The Challenger Banks Practicing Digital Disruption in the UK
It is perhaps a little ironic that it was a financial institution so ancient and well-established that opened the door for the wave of challengers who have entered the market recently. Back in 2013, concerned about the long-term effects of a stagnation in the banking sector, the grand old Bank of England slashed the starting capital requirements for launching a new bank.
What was once a complicated obstacle course of checks and assessments became a streamlined process with only two phases, and the way was effectively cleared for a new crop of lenders and financial service providers. But who are these upstarts? And how are they disrupting and democratising what used to be an inherently closed and exclusive market?
The Main Contenders
In a digital economy, the landscape is liable to change at a moments notice. However, as of early 2017, the front runners of the digital challenger bank pack were the likes of Monzo, Atom, Starling and Tandem.
You might have noticed a pattern here. It's out with the stuffy, conventional "Bank of Such-and-such" monikers, and in with the snappy, single-word titles that sound like they could belong to detergent brands or energy drinks. This is just a part of the break from the old; a sign of the new order.
But let's not get too bogged down in semantics. Let's instead have a look at what each one of these banks is able to offer.
A lender with a restricted license since July 2016, Starling began to offer current accounts to customers in March 2017. A team of idealists and visionaries, Starling's executives do have the financial services acumen and experience required to back up their big dreams. Founder Anne Boden is a former CIO at Allied Irish Bank, while marketing chief Terry McParlane has held similar positions within the Lloyd's banking group.
Starling Bank's 'Pulse' Balance feature
While Starling embrace digital technology, they do not approach it as a gimmick which could help them to make a fast buck. Instead, the team's vision is of a full-service, or 'full-stack' banking operation.
"When I first envisaged the idea behind Starling, I was determined to deliver something really differentiating, that would be a step-change in banking experience," Boden explained on the Starling Bank blog.
"Since then we have been building the cake... the mobile banking app is the icing on the top."
Basically, Starling is what a traditional bank would look like if such institutions were agile enough to change with the times. Starling is able to integrate the capabilities of new technology into its practice, rather than merely paying lip-service to the new platforms and ways of doing things. With £70m raised in capital, the full-stack approach could be about to take off.
Starling is not alone in offering the full-stack experience to their customers. Monzo Bank - formerly known as Mondo, until a legal challenge torpedoed that idea - is doing something similar. It might be no surprise to learn, then, that Monzo and Starling share some of the same fundamental DNA.
Monzo was formed by former Starling executive and co-founder Tom Blomfield and the company was handed a restricted license in August 2016. As of April 2017, the organisation was providing test accounts to limited numbers of customers as they set about proving their capability to financial assessors.
Like Boden at Starling, Blomfield believes in what his team are doing, and in the advantages he is providing to retail finance customers. Blomfield, however, tends to be a little more scathing in his criticism of those who use existing structures;
"If you just want to see the same old products then go ahead and buy the pre-existing products," he said. "But if you want to be adaptable and deliver 21st century expected experiences, then you need to own the stack."
He has a point. If challenger banks are to offer a genuine alternative in the market, and if they are to be capable of taking the financial sector in a new and exciting direction, they must be inherently, structurally, new. If the products they offer are based upon existing frameworks, then it is simply an exercise in re-branding and re-packaging. Like Blomfield says, true challengers must 'own the stack'; they must be in a position to offer everything a customer can need.
Monzo have around £22m in capital, raised through a combination of different sourcing methods.
When asked to name the financial services hub in the UK, few would stray beyond the bounds of the M25. Fewer still would head to the opposite end of England altogether.
Not that the Atom Bank team cares. The Durham-based challenger institution is proud of its northeastern roots, and is leveraging these roots in the market, much as BT PlusNet did when it launched its "Yorkshire broadband" campaign. In fact, Atom are making serious headway in overturning the negative reputation that banking organisations have, post-2008.
"We're building a bank," they say, "with lots of heart and plenty of soul."
Unfortunately, Atom is one of the challengers who have drawn the ire of Tom Blomfield at Monzo, on account of their non-proprietary systems. Instead of building their own system architecture, Atom use pre-existing banking software from FIS.
This is accessed via a self-developed user interface, unique to Atom Bank, but it cannot be said that Atom have built the structure themselves.
That said, Atom do have the jump on the competition. They are no longer under any operational restrictions, having sufficiently pleased the regulators as early as April 2016, the same time that the bank's mobile application was launched, and with £135m in raised capital backing their efforts up, Atom could have what it takes to provide a genuine alternative for customers.
It's been a rocky road for Tandem, so far. The FCA and PRA approved the challenger's banking license in November 2015, but this license was revoked in 2017 after vital funding was withdrawn. However, despite this major blow to Tandem's credentials as a serious banking alternative, the London-based institution are still planning to launch a variety of features and products over the course of 2017.
This includes that vital piece of kit for any self-respecting rebel bank; the mobile banking app. As of April 2017, this app was still in the beta testing stage.
As the majority of Tandem's offerings are either in development or still on the drawing board, it is difficult to say whether the organisation represents a genuine revolution in banking or is just more of the same. The company have amassed an impressive level of funding however - even after losing out on the critical £29m earlier this year - with some sources placing the figure at over £100m. They also have a positive philosophy, which seeks to take banking in a new, more trustworthy and reliable, direction. We will have to wait and see what the rest of 2017 holds in store for Tandem.
Challengers for the Future
This chasing pack of challenger banks find themselves in something of an interesting position. The technology is available, and is more powerful than ever before; there is a distinct consumer appetite for change in the banking sector; and digital channels are growing in popularity. The stage is set for a digital banking revolution.
However, these financial institutions also find themselves facing the same problems. Public taste is a strange phenomenon and is difficult to bank on; many consumers may express their desire to jump ship and leave their unscrupulous old bank behind them, before deciding to stay put. If these upstart rebels - these fresh-faced pretenders to the throne - are to make any headway, they must first do two things; win consumer trust and provide a truly head-turning product.
Regulatory checks and minimum capital levels go some way to achieving the former, but the latter can only be accomplished via extremely attractive interest rates and other perks for consumers. How far these up-and-comers will be able to push this agenda remains to be seen.