As branch visits continue to decline, a new wave of start-ups are tapping into this trend and offering digital services only. Abi Millar talks to Monzo CEO Tom Blomfield; Tandem co-founder and CEO Ricky Knox; Tide founder and CEO George Bevis; and Holvi CEO Antti-Jussi Suominem about why digital products are so appealing and how they plan to revolutionise the banking landscape.
The decline in branch banking has been under way for some time. Between 2011 and 2016, the ‘big five’ UK banks (Barclays, Lloyds, RBS, HSBC and Santander) closed an estimated 1,700 branches, with Lloyds stating its customers’ use of branches was falling 15% each year. According to consultancy firm CACI, visits to branches are set to almost halve between 2016 and 2020.
As the downward trend continues, it is no surprise that industry luminaries are framing the decline as demise. Brett King, CEO of Moven, has compared bank tellers to “the telegraph operators of the late 19th century”, while Jay Sidhu, chairman and CEO of Customers Bancorp, has described bank branches as “mausoleums”.
This kind of talk, once contentious, is becoming increasingly commonplace. Paint a picture of a high street free of branches – with banking conducted entirely through digital means – and you run the risk of stating the obvious.
“It’s not even a debate that’s being had anymore,” says Tom Blomfield, CEO of Monzo. “As an analogy, 15 years ago, people were asking if there are still going to be travel agents on the high street – clearly, the answer is ‘no’.”
The future that Blomfield – and many like him – envisages is still some way ahead. However, the journey there is beginning. As traditional banks consider what this means for them, a wave of digitally focused challengers are setting up shop with an eye to stealing a march on the incumbents.
Monzo, which will shortly receive its full banking license, is a prime example. A start-up mobile-only bank allowing customers to track their purchases through an app and receive spending notifications in real-time, it will be rolling out a full current account later in the year. Blomfield says the aim is to remove the ‘sharp edges’ you get with most bank accounts.
“Normally, you go abroad and you get your card blocked for fraud, and once it’s unblocked you get charged 7–8% to take money out,” he remarks. “Or you lose your card and it takes seven days to get a replacement. Or you get overdrawn and your bank waits three weeks to send you a letter detailing all the charges. And your balance is simply never right; when you spend, the transactions don’t appear right away. Monzo aims to solve all those pain points with real-time, visible control.”
The service has proved a hit with its customers, whom Blomfield describes as “anyone who lives life on their smartphone”.
“Our customers tend to be a bit younger, but I think it’s pretty lazy to describe them as millennials; we have people from 18 way up to about 85,” he says. “They’re anyone who uses Uber or Amazon and gets frustrated when they have to fill in forms, wait on hold or visit a branch – they expect that everything’s going to happen in one click from their phone.”
Monzo also aims to remove the sense of ‘us and them’ from the banking relationship, ensuring that its business goals are transparent and in line with the customers’ needs. It’s an objective shared by fellow banking start-up Tandem, which calls its early adopters ‘co-founders’.
“By signing up on our website, anyone is able to contribute ideas to the formation of a good bank,” says Tandem CEO Ricky Knox. “So far, these people have helped us to name the bank, design our credit cards and define our values. We are co-creating a bank with some of the people who will be our future customers, and we hope to continue involving these people throughout our launch and beyond.”
A new approach to banking Tandem was born in 2014, when Knox, a successful fintech entrepreneur, joined forces with Matt Cooper, a co-founder of Capital One Bank. They discovered a shared ambition: simply “to build a good bank”.
“Traditionally, banks only have a passing interest, mainly for PR purposes, in helping their clients financially,” says Knox. “We wanted to create a bank that genuinely put our clients’ individual financial welfare at the heart of everything we do.”
In November 2016, Tandem began rolling out its app, which can initially be linked to any UK bank account. It helps users monitor their spending and gives them suggestions for how they can save more, segueing neatly into its first product: a savings account.
While the start-up has since faced investment challenges and lost its banking license in late March, Knox says this does not change its long-term vision. He is expecting to reapply “at the right time for our customers”, and, ultimately, to offer a full range of services including a current account, credit cards and loans. That said, the emphasis is more on helping people manage their money than on direct product sales.
“Banks, like other businesses, are here to make money, which is fine, but at Tandem, we think the industry is ripe for change,” he says. “It’s time to start genuinely helping our customers to make it to the end of the month without trying to trip them up and charge them for every mistake.”
Tandem and Monzo have both attracted high-profile investors, with the latter raising £35 million from venture capitalists. A third UK start-up, Atom Bank, which launched fully in October 2016, has raised a whopping £219 million to date, and a fourth, Starling, has raised £70 million. These challengers join the likes of Fidor Bank in Germany and Holvi in Finland as part of what proponents are dubbing a revolution in banking. All are digital only, meaning none of them plan to open branches.
Services for SMEs
Although the fintech sector first took off in the wake of the 2008 financial crisis, it is only over the past few years that the trend has really gathered pace. In 2013, the Bank of England simplified the process to becoming a bank and lowered the capital requirements, leading to a host of new entrants being awarded licences.
Not all these banks are consumer-oriented. Tide, for instance, is targeted at SMEs and offers a ‘nimble small-business current account’, along with finance apps and accounting capabilities. A banking service rather than a bank, it was launched in full at the end of January 2017 after an extensive testing period.
“The point of Tide is to find ways to save small businesses time and money,” says Tide CEO George Bevis. “For example, your bookkeeping is made much easier if you use Tide, and it integrates really nicely with the top accounting packages. It’s about finding smart ways to help small businesses with software, on top of a banking capability.”
Holvi, too, is targeted at small businesses. Billing itself as ‘banking for makers and doers’, this six-year-old banking service aims to become the preferred financial-management tool for micro-entrepreneurs and SMEs in Europe.
“Many entrepreneurs get stuck in time-consuming administrative tasks and continuous financial-management bureaucracy,” says CEO Antti-Jussi Suominem. “Our purpose at Holvi is to change that. We aim to capture their daily challenges, and turn those needs into elegant product features and solutions that help them run their business more effectively.”
He says that while banks, traditionally, have built their core offering around a one-size-fits-all service, these days there is a strong demand for individually tailored banking.
“Our benefit is being close to the customer – we can bring out their unique context and specific need, and attach that to our service,” he says.
Ahead of the curve
If the challengers do have something in common, it’s the fact that they are unencumbered by legacy systems. Whether they’re building their systems in house (like Monzo) or turning to existing platforms (like Tandem), they are able to design lean, agile offerings from the ground up without splurging on extensive branch networks. This seems to be paying off: customer numbers are growing fast, cost-to-income ratio is typically low and return on equity is high.
All that said, the challengers still represent a fraction of the overall banking landscape and they may struggle to gain customers’ trust. How can they close the gap between their start-up nature and their sizeable ambitions?
Bevis believes there are grounds for optimism. While his projections for Tide are far from modest – 50 million small-business clients globally in ten years time – he feels this is achievable for a start-up at the forefront of market trends.
“I think the future of banking rests entirely on digital products,” he predicts. “There’s no good reason why people would want to waste time talking to a human banker to achieve very simple banking experiences.”
Knox agrees. He feels that banking is a sector that is improving immensely thanks to technology, and points out that challenger banks benefit from a level of flexibility that incumbents do not.
“There is a lot of scepticism from the public and policymakers about new banks, and we understand this – everyone who launches says they’re different,” he says. “Yet the environment we’re in now makes it much easier to create a bank that understands a customer’s financial habits, and one that ends up making them money.”
Blomfield thinks that while there is no longer any argument surrounding digital, the really interesting movement over the next ten years will be a drift away from full-service traditional banking.
“I think we’re going to see a move towards integrated marketplace banking, where you can do everything from one app but connect to a bunch of different providers,” he says. “So when you need a mortgage, Monzo would help you get that, and if you need to switch your gas and electricity, you could do that within the Monzo app as well. You’d have this financial control centre that helps you run your entire financial life, in the same way Facebook helps you with your social life.”
Of course, it is wise to remain circumspect about any service promising to become the new Uber or Facebook. Banking is not really comparable to other industries in terms of the layers of regulation involved, and many customers may be hesitant to entrust a start-up with their savings. That said, there can be no doubt that digital challengers are poised to make an impact and, most likely, the ripples will be felt sooner rather than later.
“We have an eye on the future, rather than spending all our efforts on upkeep of the past,” says Knox. “When people see the evolution in banking, we’d expect to see more of them sign up.”