The digital-only banks – the hottest players in the challenger banking space – are a brave new cadre of disruptors which have cast aside the branch and manager in favour of hyper-intuitive apps and superior transparency. Many are pre-launch, all are early-stage. The big names are Monzo,Starling, Atom and Tandem, while newcomer Loot is also starting to make waves. Several hundred million pounds of unevenly distributed capital has been raised between them.
Each firm is taking a slightly different approach to shaking up the market. Loot, for example, has not opted to pursue a banking licence. Instead, the company holds an e-money licence. This means that while money held in Loot is ring-fenced and cannot be touched, it is not covered by the financial services compensation scheme. Most of Loot’s peers have gone the other way, spending a great deal of time and money in procuring banking licences.
There are, of course, a whole host of technical differences between the digital banks. But what binds these disruptors together? Here are the three key features (all Ms, coincidentally) of a digital-only bank.
Digital banks love mobile, and so do their customers. Atom Bank, for example, has often claimed to be the first bank to be built “exclusively” for mobile. But all of the big players have extremely slick mobile interfaces, and look to have been made first and foremost for mobile usage. This is hardly surprising, given that millennials comprise a large part (often the largest part) of their target customer bases.
The apps themselves go way beyond the typical high street bank app in terms of functionality. Accounts can be activated in minutes without any paperwork, and can be accessed using face and voice biometrics. Cards can be frozen and un-frozen at the touch of a button. Cash can be moved around with an ease that will be alien to most people.
Running a bank on apps rather than on branches creates a huge cost saving – one that ought to be passed through to the customer.
“In a self-service environment, which the digital environment clearly facilitates, as well as the benefits of speed and flexibility, customers will rightly expect to see a cost benefit accrue to them as they are in effect the ones doing the work previously carried out by bank staff,” said Craig Iley, UK MD of Atom Bank.
But cost aside, perhaps the biggest benefit of these apps is the level of oversight that they provide to users…
Never before has banking been so interesting. Most if not all of the digital-only banks perform some kind of categorisation of a user’s spending, helping them to better understand where they’re overspending, and how they can cut back. Categories can include things like food and drink or travel. The whole thing is fuelled by a generally more timely system for keeping tabs on payments. Some digital banks will notify users by phone alert the moment a payment is made on card. Compare that to a typical bank, where users will often have to wait days for payments to filter through, and the edge is clear.
“Transparency is THE battleground for banks over the coming decade,” said Iley. “The universal banking model where many income streams are blended and which allows banks to hide costs and unfair charges will be dismantled. Transparency is good for customers and good for competition.”
Mainstream banks are generally bad at offering transparency to the user. The Barclays app, for example, simply gives you “money in, money out” headline figures for each month. The level of granularity and timeliness delivered by the digital players far outstrips this.
Loot goes a level further. Rather than simply accumulating savings on a passive basis, Loot turns savings into something active by allowing users to set specific savings goals. You could have, for instance, three “Loot goals” – saving for a deposit, saving for a holiday and saving for golf lessons – and allocate spare cash to these accounts as you see fit.
Loot wants to know its customers’ spending so intimately that it will one day be able to offer them discounts on their favourite products via discount codes, and to make money through the process of referral.
But data-based referrals as a concept stretch far beyond coffees and cakes. In fact, they are a cornerstone of the whole digital-only banking mantra…
Many in the new wave of digital banks do not actually have many products of their own. What they do have are sexy user interfaces and a small number of uniquely useful, sensible and intuitive products that the big banks simply haven’t yet caught up to. The basic package for a digital-only, consumer facing bank is: mobile app, seamless on-boarding process, current account with card, high level of transparency.
From there, many of these next-gen banks plan to scale their models not by implementing their own products – like loans, mortgages and insurance products, which might not fit quite so neatly within a simplified banking proposition – but by using customer data to intelligently refer users to the financial services/fintech products that are best-suited to them (while making a fee on referral). They might build out their own bespoke products in time, but there's no reason that these can't sit within an online marketplace that's bigger than just one bank.
Starling Bank, which is yet to launch, is a big believer in the marketplace model. And there are some players in the wider fintech space that think the creation of a marketplace is the key to becoming a bank, of sorts. Personal finance management app Pariti, for example, has spoken before about creating a “marketplace bank”.
At present, Pariti helps users to identify and solve problems in their personal finances. The app is integrated with leading peer-to-peer lender Zopa, and uses Zopa loans to help consolidate its users expensive credit card debts.
When asked for his take on the three defining features of a digital bank, Atom Bank's Iley pointed to low cost models, transparency and innovation – the third of which to an extent encapsulates all of the above.
“For the first time in history it is possible to really challenge the pre-eminent positon of the banks and to disintermediate them,” he said. “If banks don’t respond by being innovative with their UX layer they will no longer be the ones having the conversations with the customers and they will be relegated to the commoditised dumb rails that the UX interface runs on.”