The rise over the past twenty five years of both vast computing power and networked, digital communications has profoundly altered many industries. Bookselling, newspapers and recorded music, for example, have been transformed. Financial services, however, are yet to really change.
Despite, for example, the expectation that peer to peer would disintermediate lending banks, big banks remain the intermediaries of choice in the credit market. The regulator has striven to encourage start-up challenger banks, named so as challenger's main target is to compete directly with the larger well-established banks, by giving them a chance to try out their business model in the so-called “sandbox”, but the challengers are still tiny.
Can the fintechs really change retail finance in the way that digital streaming changed music? There is, arguably, a great deal more at stake: reducing reliance on "too-big-to-fail" banks, cutting costs, increasing transparency and boosting financial inclusion.
UK challengers Monzo, Starling Bank, Cleo (an online budgeting tool and financial services broker) got together in mid-November under the auspices of TechCrunch, at an event sponsored by The London Institute of Banking & Finance and hosted by Startup Grind, to analyse what the future might hold for FinTech.
Tom Blomfield, the CEO of online bank Monzo, was frank in admitting that what the bank’s half a million customers have so far is not “revolutionary”.
“Most of them are using a pre-paid/top-up card. It’s amazing it’s so popular. 20-30,000 of our customers now have a ‘full’ current account and about 20 per cent of those [I guess] are using it as their sole account.”
Reluctance to Switch
A problem for most start-ups is that the majority of UK consumers are reluctant to switch banks – particularly when it comes to handing over their monthly salary payments. (Since the current account switch service was launched by the government in 2013 to make the process easier, just 3 million individuals, small business, charities or trusts have switched accounts.) At the same time, where banks make money is on extending credit. Blomfield doesn't want to just rely on credit provision:
“The average bank makes £100 - £150 a year from overdrafts, fees, etc. To break-even we expect to only need to make £15. So we can provide cheaper services than traditional providers in the longer term. Our end goal is to be the ‘amazon marketplace’ for all your money. FinTechs are vying to be the financial control centre – a platform/marketplace with networking.”
The Money Hub
In that model, a bank like Monzo would be a sort of online financial concierge, helping with all money-related issues such as switching energy provider, or looking for cheaper insurance products –
services on which they would take commission. They would also, if the business develops as Blomfield plans, have a strong stake in people’s personal life as the hub over which money is pooled, bills are split and recommendations are sent. This sort of overall helpful functionality is where Blomfield sees the gap in the market. When asked why there was a need for a new bank he said:
“Banks are crap, basically. [Mobile] apps exist to make my life easier, banks just annoy and frustrate me. They revolve around products and we have to fit around them…So there’s a gap currently – user experience. We should be designing services to suit people’s lives.”
A number of the services that Monzo wants to offer are already available – but not as a bundle from banks. That – and in particular a service that offers best in breed regardless of provider is – Blomfield argues, something incumbent banks will have to wake up to, or lose out. He says that some are already trying to get to know their customers’ needs better. “But they’re still promoting their own products – e.g. loans, insurance. The rub will come when they compare products from other providers,” Blomfield says.
For more details of the debate around innovation in financial services, see the latest edition of Financial World, the official journal of The London Institute of Banking & Finance.