How challenger banks are revolutionising the sector
This article first appeared in ICAS’ CA magazine.
Three expert CAs tell Karam Filfilan how a new wave of challenger banks are helping to revolutionise the sector, both for consumers and businesses.
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Digital transformation has revolutionised the banking sector over the past decade. Gone are the days of neighbourhood bank branches and personal relationships with individual account managers. Instead, major banks are centralising services and pushing customers towards online banking and mobile apps.
With this comes an opportunity for new challengers. The Financial Services Act 2012 reformed banking regulation with the aim of encouraging competition in the sector, making it easier for start-ups to obtain licences to operate. This first wave of banks to enter the marketplace was distinctly digital-first, focusing on personal banking or individual financial services.
According to data platform Beauhurst, there are now more than 40 active challenger banks in the UK. Some – like Monzo, Starling and Revolut – have become household names, raising hundreds of millions in investment and cornering nearly three-quarters (72%) of the UK’s digital banking market.
This growth in customer numbers is yet to translate into profits for these “neobanks” (a direct bank operating exclusively online), however. Monzo posted a £113.8m loss in 2020, while Revolut lost £207m in 2020, almost double its 2019 losses. With concerns over data safety and the impact of Covid-19, the challengers have a long way to go before they threaten the dominance of the high-street banks.
So what is the future of banking? Open banking regulation has forced banks to share data on customer transactions with third parties, creating a wave of new fintech offerings that help consumers better manage their money. Open finance is the likely next step, sharing consumer data on our entire financial footprint, including mortgages, pensions and credit. In theory, this could lead to a wave of new digital financial products and services – although, again, concerns remain about how institutions share and protect data.
Perhaps it lies in mixing the old with the new. A 2021 Accenture report called Banking on Empathy suggested that all banks are facing two key challenges – making themselves more empathetic and personalised, while also becoming progressively more digital. Combining the digital reach of challenger banks with the human touch of traditional banking could be the key to creating the next wave of banking institutions.
We speak to three CAs looking to lead the challenger bank charge.
Duncan Cockburn CA, CEO and Founder, OneBanks
Banking’s shift towards digital has meant a rapid reduction in its high-street presence. More than 4,000 bank branches have closed since 2015, according to a report by consumer group Which? – a rate of more than 50 a month. But what happens to those customers left behind by technology?
“There are a lot of people in the UK who still rely on cash and face-to-face transactions,” says Duncan Cockburn CA, CEO and founder of Scottish start-up OneBanks. “We’re trying to serve those people to get what they need, while helping them move towards a digital society.”
OneBanks offers a shared bank and ATM infrastructure, aimed at communities and small businesses lacking physical bank branches. Customers can perform banking transactions such as bill payments, cash withdrawals and deposits, and even set up online accounts with their own banking provider.
“We’re not a bank, but we aim to serve underbanked communities where there are no longer banks present. There’s a huge commercial strain on banks at the moment. Where transaction levels are low, it can be hard to justify bank branches which cost an average of £600,000 a year. Through open banking’s development, we’re able to integrate with banks and perform transactions on their behalf,” says Cockburn, who spent five years in audit with KPMG before founding OneBanks in 2020.
Cockburn’s ICAS training has been invaluable to him as a business founder, providing him with a “breadth of knowledge” – particularly when it comes to learning how to communicate with clients on a day-to-day basis.
OneBanks soft launched in February for friends and family, before going live in April with three pilot kiosks across Scotland, open seven days a week. A fourth is planned for later in the year, but Cockburn says the start-up’s current focus is on improving its technology and user experience and landing commercial partners – as well as taking on board customer feedback.
“We’ve learnt a huge amount from the pilots and we’re very keen to learn from customers about the services they want,” he says. “A good example of this is coins. A lot of businesses have wanted to deposit coins and we couldn’t do that, so it’s made its way up our priority list rapidly. We’re currently rolling out a coin-deposit device, which will allow coins to be deposited and withdrawn.”
Despite the recent focus on cash, Cockburn says he sees OneBanks as being about a “beyond cash” vision, aiming to take customers on a journey from signing up for online banking, through using its over-the-counter kiosks and into self-service.
Covid-19 has accelerated digital transformation in banking, but the gap between those who are comfortable with technology and those who aren’t is widening. For Cockburn, fintech and banking challengers need to focus on accessibility and inclusion, rather than constantly pushing technological boundaries.
There is a portion of people who are being left behind. Fintechs are focusing on what is next in terms of open data and finance, but I believe it’s important to scale back, use solutions like ours to get everyone involved and then go again. We need to make sure everyone is on this journey.
Rod Ashley CA, CEO, Albaco
There are six million SMEs in the UK, contributing some £2.3trn to the UK economy and employing 61% of its workforce, according to the Federation of Small Businesses. Many of them have been impacted by the pandemic, requiring financial assistance, debt refinancing or simply advice on pivoting into new markets. But in their moment of need, a lot of small business owners have been struck by the impersonal nature of business banking, where centralised teams in distant headquarters make decisions, based on algorithms, at a speed that suits them, rather than the owner.
Or at least that’s what Rod Ashley CA, CEO at Glasgow-based challenger bank Alba believes. “The problem for SMEs isn’t necessarily a lack of access to finance,” he says. “It’s a feeling that decisions aren’t being made locally, and often by people who don’t understand [the SME’s] business. We want to bring back the idea that you can have a relationship with your bank.”
Designed with business owners in mind, Alba is on a mission to transform SME customer banking. Its planned soft launch later this year will see a team of dedicated bankers build a portfolio of SME clients, visiting them in their place of business and working with them to provide personalised banking. Working remotely and through a dedicated IT system, Ashley’s team will reduce business banking friction while also being empowered to make decisions without having to pass clients onto other teams. He dubs it a “high-touch, high-tech” approach.
Ashley sees this as a gap in the banking market, with major banks reducing their customer-facing branches and services and digital challengers such as Monzo and Starling largely focusing on personal banking.
“Once banks get to a certain size, there’s a regulatory control that pushes them towards centralising services as it’s easier to monitor,” he says. “Add in legacy IT services and branches, and many banks have massive overheads, so they’re pushing people towards digital banking. SMEs aren’t quite there yet – as a business owner, you still want some personal contact.”
Alba is in the final stages of obtaining its banking licence from the Bank of England, with plans to take on its first customers “within four to six months”. However, Alba’s gestation comes from Ashley’s time as CEO of Airdrie Savings Bank, which closed down in 2017. On becoming CEO in 2013, Ashley led efforts to modernise the bank, growing its lending book by 30% to £60m, through a focus on relationship banking.
At the time of its winding down, Airdrie Savings Bank was the final remaining independent savings bank in the UK, operating on mutual principles and without shareholders. It had been running for 182 years.
Moving from leading such an established bank to a start-up has been “fascinating” for Ashley, challenging him to adapt his leadership style – although several of his core team at Alba also worked with him at Airdrie. That is perhaps not a coincidence – he sees Alba continuing in the same tradition of community banking as Airdrie.
For me, banking is a people business. It’s not numbers. It’s about people, it’s about their businesses and hearing the passion for what they do. Many people think banking is just a utility, but I want to understand what people do and why. It’s about relationship banking.
Lori Hammond CA, Head of Decision Support, Atom
Atom was among the first wave of challenger banks to hit the market. Founded in 2013 by former Metro Bank co-founder Anthony Thomson and First Direct CEO Mark Mullen, in 2015, Atom became the first digital-only challenger to be granted a banking licence. Unlike rivals Starling and Monzo, it focuses on savings accounts, mortgages and business loans, rather than current accounts. Its progress over the past five years culminated in it posting its first-ever monthly operating profit in June 2021.
“It feels like there has been a pivot,” says Lori Hammond CA, Head of Decision Support at Atom. “We were loss-making before, but we’re now on a good, consistent trajectory towards profitability, hitting important milestones in terms of volumes and margin of returns. There’s a real momentum that we’re now a grown-up business that will be profitable – it’s now about the journey to IPO.”
As an app-based product – Atom has no physical branches or plans to offer them – the bank focuses on being as user friendly as possible. The aim is to make the process more efficient, speeding up applications and empowering customers to make their transactions at their own pace.
“If you look at other industries, technology is pushing customer experience forward,” she says. “Banking has traditionally had low customer satisfaction, but people now expect better value. If I look back to my own mortgage application four years ago, I actually had to send something via fax. Once you’ve experienced the speed of doing things digitally, the appetite for going back to that diminishes.”
Hammond cites the impact of Uber on ride-hailing as an example of how other industries and business have influenced banking: “Before Uber, who would have thought of booking a cab on a smartphone app? Once you’ve experienced the speed of that, why wouldn’t you want to apply it to financial services, where processes can take weeks to complete?
“Buying a house is a big event in anyone’s life, but for most people, the mortgage journey hasn’t been a great one. If people see the customer journey improving elsewhere, they are naturally going to expect it from banking.”
Despite the boom in challenger banks and associated financial services, Hammond doesn’t expect to see neobanks overtake century-old institutions any day soon. However, the market is so big that this isn’t necessarily a problem. Competition will force the big players to improve customer experience and price, but the breadth of services offered by challengers means there are niches for all. Rather than competing individually, the smart option for fintech challengers might be to team up to become bigger forces, she believes.
Hammond joined Atom in 2017, having previously spent time working at EY, Barclays and Cigna. Although Atom has now grown to around 420 employees, the appeal of working in a nimble, high-growth business still applies.
At EY and Barclays, there was a set process and you had a job to do. You’re not changing that – you’re a small cog in a very, very big machine. Working at a start-up, you have to be agile and react to market. You have a chance to put your marker on things.
Hammond is currently in the process of setting up Atom’s decision support function with a small group of colleagues, and it is here that her ICAS training comes into its own.
“My job is so open in terms of the ability to influence and change things,” she says. “Having such a broad role, which you’re creating for yourself, means you have to know the fundamentals. It’s about having a grounding in the theory and what a good outcome looks like. Why is my function here and what am I trying to achieve? My accountancy training has given me that ability to analyse and create processes and structures.”
ICAS training partner BPP offers an introductory course on artificial intelligence.