The Race is On: How 3 Challenger Banks Plan to Win Customers (and Make Money)

Sarah Mikutel
5min read

Seven years ago, the first new retail bank in the UK in almost a century got its licence to open, as Chris Skinner noted in a recent blog post. Now, there are nearly 50 banks in the pipeline: app-only startup banks, foreign exchange payment cards, personal financial management apps, business accounts, and more. How are they all going to make money? And how will they differentiate themselves enough to win the hearts of customers? In episode 228 of FinTech Insider, we discuss with guests from FinTech challenger banks Fidor, Starling Bank, and Loot.

Megan Caywood, Chief Platform Officer at Starling Bank; Sophie Guibaud, Vice President of European Expansion at Fidor; and Ollie Purdue, Founder and CEO at Loot, joined us in a conversation about their business models, who their customers are, and how they’re using technology and data to provide a great customer experience. We also talk about the challenges they’re facing, what agile really means, and what’s coming up for them in 2017. Megan, do you want to get us kicked off and tell us a little bit more about Starling? Megan: Starling is a tech startup with a banking license here in the UK. It’s often referred to as one of the leading challenger banks, and what that really means is that we’re building a full stack bank, a bank from the ground up, with the intention of being mobile only, and with a vision of putting the customer first. We want to be the world’s best current account, but we don’t want to be the world’s best mortgage, or insurance, and so instead, we’re building out a marketplace which is an API layer where we can integrate in other best in class FinTechs from across the market, to enable our customers to easily access those, all from within their Starling app. Sophie, what about Fidor? Sophie: Fidor is a bank that has launched back in 2009, in Germany, based on the principle that we want to also put customer first. We have found a way to doing so, by launching a community where people can help each other around personal finance topics, and on the other side, give us input about what Fidor should launch next, and what, basically, the clients want. We are now licensing our technology across the world, to organisations such as banks and retailers, and telecoms, to help them launch digital banking propositions. Ollie, tell us a little bit about Loot. Ollie: Loot is a digital challenger focused on the millennial segment. So our bullseye is around 18 to 25 year olds, and we look at key day to day issues that we can solve through banking, using predominantly the transaction data, and using that in really interesting ways, to help people know more about their spending, but also enable them to do more, as well. Talk to me about how digital only, as a business model, could be changing the financial sector. I mean, is there an advantage to not having branches? Ollie: I met a banker and he told me branches were great, because that’s where people go to complain. So that’s a really flawed model. Branches were the best option when there was no other option, when you couldn’t onboard people electronically. We’ve looked at it, and branch-based account openings is the biggest fraud risk, so right now it’s actually the worst option. The biggest risk of account opening is the fact that the people aren’t trained well enough to look at it. So if you can do that digitally, you can do it much better, and lower your risk. And then also the reason branches exist was to upsell, and I don’t think consumers think that way anymore. People used to go to your bank for everything, [but] you don’t anymore. So branches are just expensive. I like to think our whole operating expenses are still probably less than one bank branch, so if you think about that as, like, economies of scale and stuff, it doesn’t make any sense to have branches open. That’s why when people say, like, banking and current accounts aren’t profitable, they’re just looking at it from the wrong angle. How do you guys make money? Talk to me about the business model. Sophie: Fidor started like a traditional banking model, credit and, and savings, and the demand chain in between, but also referrals to FinTechs and the idea of providing a one-stop shop experience. We are offering free banking in Germany. We charge for the card, but it’s kind of market standard, and actually, out of building our own technology, people came to actually ask if they could lend our technology, and this is where a new business model was born, because it was about providing our technology to other players to launch digital banks. And out of that, another business model came out, which is lending our business license, lending our marketing activities, lending our AML compliance, to players such a telecom companies that want to launch in banking. So, it hasn’t been planned since the beginning, it has been, growing step by step with what the market was asking, and realising there was a business model beyond banking, and this is what we have been advocating. Megan: There are many other intelligent ways that banks can make money, other than upselling higher profit financial products, because when you look at the strengths the bank have around the KYC and AML, around transactional businesses, access to payment schemes, those revenue streams other than just the net interest margin from lending and deposits that you can also monetise, without passing on fees to your customer. That’s exactly spot on with what we’re looking at, as well. We’ve seen the UK's top four banks’ share of market grow from 66% to 77% over the last ten years. Should they be complacent? Ollie: That’s temporary. I have yet to meet a happy banking customer. There probably are some out there, but I think for lots of markets, and lots of different demographics, they’re really underperforming. So they’ve got scale, and they do have lots of money, and the ability to transform, but if they don’t do something, I think they’ll start to lose users. Megan: We like to spend a lot of time talking with our customers, not just usability sessions, but chatting with them and understanding how they’re currently using their banking products and where those pain points are. What we hear time and again is that what they’re used to expecting – seamlessness and ease of use from other apps and products – just isn’t what they see from their bank. Banks might have an app, but that doesn’t mean they’re competing. I won’t name the big bank that I joined when I first moved to London, but my balance is never actually accurate. It’s clunky, I have to mail in tons of forms, they just don’t get what technology has enabled for customers today. And so there’s this kind of gap between what banks are offering, and what they’re expecting from the application that we’re looking to put forward. We see data being huge, 'data is the new oil' and all that. How do you balance privacy of data versus being useful with that data? Sophie: we are a German bank, so dealing with privacy is very important for a German regulator. On the other side, you have ways of using data that are useful to the customers by just anticipating things on an opt-in basis. For example, we are providing emergency loan, an overdraft, just by one click, by analysing what’s going on in the past three months of the customer, you know him, you don’t need him to fill out a form. So it's about getting additional data from the customers when we need it, but also making the most of what he has already given us. In the future it’s going to be about cross-selling, improving that capability of being proactive as opposed to reactive, of being able to be here exactly at the time the clients need us. Another thing we are looking into is actually charging clients according to how loyal to the bank they are. If, for example, they add value in the community they should probably get a better pricing on overdraft than clients that are a bit less loyal. So we have these different things that are about instantaneity, about cross-selling, and also about loyalty, around data. Ollie: it would be really hard to make a great product without using data. The way we see it is, if you were to look at a normal banking app, it will show your balance and your transactions. We’re now at the stage where we can show your balance, transactions, how much can you spend for the week, and stuff like that, kind of basic budgeting. But then what we can do is if we just compare your spending to other people similar to you, we can then say, “Well, your spend on food is higher than it should be,” and then that’s actually actionable data you can give people, which I think is way more important than trying to give them an overdraft because of their spending. Megan: Perhaps the less sexy side, but very, very exciting, is when you look at data, how that can help influence and spur fraud detection to increase security and stability of the ecosystem. So on that point, do you guys see yourselves as part of a wider ecosystem to integrate with? Megan: We consider ourselves a platform. So we offer the current account, but at the same time, we’ve built our open APIs, that enable anyone to build on top of our platform, and then at the same time, we’re integrating in the best-in-class FinTechs from across this ecosystem into Starling, and the whole idea there is we want to focus on the current account, but obviously, our users have diverse needs. They need lending, they need insurance, they need mortgages, bill splitting, budgeting, a whole number of products that a number of FinTechs have done exceptionally well. So, rather than building that out ourselves, we can instead integrate all of that functionality and those offers into the Starling app. So definitely a horizontal play there. Ollie: We look at it from user stories. So what are we going to try and fix? So the first three were, “How much am I spending?” “Is my spending normal?” and, “How much can I save?” and we can solve all of that in our own ecosystem. There will be other user stories that we can’t solve on our own, so that’s when we’ll use best-in-class providers. How do you stop yourselves losing some of the sharpness when it comes to being agile? Sophie: First of all, company culture. If course we have compliance people, we have legal people, we have risk people, but those are people that were recruited because they understood the mission, what we were trying to fix, and they are not trying to bend the rules, they are just trying to understand the rules, as opposed to protecting themselves all the time, and I think that’s really important if you want to be a startup, challenger bank. The second point is the size. I think HSBC has 20,000 people working in compliance. “Yes, challenger banks will grow and you will end up with teams of ten people in compliance, 20 people in compliance,” but just our structure is not made up so that we reach 20,000 people. When you have a leader in a team leading 50 people, you end up with one streamlined discussion. 20,000 people just doesn’t add up. Megan: We still embrace agile as a model, but we have continuous delivery. We’re releasing daily. But we have to continually ask ourselves, when regulation comes out, “What does that mean for us?” and as we continue to grow, and in five to ten years, when new, disruptive competitors are in the market, how do we maintain that competitive edge? And I think the answer to that is we have to be willing to continually disrupt, even when that means disrupting ourselves. Looking at an example from the US, is Intuit. So, Intuit is this massive, 30-year-old company, that built out QuickBooks back in the 80s, but they’ve maintained their competitive edge really, really well, and they’re still a billion-dollar business today. And that’s because they’re not afraid to disrupt themselves. They’ve this ethos of speedboats versus battleships. So they launched QuickBooks, QuickBooks Online, ten years before Xero made it into the market. So Xero went into New Zealand and Australia, and MYOB and others were said to be asleep at the wheel, because they just didn’t get the Cloud, like, “Oh, it’ll never take off.” And if they were to offer an online offering, it would disrupt their revenue stream. Intuit, on the other hand, even thought QBO, their QuickBooks Online offering, disrupted their desktop offering, they still pushed it out and they still forced migration onto it, early, because they saw what the competitive threat would be. So I think even within banking, we’re going to have to maintain that from a regulation perspective, from a competition perspective. We’re the disruptors right now, but we won’t always be, so we’ll have to be willing to disrupt ourselves when that time comes. Ollie: We built a whole fraud engine in a weekend. That’s what we’d call agile. I think the second you realise there’s a thing you need to do, you just do it, and there’s nothing stopping you. Obviously we plan pretty ahead of what we do, but if something comes up, the ability to be able to build brand new functionality into your product and release it overnight, or over a weekend, I think is really key. Ollie, you had an outage at a card processor you use, and it shut down Monzo, Revolut, yourselves, but your customers seemed really grateful for the transparency about what was going on, which seemed to kind of strike a contrast with what we would have seen from a larger bank. Can you tell us more what happened there? Ollie: We were really lucky, because we were doing an internal hackathon that weekend, so we actually had a really good group of, like, developers, customer support, marketing, all in the office at the exact moment we went down. We knew about it before our supplier did and we were able to message every user in the app, put everything on social, and just say, “Just carry another card.” All you guys are communicating with your customers in a very different way. I know Fidor is based around a community. Sophie: Customers kind of expect that the banks, or any kind of services, answer them in the channel they want We are trying to give them the range of channels that they have in mind, be kind of at the forefront every time something is coming up and just listen to them where they want to be listened to. The client needs to be able to have the feeling he can reach you at anywhere, and he will get a fast answer and a good customer service. If you had one piece of advice for a CEO of an incumbent organisation, what would that be? Ollie: Work out what you’re better at than anyone else. So if you went to, like, the CEO of a big bank, and said, “What are you better at than all your competition?” They definitely won’t say the same thing as the guy right below them, and I think as a company, you need to work out what one or two things are you going to be really good at, and just focus on that. That’s the most important thing, I think. Sophie: I would echo Ollie, then say if you want to embrace digital, find a good reason to do it, not for the sake of digital, and then focus on inputting that in the company culture. Megan: I think they don’t need to be so focused on looking at, “How can we maintain our current profits? How can we maintain our current footing?” Looking into the future, saying, “What’s next, and how do we embrace that, and how do we let go of these current revenue streams? If that means embracing a new model, what do we need to let go of in order to maintain our footing?” What’s been the biggest challenge that you guys see, and what are your biggest challenges coming up? Megan: It’s no small feat getting a banking license. The entire process of just applying, successfully submitting an application, getting your banking license with restrictions, lifting restrictions, that process is very arduous, very challenging, it takes a lot of time, takes a lot of money, and for good reason. It should be difficult to become a properly licensed bank, with FSES protection, but it has been very challenging. Ollie: I think the biggest challenge is getting the long term growth. I think FinTech isn’t mature in the UK market. You’ve got early adopters, and then there’s a big gap, I think. I think bridging that gap is going to be the biggest challenge for all of us. I think peer to peer lenders went through it really harshly. You saw Zopa get early success, then year and years of real hard troubles, before they hit profitability. Banks are going to go through the exact same process, and I think that will be the biggest challenge. Sophie: For us, it’s about being able to do everything we want to do. So, like, we are still a small company, plenty of ideas, plenty of things we want to prioritise. I think that we would like things to go faster all the time. What's next in 2017? Sophie: We are launching in several countries. One thing that has been in the press is that we are launching in France, so that’s quite a big piece. New things are on the works, new contracts with b2b clients launching digital banks, so that’s going to be quite exciting too, and for new products, there is the marketplace in white label that is called Finance Bay, we are empowering banks to launch their own marketplace, basically, and we are doing all the work for them, and other stuff that I cannot talk about yet. Ollie: We launched our accounts at the, kind of, mid-December, so we’ve been spending a lot of time refining them. This year’s all focused on new products, and new markets. Megan: Yesterday, as you know, we announced our first marketplace partner, of Transferwise. Today, we launched our Beta, so that was really exciting, and then on Monday, we’re going to announce that we’re launching CASS, which is Current Account Switching Service, which will be really huge for us. After that, you’ll see us opening up Android beta, shortly thereafter launching our API, then you can expect mobile wallets, and then you can also expect new payment schemes coming on board. Those, we’ll be a little bit coy about, because I can’t say anything specific. Does this mean, then, that somebody who is an account holder with one of the big banks could actually switch their whole bank account to Starling? Megan: Yes. So we are a proper bank. We are fully licensed, you can use it with direct debits, faster payments, you can use it just as you would your bank, and it’s great, because it also has real time notifications, it has card control, it has all sorts of stuff, biometric, everything you could possibly want in a bank. So give it a try. The battle begins.


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