It’s by now well documented that fintechs pose an enormous threat to banks globally—between Brexit, the advent of Open Banking, cryptocurrencies, the regulatory confusion inherent in data control and many other new questions, the fortress of traditional financial services has been breached. You may not be feeling this in the U.S. as much yet, but in the UK, we are calmly marching into a very uncertain future. Here I want to discuss not so much that it’s happening, but how—and by whom.
To set some context, I live and work in London, which currently houses 60,000 people who work in fintech. In the last decade, the Bank of England, the Financial Conduct Authority and city regulators have gotten behind these entrepreneurs to create a framework enabling them to thrive. A veritable hive of fintech activity, London has seen more radical disruption in financial services than most other global cities.
Dozens of small companies—many of which were founded in the last three or four years, but all since 2010, doubtless made opportune by the global financial crisis—have been consistently seizing upon financial services industry pain points, across several value chains. They offer highly technological, often mobile-only applications in areas such as remittance, foreign exchange, savings, and insurance—services where customers genuinely benefit from better and more seamless solutions. Between this real need—for example, customers have serious issues with their existing payments and international exchange services—and these small companies’ lack of physical overhead, the cost of customer acquisition is much lower than it is for traditional banks.
The truly interesting thing, however, is that they are not content to get by on the table scraps of the banking industry. Some fintechs want to revolutionize banking itself. Several of them have gone beyond partnering with mainstream banks to seek and acquire their own banking licenses—clearly looking to replace conventional banking for their mobile-only customers. These customers now number in the millions in the U.K., a country with a population of only 66 million to begin with. Let’s look at some of these upstarts and how they’re doing it.
Challenger banks, marketplaces and transparency.
Let’s begin by describing a few of these startups, and how they have responded to the now-realized promise of open banking. These three firms—Starling, Monzo and Revolut—are building data-intensive marketplaces that allow customers to access, through their app, information on the financial services products of other providers, as well as their own. That’s a major differentiator compared to incumbent banks, and flies in the face of their traditional design-manufacture-distribute model. It also disrupts the established notion that banks were going to be the ones setting up these marketplaces, due to their having access to so much data. Currently, fintechs are finding that fully half of their marketplace subscribers are the banks themselves. So clearly banks have missed that boat.
Who are these fintechs? Starling. Founded in 2014 by Anne Boden, a former Allied Irish Banks COO and incidentally one of the only women to have held several top banking jobs in the UK, Starling is among the earliest licensed mobile-only challenger banks. In July 2016, Starling received its banking license from the British Financial Conduct Authority. It has received $190 million in funding to date, the latest round being $106 million in May 2018.
Offering a limited selection of services, Starling Bank is creating an app that will replace the checking account for a generation of mobile users, with the aim of helping them to see their money from a new, worry-free perspective. With more than 300,000 users, Starling is customer-first and mobile-only, designed for those people who live their lives on their smartphone and would like to be able to manage their money there, too. Monzo. In 2015, then 30-year-old Tom Blomfield left Starling and started his own challenger bank, Monzo. In August 2018, Monzo was granted a full banking license “with restrictions.” With total funding of $146 million, the latest influx being $1.2 million in November 2017, Monzo is known for setting the record for “quickest crowdfunding campaign in history” when it raised £1 million in 96 seconds via the Crowdcube investment platform.
Recently passing the 1 million user mark and recruiting 20,000 new customers a week, Monzo is a bank for people who live their lives on their smartphones. It’s targeted to those who want to get things done in a click and don’t see the need for bank branches and checkbooks. Monzo is focused on building the best checking/debit account in the world, and making it easy for traditional banking customers to switch over their checking accounts. Monzo is working with a range of other providers (see Partnerships, below) and ultimately aims to become an intelligent hub for your entire financial life. Revolut. Also in 2015, 30-something Lehmann Brothers trader Nikolay Storonsky co-founded Revolut, another challenger digital-only bank—though Revolut is still waiting for its license, and finally applied for one in Luxembourg, apparently due to Brexit fears. It has received $336 million in funding, the latest round in April 2018 for $250 million.
What started as a pre-paid foreign exchange card offering fee-free spending abroad has become a global ambition to become a fully-fledged bank. Last year, it launched services which mirrored a checking account—and even without a banking license, Revolut has already amassed 1.25 million customers in the UK, almost a third of whom are over 40. Probably more to the point of this article, Revolut is the one company among these startups that is actively planning a U.S. launch in the near future, claiming that it has a waiting list 60,000 strong for U.S. customers. Its seamless app offering of personal banking, crypto wallet and fee-free stock trading will certainly pose direct competition to U.S.-based online brokerage disruptor Robinhood, in addition to U.S. banks.
Other challenger banks include Atom, which got the jump by a year or so in gaining its full banking license in 2015—it offers mobile personal banking and savings and has added business banking, loans, and mortgages, using advanced biometric recognition. And N26, founded in 2013 and receiving its banking license in 2016 in Germany, has the aim of revolutionizing the traditional banking industry. It’s also got plans to launch in the U.S. in the first half of 2019.
Taking the worry and guesswork out of budgeting and saving while encouraging good habits.
Along with brick and mortar and virtual banks, there’s a whole host of niche apps coming to the fore—these firms don’t wish to be a whole bank, but rather are focused on certain parts of the banking value chain. Yolt, for instance, is an aggregator of financial information. Owned by Dutch ING Bank, it’s an app that uses open banking to give its 500,000 customers an overview of their UK bank accounts and credit cards, helping them to understand their spending, see upcoming debits, create easy budgets, monitor bills and subscriptions, and even look for better energy deals on their platform. Like many other disruptors, its stated goal is to help its customers worry less about money by helping them budget and save.
On that same topic, Chip is an automatic savings app that tries to make saving money easy for the customer, basing it on spending behavior. The algorithm calculates how much the user can afford to save, and every few days automatically transfers small amounts of money from the user’s checking account into the Chip savings account. With $1.4 million in funding, it boasts the second largest crowdfunding campaign on CrowdCube.
A subsidiary of Tandem Bank, which was recently acquired by Harrods Bank, Tandem Money was founded in 2013. Its app and other products include savings accounts and credit cards, but Tandem’s claim to fame is that everything that it builds is done with input from its community of users. Again the goal is to make money simple, help their users save, and to free up their time from financial stress.
In an interesting backlash against unscrupulous banking behaviors over the last decade, some of these firms try to build morality directly into their apps. Monzo, for instance, has a new feature that allows users to block gambling on their cards, which some 25,000 people have supposedly activated.
Taking money worries away from their customers is one thing, but most of these start-ups face the real and serious issue, with their emphasis on signing up many customers and simultaneously lowering fees, of dangerously thin margins. How and when these companies will start breaking even and making money is a question they seem not to be overly concerned about—for Monzo, even with a $1.5 billion valuation, their 2017 revenues were only £1.8 million, and it still may be years before they’re in the black.
Slashing the cost of international exchange and revolutionizing banking for expats and new residents.
Responding to the consumer-driven need for relief from exorbitant foreign transfer and exchange, several niche fintechs have taken on the system, figuring out ways to offer international online services at a tiny fraction of the established cost. Likewise, some of these new companies are dedicated to smoothing the way for non-UK citizens, digital nomads and new residents who wish to establish bank accounts. Here are just a couple of these.
Operating on the principle that, by using mid-market exchanges rather than foreign exchanges, money doesn’t have to be moved abroad for processing, Transferwise provides online and mobile-based fund transfer services. The idea for the company—which was the brainchild of an original Skype team member, cofounder Taavet Hinrikus—was to make it easier and more affordable for foreign students, expats and businesses to move money globally. Now well established, Transferwise is the first non-bank to be granted a settlement account with the Bank of England’s RTGS system. Available in 72 countries, it’s primarily regulated by the British Financial Conduct Authority, but also has licensing oversight in the U.S., Australia, Canada, Hong Kong, Japan, New Zealand, and Singapore, and moves about £3 billion worth of transactions each month. Geared more toward the international community living in the UK, Monese was established because of the founder’s firsthand experience of the difficulties of opening a bank account in a new country. The app provides instant on-demand UK banking checking accounts, regardless of the customer's citizenship. This is a direct disruption to traditional banks’ imposition of ‘residency restrictions’—one of the greatest barriers to newcomers accessing the banking system when they arrive in a new country. Monese's open banking-enabled technology can validate the identity of customers in real time, enabling them to open an account, complete with a contactless debit card and cheap global payments, in a matter of minutes.
Partnering, partnering and more partnering.
These startups are not interested in monogamy. Nor monopoly. Probably due to their small size, the name of the game for fintech disruptors seems to be polygamy—forming as may strategic partnerships as necessary to keep expanding services and features without adding to overhead costs.
Some of these mobile neo-banks and other fintech start-ups have partnered with traditional banks for access to services such as check deposits and remissions. Starling’s partnership with NatWest is one example, as is Transferwise’s partnership with French bank BPCE, which allows the bank’s customers access to the app’s low-cost money transfer service. Starling also has partnerships with investment app Wealthify and UK online mortgage broker Habito. Transferwise also has partnerships in place with Monzo and N26. Yolt has forged so many partnerships it’s difficult to keep track of them all. Yolt has partnered with Monzo, Starling, and 28 other banks; with Moneytis, another international money exchange app; with Runpath, an energy comparison platform; and with Homelyfe, an app that promises a home insurance quote in under 4 minutes. This begs the question, have these disruptors disrupted the notion of competition itself?
How they make it happen.
Different challenger banks have used different go-to-market strategies. Tandem, Starling and Atom bank took the conventional route to setting up banking services. They each spent a couple of years getting their banking license, and then through various partnerships and intuitive/customer friendly services went on to acquire customers, mostly using their core banking services. When compared to the likes of Revolut, however, they have been less successful and have ended up spending more money in acquiring customers.
And yet… are people buying it?
Though in the UK these digital-only banking apps have taken off like wildfire, their popularity may be on the wane. One survey found a marked decline in appetite for mobile-only banking among UK consumers, falling from 78 percent to 54 percent from the beginning of 2017 until the end of that year. However, the same RFI report found that globally, the proportion of people using digital banking rose from 58 to 68 percent through 2017. RFI Group said consumers appear to prefer digital offerings from existing banks to making the bigger leap to mobile-only startups.
Looking at all of these companies, and having a glimpse into their early successes as well as the difficulty they’ve had just breaking even, I wonder whether it may be a strategic failure to position oneself from the outset as a challenger bank that provides standard banking products. It seems more efficient to focus on the specific pain points of different financial services value chains, and carve out a niche where there is a known need. Then, once a firm has made a significant impact in one of these use cases, and acquired customers at the mind-boggling fintech pace, it can then provide more quotidian banking features such as checking/debit and savings accounts.
There’s much that established banks can learn from these start-ups, but in the meantime, it looks like they’re in for a wild ride in terms of customer volatility. However, if they also watch, learn and intelligently react to these incessant waves of Schumpeterian creative destruction, they can potentially arrive at an equilibrium that offers previously unimagined capabilities that can be delivered at a fair cost to the consumer but not at a loss to the challenger, who has hitherto been pricing products and services at negative margins purely to build volume.
Martijn Moerbeek is group director of Digital Strategy & Innovation at Legal and General, a forward-looking, UK-based financial services and insurance firm managing over $1.4 trillion in assets.