The UK’s financial sector has been undergoing somewhat of a change in the past seven years as a result of challenger banks.
Starting in 2010 when Metro Bank became the first new financial institution to receive a banking license in over 100 years, there are now several new banks popping up.
From Starling Bank to Monzo and Atom Bank, they all have one thing in common: to make banking better.
Kit Carson, head of banking and fintech at GlobalData, believes there are a few reasons why challenger banks are making head ways in UK banking. The first one is simply technology. He tells Verdict:
As a consumer, our experiences and expectations of banking are being set by how easy it is to get my shopping through Ocado, or ease of downloading a running app with a thumbprint. It’s being set by all these other service providers and that’s where our sky-high expectations now exist.
Many challenger banks are mobile-focused, eschewing the old regime of needing a high street presence with branches across the country. And they understand the technology they’re using.
The people creating the banks, they’re not going to be bankers. They’re more likely to be user experience designers, who have worked at tech firms, gaining different skill sets. This translates into a slicker, more intuitive and joined-up experience for the consumer.
When discussing the new banks, it’s hard not to go back to the global financial crisis, which permanently changed banking across the world. After the effects of 2008, there was a lot of distrust in the sector, and the challengers are upending this. Carson adds:
When you look at the challengers all the marketing is ‘We’re here for you’. It’s very much ‘we’re creating the solutions for you that you need today’. They’re really talking to the consumer.
Verdict spoke to some of the challenger banks in pursuit of changing UK banking.
The current account one – Starling Bank
Starling Bank’s mission for banking is simple: do one thing really well whilst putting the customer first. This aim goes back to chief technology officer, Greg Hawkins’s time at various incumbent banks, including Lloyds.
“You can’t be in banks in any capacity without realizing the tremendous inefficiency and all the things that are wrong in those institutions,” he tells Verdict.
Really, our financial sector is not set up to make things work for the customer at the moment.
When he joined Starling in early 2016, shortly before the bank was awarded its license, his vision for the company was to borrow techniques from the likes of consumer tech companies, including Amazon and Netflix.
This focused on using modern software and organisational techniques to deliver software in a fast, responsive way.
I’ve seen the release cycles of banks. Some of the incumbents will strain to try and get a release out every three months or so. And then deliver something that’s highly underwhelming on mobile.
Starling uses Amazon Web Services to host the services, which allows it to move and design much faster than “the old world, where you would have to have the physical kit.”
As well, it is the only challenger bank to have opened up its APIs (application programming interface) as a way to encourage growth and collaboration with other fintechs.
For instance, if you use MoneyBox for saving, it’s built on Starling’s API.
If you want to use Moneybox to manage your ISA, then you can give it access to your Starling bank account. Through that, you can round up recent transactions to the nearest pound and stick it in your ISA.
As well as making this easier for the customer, it means that Starling can concentrate solely on building the best current account. Hawkins says this is similar to when apps and companies became building on Google Maps’ API back in 2005.
Nowadays, it’s hard to imagine any app which isn’t enriched by Google Maps. We’re at a similar place in finance and fintech – collaboration and interoperability which is fostered by these APIs is going to leave to a flowering of different possibilities. It’s almost unimaginable what we will be using and seeing five years from now.
The local one – Redwood Bank
Whilst some of the other challenger banks focus on technology, Redwood is slightly different. Founded by the property developer David Rowland and his son Jonathan, the bank sees itself as more of a specialist business bank than a fintech.
Redwood’s chief executive, Gary Wilkinson, tells Verdict:
We’re a niche bank. We have pretty simple products: we lend to small and medium-sized enterprises (SMEs) secured on either commercial or residential property, and we receive deposits from SMEs.
Wilkinson has a background in financial services and helped launch one of the first intake of challenger banks, Cambridge and Counties, back in 2012. Like Redwood, it was a challenger bank that focused on traditional lending.
This time, Redwood has chosen to focus on SMEs as Rowland and Wilkinson believe there is a gap in the market, vacated by many of the incumbents after the global financial crash.
It received its full license in August this year and is ready to lend.
Our ethos and objective is to make things as easy as possible for customers and to turn things around very quickly. Being a small bank means there’s much less bureaucracy and we can make decisions quickly. We can change products quickly too: take a product out or launch another product if we need to and we have the flexibility to do that.
Serving its customers, of which it won’t reveal any numbers at this early stage, is integral to Redwood’s vision. Wilkinson says:
We have persons that we deal with directly, from a broker and a customer perspective. We don’t have account numbers, we’re names and human beings. Every time the phone rings during 9-5 a human being will take the call.
It also benefits from being 100 percent based in the cloud, though Wilkinson won’t disclose who the provider is yet. “It’s no longer tin boxes in basements of banks – that’s the way of the past and that’s not the best use of resources or your time.”
Unlike the traditional startup, which aims for high growth at a fast pace, Redwood’s approach is a lot more cautious.
We’ve taken the biggest step in that we’re open for business. We’re confident that it will achieve what we want it to achieve [but] we will grow at a cautious and measured pace.
The global one — Revolut
Global money app and challenger bank Revolut is setting its sights on world domination. After launching in 2015, it’s now available in 26 markets, with over 800,000 customers, and has plans to dominate the US and Asia next.
Revolut’s head of brands and communication, Chad West, tells Verdict:
Fintech is about upgrading the banking sector completely, not simply with a little bit of tech.
At the moment Revolut offers its customers a pre-paid card which allows them to makes ATM withdrawals for free and better exchange rates for payments made abroad.
With Revolut, you get the interbank exchange rate, the rate at which banks swop currency between each other. This is different to other banks which set their own exchange rates, which can be marginally higher. The customer gets a better rate as well as being able to hold up to 26 currencies, including pounds, euros and US dollars, in their wallet.
Revolut isn’t just taking on the banks, it’s taking on other fintechs too. It recently launched free international money transfers, allowing customers to transfer up to £5,000 per month for free.
That was a real move to challenge Transferwise, which is a great brand that offers a great service, but we knew we could provide a free, new option for our users.
As well, it’s in the process of launching a spare change investment platform, similar to London-based app Moneybox.
When you got to Starbucks and buy a coffee for £2.50, Revolut will send you a message and you can round it up to £3 and invest that 50p in Netflix, for example. It’s not necessarily better [than Moneybox] but the main thing is that people don’t want to have multiple accounts anymore. If you can have one app, one financial control centre for all your financial needs, people are going to adapt to that.
Yet, there are some issues about Revolut that don’t square up. The startup has an e-money license and it is regulated by the FCA, but money held in a Revolut wallet isn’t protected by the Financial Services Compensation Scheme (FSCS).
Banks that are protected by the FSCS protect an individual’s money up to £80,000. That means, if Revolut goes under, the FSCS won’t reimburse you that money.
West’s response was that Revolut doesn’t have access to its customers’ money. “In the unlikely event that Revolut were to go bankrupt, we would never have access to client’s’ money even then. So people could just log on and transfer their money back to their main bank account.”
It says it is “looking at” applying for an official banking license, so it would be protected by the FSCS, but it has no timeline on this.
Instead, it’s focusing on expanding to more countries, starting with the US later this year. West says:
There’s a lack of real, innovative fintech players founding over there. For a British-based company to go into the states and kick that off big time, it’s going to be quite good.
Are the challenger banks going to take over?
Carson says that the barrier standing in between challenger banks and growth is trust. People will use them as secondary accounts for a while, but it will take a long time before the new fintechs get customers to fully adapt.
They will be able to survive at the rate they’re growing now, but they have to be able to wait for this adoption. They need to not mess up too. If there’s a mess up then there will be serious implications because that will really affect the trust.
Whilst offerings from Starling and Redwood appear cautious and stable, the fast-paced approach from Revolut could be part of this barrier to full adoption. It says its approach not to get a full banking license straight away is what sets it apart from other challengers like Monzo, as instead it “chose” to focus its Series A funding on developing its products.
However, until these provisions are made by challengers to play by the rules, there will be a lack of trust surrounding startups and fintechs. And in some cases, this will be rightly so.