How tech is shaking up the world of banking
The morning of 15th September 2008 is remembered darkly as the beginning of the global financial crisis. The bankruptcy of New York investment bank Lehman Brothers – and later the near-bankruptcy of UK-based RBS and HBOS – did not just spark a global recession, it is often said, but also permanently damaged public trust in large financial institutions. Into this void a few years later stepped what are now known as ‘challenger banks’, which use digital innovation to disrupt the market of large high-street outfits.
That is the common story anyway. But Tom Blomfield, CEO and founder of the popular digital bank Monzo, thinks it’s all far simpler than that. Smartphone culture, Blomfield believes, is the key to explaining the success of digital challengers.
“The smartphone in particular has really shifted our expectation of what products and services could do,” he said, “we don’t realise how seismic that shift has been. The fact that with Uber, for example, you can order a car with a single tap – that’s revolutionary.”
Blomfield thinks the growing gulf between the instant, personalised services offered by apps like Uber, and the cumbersome experiences of high-street banks, “where it takes a week to do anything”, drives the appetite for digital challengers. And he would know: digital-only Monzo, which offers users prepaid bank cards and hopes soon to provide current accounts and overdrafts, hit headlines last year when its crowdfunding campaign raised £1m in 96 seconds.
Indeed, more and more of us are relying on smartphones for our personal banking: mobile banking apps were used 11 million times per day last year, whilst website logins fell to 4.3 million, according to the British Bankers Association. And digital challengers – both in the form of licensed banks and less formal ‘banking services’ – are keen to exploit this growing demand for instant, personalised service.
London-based Coconut, for instance, is launching the country’s first service aimed solely at freelancers later this year. Creator Sam O’Connor – a former freelancer himself – told The Memo that high-street banks have “really neglected very basic stuff that we think should happen in this data-driven world”, with Coconut giving users instant transaction notifications (high street banks still take at least a day).
Starling Bank – licensed last year and set to launch current accounts this month – promises to use financial data to “empower” rather than trick its customers, with the app offering to alert its users with advice on smarter money management.
Its founder, Anne Boden, has more than 30 years of experience in the large commercial banks that she now seeks to challenge: she is the former chief operating officer of Allied Irish Banks, having previously worked at Lloyds, Standard Chartered and UBS.
The momentum within the banking world certainly seems to be held by the digitally-tailored startups. A government report last year criticised high-street banks for their reliance on antiquated systems, warning that, with larger banks not having to compete hard enough for business, smaller banks are struggling to break through. High-street banks are also failing to offer customers the latest digital services, the government said, with high-street banks asked to launch mobile apps by early 2018.
Entrepreneurs in particular are moving toward the challengers, with their small business ethos pushing them to sympathise with the ‘little guy’ challenging corporate giants. Lars Andersen, founder of Arty Lobster, which makes 3D sculptors of pets, has spoken warmly of digital startup Metro, describing the service as “quick and painless … not words you’d associate with a high-street bank”. And Ben Little, co-founder of innovation consultancy Fearlessly Frank, is pleased with his switch to Monzo, telling The Guardian “entrepreneurs want a bank that behaves as they do, and works at the same speed too.”
Digital innovation also looks set to ease that age-old banking dilemma: how to ensure the security of customer accounts. Increased connectivity through the much-hyped Internet of Things could allow users to verify their banking details through a wearable device. The Nymi Band bracelet, for instance, could be used to authorise contactless payment via the wearer’s heart rate. Although, as noted by Mark Aldred, head of international sales at Auriga, expanding the Internet of Things into banking still carries security concerns, which need ironing out.
Even the (seemingly) human service of financial advice is being digitised by challenger startups. As Accenture’s Peter Kirk notes, machine advisors are getting smarter by the day, with ‘robot’ financiers taught to learn customer tones and better emulate human speech. Indeed, a large Accenture survey found 74% of banking customers willing to use ‘robo-advice’ for complex banking decisions.
When you look at the pitifully low levels of trust in real-life, human bankers since 2008 – 83% of Brits told YouGov [pdf] in 2013 that bankers are “greedy and get paid too much” – the strong public appetite for digitised banking (existing even among the over-65s) is hardly surprising.
There are certainly issues that must be addressed before digital startups can truly take over – research shows that most customers (including Millennials) still prefer the option of a branch they can physically visit, with a quarter a 18-21-year-olds visiting their bank each month. And security concerns still linger, whether rational or not. But as frustration with the seemingly cumbersome methods of larger, older outfits shows no signs of abating, it is no wonder that, according to Monzo CEO Tom Blomfield, digital challengers pose a “fundamental threat” to their high-street forbearers.