniel Hegarty, CEO of startup mortgage broker Habito, a world where his startup can partner with forward thinking banks like Atom, saying: “It’s very exciting to see a new lender coming to market with a digital offering, and seeking to partner with intermediaries who can ensure that customers receive the best advice possible. We look forward to working with Atom Bank in the near future and continuing the broader mortgage revolution."
When asked why it launched mortgages before current accounts, Mullen had a simple answer: it was Atom Bank's strategy all along.
"Right from the get go we wanted to start gathering deposits and lend that money to small businesses, which we started a few months ago, then lend to the residential mortgage market. When we completed those products we would expand our range to current accounts and to include the broader range of retail banking products and present them on an open platform," he said.
Mullen sees current accounts as an important product, but not one that brings much in for the bank as customers refuse to pay for a current account outright. This means banks are forced to make money from ancillary services like foreign exchange and overdraft fees. "We still believe we should have [a current account] but with a business model that is acting in the best interest of transparency and fairness," he said.
On a point of principle, these new banks are trying to distance themselves from overdrafts. Mullen explained: "The dirty secret of overdrafts is the people that pay the fees are people that can't afford not to." He says that aside from PPI, overdrafts are the most complained about banking product. He asks rhetorically: "Are banks being proportionate with their overdraft?"
Monzo has its own take on overdrafts, which it hopes to launch in 2017 once its banking licence restrictions are lifted and it can offer customers a current account. The Monzo approach is to inform customers when they are at risk of becoming overdrawn and offer to lend the required money at a fixed rate. This rate will still be in the "double digit" interest range, Blomfield says, but there will be "no crazy fees. Most banks charge in the triple digits once you add it all together," he said.
When it comes to his own point of principle, Mullen says Atom won't be manufacturing a credit card. "I don't like the dynamics of a credit card business because revenues associated are generated disproportionately and invisibly," he said. "You have those that can't pay it off and those that can, but you have interchange fees, overseas charges and ATM access charges are disproportionate."
He continued that while Atom is "not here to tell a customer they shouldn't have a credit card" it will help customers to find the best deal and then manage it in a single place: the Atom app.
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.
Atom Bank has raised £135 million in capital from Banco Bilbao Vizcaya Argentaria SA and fund manager Neil Woodford so far, and is reportedly looking to raise another £100 million. In terms of future funding Mullen said: "We have a fantastic investor base and are working to look at the next capital raise on our balance sheet for 2017." He says this money will be primarily used to grow its balance sheet rather than for operations and product development.
He added that investors "don't have indefinite patience, so we need financial viability, as opposed to being a nice tech business".