Why the UK’s digital banks enhance its status as a global fintech hub
Partnership opportunities abound in London’s busy fintech sector.
Fear not: this isn’t just another article lauding London as a global font of financial innovation. Instead, it’s an article about a seldom-mentioned but crucial factor that cements that status.
Progressive regulation, government support, access to talent, to funding and to sophisticated capital markets infrastructure – these are the strengths most commonly cited in explaining London’s emergence as a global fintech hub. But there’s another, less-vaunted reason that is becoming increasingly important.
In part as a result of the factors listed above, London boasts perhaps the world’s most active digital banking sector. Between Monzo,Revolut,Starling,Tandem, Atom, Loot,Curve and Tide – to name but a few – it’s already a very competitive market, featuring at least a few billion dollar businesses and spanning several million customers.
These banks are not only improving the financial lives of their customers; they are also giving a wide range of smaller, more specialist fintechs access to those customers.
It’s all possible because of the marketplace phenomenon. Most of the UK’s digital banks are cross-selling products via an online marketplace, or at least plan to. Whether it be loans, wealth management, mortgages, money management or business accounting, there’s a fintech that does it and digital banks are able to proactively link their users to that fintech.
For the banks themselves, it’s often been suggested that marketplaces represent an important route to commissions-based revenue. For specialist fintechs, the opportunity is primarily about customer origination – but it’s more than that.
A lender plugging into a leading digital bank, for example, suddenly has access to millions of potential borrowers. But perhaps more importantly, a seamless integration with the banking app means credit can be offered seamlessly and in a targeted fashion. The lender can leverage the banking app’s data to pre-approve borrowers and to help price loans. In short, the lender gets access to a sea of new customers – and knows exactly where to fish within it.
The value of such product pushing by digital banks could become all the more effective using the Open Banking framework (now a little over six months old).
Users of the two neo-banks [Monzo and Starling] will be able to access Plum’s chatbot service without divulging their login details, from within their bank accounts. It's TrueLayer that makes this possible by directly accessing users’ account data (held by the banks) and making it available to Plum through a secure API.
Users must of course give consent in order to allow Plum to access their data, as per standard Open Banking rules – and even then access will be on a ‘read-only’ basis.
Plum needs access to account data in order to deliver its core service. The app monitors users spending patterns and sets aside an amount of money it deems fit every few days. It can also help users to invest their saved pennies via one of seven options, centred on themes such as ‘ethical investments’.
Here you have the perfect example of multiple fintech synergies in action. I’d argue that at present this could only happen in London. Where else in the world do you have multiple major digital banks, each competing to out-partner the other to the benefit of their customers? Where else in the world do you have Open Banking greasing the wheels of such integrations? Where else in the world do you have dedicated Open Banking tools like TrueLayer quickening the pace of such partnerships?
A digital bank is a goldmine for a specialised fintech firm – and it won’t be a surprise to see more and more of these firms setting up shop in the UK in the future, as they seek to tap into digital bank customer-bases.
If there’s a downside, it’s what you give up by hitching your wagon to a more all-encompassing business, like a bank. There’s an argument that the fintechs that do this will become dependent on their bank partners – an especially worrying outcome if those banks ultimately choose to develop their own equivalent services in-house.
Brendan Meehan, a behavioural economist, once told AltFi in an interview that reliance on third-parties in digital banking is merely “a temporary state”. In other words, the disaggregation of financial services – a state of play in which many specialist firms can flourish in partner roles – won’t last forever.
But for now at least, the promise of tailored access to vast reserves of tech-savvy customers is one of London’s biggest draws as a global fintech hub.