New-generation UK banks challenge with technology

Sports teacher Ian Gould has little time for conventional banking. He cannot escape to a bank branch in his lunch hour or make lengthy personal phone calls at work.

So switching his mortgage through a mobile app was revolutionary. Using Atom Bank enabled the 45-year-old to make his application with no fuss and easily track its progress.

“Taking phone calls and dealing with emails is not possible, so I needed something quick and easy to use,” he says. “It was great to see where you were in the line of remortgaging; that was important because I wanted to get it done quickly.”

Atom Bank is one of a range of app-based banks emerging in the UK as the latest wave of new competitors to the large established lenders.

They are not the challengers the industry expected six years ago, when an overhaul of UK retail banking attempted to break the hold of the dominant five lenders.

But, as the larger “challengers” have stalled — in the past few weeks, two lenders that were touted by government and consumer groups as fresh competitors that would shake up the stale UK market have encountered problems — this new breed of digital-only banks, with slick technology and low costs, is gaining traction.

A number have gained licences from the regulator in the past year and are set to launch in the coming weeks. Atom Bank, launched by one of the founders of Metro, was the first to emerge last year.

These so-called neo-banks are tiny — Atom, for example, has 14,000 savings accounts. But unlike traditional high street banking services offered by branch-based challengers such as Metro, TSB and Virgin Money, they are offering customers the ability to manage their own money with an app.

They are built with modern technology that allows them to plug into external services, such as lending, investing or shopping from other providers and rival banks.

By analysing customer spending data and habits, these banks can offer customers deals by linking up with retailers or coffee shops, for example, in return for a referral fee.

Starling and Monzo are two examples that have gained a licence to operate and will focus on providing a digital current account and money management services.

Ricky Knox, founder of Tandem, another bank preparing to launch that will also focus on money management, says: “Airbnb didn’t go after the hotel market, but everyone’s spare room. We’re not going after banking, but everyone’s personal finances. The opportunity as we see it is that your bank is not trying to help you with your personal finances.”

It is still too soon to assess the impact of the digital-only banks, given many are yet to launch and others are at an early stage. They are not expected to take a significant share of the market from the biggest banks.

But they could be helped by problems afflicting some of the more traditional challengers that were supposed to rebalance the market away from Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC.

Last month the Co-operative Bank, which five years ago was set to double in size by acquiring TSB from Lloyds, put itself up for sale as a way to secure fresh capital. On Thursday it reported an annual loss of £477m, taking its total losses to £2.7bn since 2012.

Meanwhile, RBS is in talks to ditch plans to carve out 300 branches to form a new rival, Williams & Glyn, after a protracted failure to sell the business.

Other challenger banks, while growing their deposit and loan books, have struggled to gain current account share from the biggest lenders, with the number of customers switching still a tiny fraction of the market.

Imran Gulamhuseinwala, global head of fintech at advisory firm EY, says: “Part of the issue is many of the larger challengers look very similar to the existing banks.”

TSB, for example, which was hived off from Lloyds and floated after the failed Co-op sale, has been restricted to a degree by Lloyds’ IT systems.

Some smaller banks are now changing tack, in moves that emulate the digital start-ups. Clydesdale and Yorkshire Banking Group has unveiled B, a money management tool that sends prompts to customers when they are about to enter their overdraft and provides discounts at shops.

Jayne-Anne Gadhia, chief executive of Virgin Money, is also preparing to launch a new digital app. “It’s very much data driven, personalised for consumer requirements, and will almost certainly start with a current account,” she says. “We think that will drive down costs and improve service and efficiency for customers.”

She adds that Virgin sits between the traditional lenders and the smallest start-ups. 

“We’re not trying to put a digital front end on to a legacy system, and on the other hand, neo banks are tiny and I think you need scale to be impactful; we have brand and customer numbers.”

However, Tim Levene, founder of Augmentum, a fund backed by Rothschild, says that the more traditional challengers still face obstacles.

“Challenger banks such as Virgin Money have been unable to avoid the negative stigma of being a bank. The new banks are building more advanced feature sets and world class support, which makes them feel more like tech companies than banks.”

Nevertheless, Mr Levene’s ambitions for the new group of app-based competitors are muted.

“Unless Facebook, Amazon or Google decided to enter the UK banking market, which is not impossible, it will take quite some time and a significant amount of capital to seriously eat into the massive market share that the big banks currently have,” he adds.