Authorisation, and joining the real world
2016 was the year that most challenger banks received their FCA authorisation, but as many would argue, that alone doesn’t make a real bank. It was in 2017 that digital banks began to integrate the features that would turn them into a fully-fledged financial institution.
For some, that meant creating a current account. On this front, Starling Bank was way ahead of the game, with rivals like Monzo and Atom Bank fighting to catch up. Monzo finally released its current account in July, and has now closed access to its expensive pre-paid debit card for good. Meanwhile savings bank Atom had to delay its current account offering until next year, leaving it firmly behind the pack in on-demand banking.
For others, it meant integrating normal banking features into their newly-minted bank accounts. 2017 saw Starling Bank and Monzo join the Faster Payments scheme, offer Direct Debit functionality, and even provide users with arranged overdrafts. Some have also begun to target SMEs and entrepreneurs with digital-only business banking, and with great results. Banking app Revolut has seen over 16,000 users sign up for its business accounts since launching in June, and business-only bank Tide can now claim to corner 7 per cent of the UK’s business banking market.
As we look towards 2018, we can expect to see more digital banks widening their offering towards those in the business game and establishing themselves as proper banks in their own right. European applications have been rife, with Revolut recently applying for an European banking license and Starling Bank being accepted into Target2, the EU’s payment system for large Euro transactions. Excitingly, Starling Bank has also received permission to offer its own financial services app store to users this month, meaning we can expect to see products like loans, insurance and mortgages on the horizon.
Alternative currencies, and going global
In a slight twist from the usual programming, 2017 has seen digital banks expand into the world of alternative currencies as they jostle for a unique offering that will make them stand out from the pack. This month in a first for digital banking, we saw Revolut launch support for buying and exchanging cryptocurrencies inside its banking app, as CEO Nikolai Storonsky labelled it as the “number one requested feature” for Revolut. Others chose to look outside of crypto, with banking app Glint launching earlier this year with the ability to buy and conduct payments in gold.
In addition, many based in the UK are now eagerly looking to expand their offering to target customers abroad after closing some amazing fundraising rounds this year. Some, like Revolut, are already widely available to users in Europe, challenging local rivals like N26 for market share. Digital stalwarts Monzo and Starling have been open about their plans for US expansion in the coming years, with both Revolut and N26 set to launch across the pond in 2018.
In a move to become more profitable, we saw many digital banks focusing on operating their own financial services marketplaces this year. Starling Bank launched its marketplace in September, based upon its own Open API framework which has now seen multiple partnerships with finservs like Yolt, Flux and Moneybox.Revolut also launched its own unique offering, allowing its users to apply for loans with p2p lender LendingWorks via the app.
The Marketplace is expected to become the future of digital banking, as they battle towards reaching profitability. Starling CEO Anne Boden has said that its Marketplace will account for around a third of the bank’s revenues, while Monzo’sTom Blomfield expects it to be the bank’s main source of income in the long term.
Partnerships with traditional firms have also been on the cards, further cementing the status of digital banks in the UK finance industry. Atom Bank scored a deal with the Princes Trust, and fintech firm Klarna launched a delayed payments scheme with fashion retail giant ASOS. Starling Bank also landed a partnership with the UK’s Department for Work and Pensions, demonstrating how deep digital disruption is penetrating our regular lives.
In 2018, I’d feel safe in predicting that we’ll start to see digital banks soar as they begin to hit profitable numbers in the wake of PSD2’s January launch. Revolut CEO Nikolai Storonsky has said that he expects the banking app to become profitable over the next year, and others will soon follow suit as they capitalise on the new framework’s capabilities through Open API integration.
“The difficulty is you need massive scale and access to data to really make it work,” said Blomfield when speaking to Reuters earlier this year. He sees the Marketplace effort playing an important role in the future, although “until it plays out, it’s hard to know for sure”. As we speed towards the launch of Open Banking in January, we can expect to see some big things from digital banking in the coming year.