The stage seems set for the likes of Atom, Monzo, Starling and Tandem – new digital banks that reach their customers entirely through an app. The money just keeps coming: at the end of February, Monzo secured £19.5m in venture capital, then found itself more than three times oversubscribed when it turned to crowdfunding to raise a further £2.5m. Less than two weeks later, Atom announced it had raised £113m from bank BBVA.
While Monzo has pop star Tom Odell on board, Will.i.am has struck a consulting deal with Atom. And the regulator wants to help too: in a bid to drive competition, the Prudential Regulation Authority (PRA) lowered the capital requirements for small banks last month.
Meanwhile, the banks are finding favour – Monzo already has 120,000 customers. And although we don’t yet know how varied the still-early adopters are, according to figures from RFi Group, in the last 12 months digital loan applications overtook branch applications for the first time. These figures do include the major banks, yet there is a shift: mobile banking is up by over 50 per cent from a year ago.
But it’s also very early days. Two weeks ago, Monzo’s 120,000 found their cards were being declined because of a third party service provider outage. And some players don’t have full regulatory approval, or a product range. And just yesterday, Tandem lost a £29m tranche of cash from investor Sanpower, the owner of House of Fraser.
Is it worth signing up now, or should you wait and see how this new sector plays out?
A better deal?
For starters, says Hannah Maundrell, editor in chief of money.co.uk, consider whether the new bank actually offers anything new. “You shouldn’t ever choose a bank just because they solely offer their services online. Most banks now have nifty apps that make keeping on top of your cash easier and while a slick interface is nice it shouldn’t be the driving factor in who you bank or borrow with.”
Michael Baptista, founder and chief executive of fintech VC Assembly Capital Partners and former investment banker, agrees: “if it’s some weird thing where you really need to feel like a millennial (when you’re not), then fine. But actual utility? Does the app – because it is just an app – actually offer you anything new, anything Barclays can’t give you? What are your basic financial needs? You want to store money, move it safely, borrow from time to time. You probably want a credit card and basic insurance. How on earth are they going to give me a better deal than Barclays?”
Yet while there’s no getting round newness, equivalent products so far are competitive. “Focus on what each bank can actually do for you and which can give you the deal that leaves the most pounds in your pocket. Ultimately, the rates you get and the fees you have to pay make the biggest difference to your bank balance,” says Maundrell.
Open a Barclays fixed-term one-year savings account now, and you’ll get 0.55 per cent AER. Open the same at Atom Bank, and you’ll get 2 per cent AER. Operating costs are lower, which appears to provide digital-only banks the opportunity to offer better rates on familiar products.
There are also small but helpful capabilities like instant balance updates, and being able to switch your card off in a tap – useful if you’re prone to misplacing it round the house but panic and think it’s been stolen. Monzo’s first product – a pre-paid card controlled from an app – displays real-time spend and provides budgeting tools and FX deals pegged to MasterCard’s interbank rate.
“In terms of pure-play current accounts, the products are better than those offered by mainstream banks,” says Rob Moffatt, partner of Balderton Capital (full disclosure: Balderton is invested in global money app Revolut). “All of the neo-banks offer better FX rates than mainstream banks... customers love simple features such as transaction notifications. Much more is to come.”
The guinea pig
Yet Moffatt indicates two downsides to opening an account with a digital bank right now: first, it is just a current account that you’ll be getting. And second, most are still building, and if you sign up now you’re going to be a guinea pig.
Getting their offering right means testing a spectrum of products: while some customers like budgeting tools and notifications, others will flick between an Amex at home and a feeless card from a digital-only bank when they’re abroad – just to get the best rates. Some people respond well to rewards and being straightjacketed, others will just want whatever is left over at the end of the month automatically put in their Isa. Becoming involved now means you’ll be a part of this.
Of course, there can be perks to being an early adopter. “The biggest positive is the sense of community. You’re not just a customers, but a ‘founder-member’ – your feedback will help shape the products,” says Moffatt.
Tandem, for instance, is rolling out its app and credit card to its cohort of co-founders, with plans to launch to the public later this year. It’s an invite-only scheme, but each co-founder gets a share in Tandem. And like Monzo, it’s done crowdfunding rounds – great if you like to feel part of something that’s doing its best to shape the future.
Not everyone will be able to benefit immediately from digital banks, however – what is the draw if you use cash a lot? Moffatt points out that most will charge you if you use ATMs extensively, and none have a solution for paying in cash.
Moreover, overdraft facilities remain limited, which relates to the current regulatory situation. Tandem is still waiting for final approval, so can’t yet roll out to the general public. And Monzo, while it has an impressive customer base relatively speaking, is also waiting for full banking status, meaning its plan for “transparent overdrafts” without hidden fees or charges is having to wait. “If you want everything to work in one click it’s going to be better to wait three or four years,” says founder Tom Blomfield. “What we’re saying at the moment is ‘just put £100 on a card and see if it’s for you.’”
Brave new world
For those willing to be part of the process, it’s worth noting the directions of the digital banks. While some are focusing on making it much easier to open an account which offers a better rate, others are changing the way you’ll approach your money – think banking provider versus lifestyle tool, says Blomfield.
While Atom and Tandem are building on existing banking infrastructure, Monzo and Starling are developing their own core systems. “The latter should be able to innovate much faster, but the doubters don’t think they can deliver at scale without something falling over. Personally, I am an optimist,” says Moffatt.
Blomfield says he can find himself running out of words when it comes to explaining the potential upside to people. “This isn’t a millennial thing; it’s what we’ve all come to expect. Over the last three to six years, the likes of Amazon Prime, Citymapper, Uber have provided one-touch services that give instant gratification,” says Blomfield. “That means we will work in the same mold to solve problems around your money. Banks are still banging on about mortgages... to some extent it’s a Henry Ford problem – ‘if I’d asked people what they wanted, they’d have said faster horses.’”
Baptista remains unconvinced: “I know there are millennials who like being ‘updated’ and fed information constantly, but it is a subset of a group. Does one who’s a VP at Goldman want to be drip fed suggestions all the time?”
But the new kids say they’ll offer something for everybody. Rather than thinking about economics, they are focused on behavioural economics – digital-only banks want to win your trust and put as much of your finances on autopilot as possible, just sending you notifications while, as Blomfield puts it, “moving mountains behind the scenes”.
Unlike the marketplace models that have come before them, however, they will rely on customers for network effects: i.e. the experience gets better for you the more people you know use the same service. Last month, for example, Monzo launched split bill capabilities. If you’re with friends in a bar, you can split the bill and pay each other in a click. Obviously the friends need Monzo in order to do so, but it makes life easier.
Indeed, signing up with a digital bank will take you less time than you’ve spent reading this article. It really is difficult to see a downside to just trying them now, says Moffatt. “All funds are guaranteed by the Financial Services Compensation Scheme and, should you want to, it is easy to switch back.”
This article appears in the latest edition of City AM's Money Magazine, released with the paper on Thursday 24 March.