Challenger banks will take “years” to make money
Ambitious digital challenger banks hoping to topple the big high street players will take "years" to make money according to one of the founders of a mobile bank with ambitions to do just that.
Entrepreneur Tom Blomfield, founder and chief executive of the yet to launch digital bank Mondo which recently became the fastest ever crowdfunded business, told City A. M. that several other challenger banks such as Shawbrook and Metro Bank, which have already gone public, are "selling themselves short" simply offering traditional banking at a lower cost.
"It will take time for others who are truly changing banking to make money" he said.
The opportunity to cash in from people's distrust of established banks will eventually come from areas such as data insights and identity, he said, speaking at the Payexpo conference in London on Tuesday, where he revealed that Mondo – which is awaiting its full banking license from regulators – would move towards loans and deposits in future.
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"It might be that right now it's costing £40 per year to subsidise each customer. That might reduce to £30 if we introduce overdraft fees, but we're years off making money and creating a new kind of market," he said.
Mondo's current product, a pre-paid debit card, is currently loss making and more of a customer testing and marketing device, said Blomfield.
However, top fintech investor and backer of Mondo, Eileen Burbidge, said it is clear that fintech startups and challenger banks will establish business models and build profitable companies, adding that the potential for returns is "very obvious".
"We're truly backing a vision, we're not necessarily backing a business model," Burbidge told City A.M. "But with fintech, there's always going to be some sort of transaction or transfer of value involved in financial services, and clearly the opportunity to take a fee from that.
"The opportunity of challenger banks is not simply to make money and revenue, it's to change banking – not just doing it for profit margin out of consumers. As an investor, I'm convinced there is return on investment and a value in modernising banking and the relationship people have with their money."
Burbidge, also a special advisor to the government on fintech, also noted the much lower operating costs for digital banks for them to be able to turn profit.
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Blomfieled also likened the traditional established banks to businesses like Kodak, Blockbuster and Nokia.
"Some will be gone" he said, discussing the future of the big banks ten years down the road. "Two should already have failed," he added, referring to the bailout of RBS and Lloyds during the financial crisis.
Other fintech experts speaking at the event's panel on digital versus traditional banks with Blomfield predicted a more collaborative future, however.
"Fintech won't go anywhere, banks won't go anywhere," said Norris Koppel of Monese, an online money startup.
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"Banks won't roll over and die" said Laurence Krieger, chief operating officer at foreign exchange app Revolut. Despite a reluctance to change among big banks "the reality is we're still reliant on banks and the financial system. Even other banks need banks," he said.
Revolut currently has a "fair usage" policy and charges users only when they withdraw more tha £500 from an ATM, but Kreiger acknowledged this approach would only get a startup so far – "we have to make money" he said.
After the listings of Metro, Shawbrook, Aldermore and Virgin Money, a new tranch of digital challengers are vying for a slice of banking customers. Alongside Mondo is Tandem, which was granted a banking license last year and also raised money via crowdfunding.
Tandem's chief innovation officer Andrew Hogwood, speaking at the same conference, revealed the startup is working to a specific date for its launch, but would not be drawn further on the timing. It has previously only said that it will launch this year.
Atom bank, backed by Neil Woodford and Spanish bank BBVA launched earlier this year with its initial offering of fixed term savings account and small business loans, with further products planned, while German digital challenger Fidor has recently entered the UK market.
Both Mondo and Tandem's crowdfunding campaigns were inundated with huge demand.
Crowdfunding records were this week broken by fintech startup GoHenry, an app that teaches children how to manage money and which includes a pre-paid card for spending pocket money, underscoring the interest in new technology companies aiming to disrupt traditional financial services.