With new providers and products springing up with dizzying regularity, just how on earth do you choose your digital bank?
Beware! This article is an unabashed plug for our awards. But it might also interest you. Perhaps the hottest new category in the upcoming AltFi Awards (now in its fourth iteration) is Digital Bank of the Year. A year ago, this category might have passed unnoticed. Two years ago, there would have hardly been any entrants. Now, after a year of frenzied fundraising and product expansion, supplemented by a constant stream of app-banking converts, the digital banking sector is perhaps the jewel in the fintech crown.
But how does a judge – and, indeed, a customer! – pick between the bevy of digital banking options? What separates one from the other?
The question is not a straightforward one because all of the biggest names in digital banking share certain characteristics. Those names, by the by, include: Monzo, Revolut, Starling, Atom, Tandem, Loot, Yolt, N26, Fidor, bunq, Curve, Tide and so on. Some target consumers, some businesses, some both.
For all these firms, you can bet on certain features. There’ll be a slick sign-up process with hassle-free KYC/AML checks, often conducted using biometric or facial recognition technology. They’ll be app-only or at the very least mobile-optimised. They’ll offer low-cost or free services which are possible only because they’re absorbing cost themselves (incidentally, they’ll all have raised a good chunk of equity money). They’ll do instant payment notifications, card blocking/unblocking, spending categorisation and analytics, savings goals, and some form of fee-free/low-cost spending overseas, whether the currency conversion is controlled by the user or by the bank behind the scenes. They’ll have big plans for Open Banking/PSD2. They’ll have a cross-selling strategy that is hinged either to a marketplace of integrated third-party products or, in some cases, to their own products. They’ll have signed up users in their droves.
But despite these similarities, there are also clear differences in approach.
One clear difference is the focus of the various combatants. Take, Monzo, Revolut and Starling. Monzo has more or less been entirely focused on building the world’s best current account (a common refrain of founder and CEO Tom Blomfield). Revolut, on the other hand, wants to expand into every niche under the sun, as quickly as it possibly can. Users of the app already have access to currency exchange, international transfers, insurance, wealth management, investment and credit, to name but a sample. It is indicative that Revolut users will soon be able to convert to digital currencies, such as bitcoin and Ethereum. Starling is somewhere in between the two but, with its much-vaunted marketplace, looks as though it will take its lead from Revolut.
How is a judge or a user to look upon the landscape? Will they favour the steady focus of Monzo, or the breakneck expansion of Revolut? Monzo is essentially playing the long-game. Nearly all of the company’s medium-term goals (which may be viewed via its online product roadmap) relate to the fine-tuning of its current account offering. These include faster payments, standing orders, direct debits, international money transfers, overdrafts, current account switching service integration, bill splitting and savings pots/virtual savings accounts, all of which are set to be implemented within 6-9 months.
It’s anyone’s guess what Revolut will be up to in 9 months (my guess is building sentient robots that’ll come round to your house and give you financial advice). As one industry observer told me at the recent LendIt Europe Conference: Revolut is either going to be the next financial services giant, or is going to implode. Our judges will have to decide which is more likely.
It’s a fact that digital banks are going to try to sell you stuff. There’d be no point in losing cash hand over fist to win thousands of highly engaged customers otherwise. But the way they plan to sell you stuff varies bank-to-bank.
Revolut currently operates a marketplace that is powered by integrated third parties (often fellow fintech firms). P2P lender Lending Works powers its consumer credit offering. Simplesurance powers its mobile phone insurance product. ETFmatic is its dance-partner for wealth management. The list goes on. It’s a curated marketplace with Revolut handpicking which partners to work with – the customer simply has to trust that they’ve picked well.
Yolt has a somewhat different approach, in that it tends to partner with comparison sites, rather than providers, so that consumers can easily browse the market for such services as money transfer.
Starling has a marketplace of third-party partners, such as TransferWise and Moneybox. It plans to work non-financial partners into the marketplace soon. But muddying the waters somewhat for Starling is the presence of its own products. The bank offers users what it calls “a fairer overdraft”. That fact alone may preclude it from offering consumer loans via a third party. It’s difficult to claim to make unbiased product recommendations if your own products are on the menu.
Atom Bank, best-funded of all the disruptors in this space, isn’t interested in third-party products, instead focusing on its own. At the heart of its offering is a speedy online mortgage product.
Which of these strategies will win over the hearts and minds of our judges?
Put simply, some digital banks are trying to lure customers away from incumbent banks entirely, some aren’t. Both groups want to “own” (forgive the jargon) the customer, but some don’t care whether that customer also remains a customer of a traditional bank, or several. These players are tailor-made for the era of Open Banking. Their game is essentially to plug into a user’s existing bank accounts via API and to optimise their experience by giving them a consolidated and intuitive oversight of their finances, with all the associated bells and whistles (spending insights, etc.) attached.
This approach – which we refer to as “layered banking” – is fundamentally different from the approach of Monzo, Starling and Revolut, which aggressively pitch themselves as direct replacements for old school bank accounts. Loot, Tandem and Yolt, on the other hand, are your classic optimisers.
With Open Banking and PSD2 looming, will judges be seduced by the “layered banking” play? Or will they gravitate towards the arguably more ambitious Monzos and Revoluts of the world.
There is a common misconception that digital banks and their services are free. They are not. They’ve certainly shaved away a lot of superfluous cost for services like overseas usage and global remittance. But as we’re currently seeing with Monzo, digital banks are first and foremost businesses and at some point even very well backed businesses have to make money.
After polling its users on their preferred pricing structure (very quaint), Monzo announced this week that it would begin charging 3 per cent for any international cash withdrawals made over a free allowance of £200 per month by current account users. For those still using Monzo’s pre-paid debit card, they will receive only one free withdrawal of up to £200 per month.
Revolut employs a similar structure. It also makes money on various other products, including its money transfers, which it advertises as the cheapest on the market. Furthermore, the company branched out into business banking in June, a solution which is compatible with 25 different currencies. There are three different packages on offer, with prices ranging from £25 to £1,000. Revolut also offers a premium service for consumers.
Cross-selling is of course another area in which digital banks hope to make money, via commission. Those that offer their own debt-based products will again make money here.
The difficulty in digital banking is the precedent that has been set: young users expect services to be either be free or extremely cheap. But the banks, like all fintechs, must find scalable means of making money. Striking a balance between these two forces will be a key factor in determining the long-term success of a digital bank – and will also be a key factor in the thinking of our expert judges.
This is a broad one, but arguably it’s the most important. It’s also the most difficult to quantify. Let’s be honest, all digital banks are head and shoulders above incumbents in terms of look, feel and ease of use. But there are ways of separating from the pack. Revolut, for instance, is hoping that its chatbot Rita can give it a boost. But having used Rita myself, I can tell you that her capabilities aren’t especially far-reaching, and nine times out of ten you end up being passed onto a customer agent.
The speed with which customer queries are dealt with is an important factor, particularly so for a young industry trying to win the trust of a new generation of customers. The forums of Revolut reveal instances of disgruntled customers who’ve had to wait longer-than-expected for international payments to go through, and have then struggled to get answers out of the banking app's customer support team. I’m sure the firm will be tightening up on that front, but a sense helplessness is not a helpful thing for customers to be feeling.
Helpless is also how users of Monzo will have felt during the multiple technology glitches that have been suffered by the firm. Technical issues with its card processor meant that users of its prepaid debit card have several times this year, for short periods of time, been unable to make payments. Again, winning the trust of customers is the single biggest challenge for digital banks, and delivering on expectation is the key to that. Card outages do not help.
Digital banks are very lean businesses. Unlike their aged counterparts, they’re able to roll out new products with speed and relative ease. Increasingly, I suspect the product offerings of digital banks to merge, while of course some of the aforementioned differences will remain. But user experience is perhaps the single greatest differentiator in digital banking. It will be fascinating to see which of the banks is currently leading the field in this aspect in the minds of our judges.
Applications for the AltFi Awards close at midnight on October 30th. Judges will assign a score out of five to applicants across a number of different fields, such as user experience, transparency, financial inclusion impact, and so on. Our hope is that this format will generate meaningful feedback for applicants, irrespective of who wins. Our independent panel of judges is comprised of sector specialists from a wide range of backgrounds.