Why U.K. Fintech Firms Are Becoming (Not Partnering with) Banks

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As chief operating officer at Allied Irish Banks, Anne Boden tried to break down internal resistance to change. She enjoyed her work, but hosting hackathons and the like goes only so far.

"I could only do something radically different by starting from scratch," said Boden.

Now in the U.K., she's on a quest to reinvent the checking account as the founder and chief executive of the mobile-first startup Starling Bank. Starling, which has not yet opened for business, plans to crunch transaction data to help people manage their everyday financial lives, including cash flow forecasts — through an app.

If that ambition sounds familiar, it should. For several years, neobanks in the U.S. have touted the ways they help consumers more easily manage their money — and for lower fees — than the big bad banks of yesteryear. Behind the scenes, of course, most of these would-be disruptors have been partnering or selling their companies to banks to remain viable and to gain scale.

That's not what Starling, Mondo, Atom Bank, and the most recent entrant Tandem plan to do. Borrowing a term from the software and venture capital crowds, these startups aspire to become "full-stack" chartered banks under the welcoming eye of the U.K. government. (In June, the mobile-first Atom Bank secured its banking license, for example.) In addition to collecting interchange fees, they plan to make money from holding deposits and overdraft lending.

Their journeys are important to watch as part of a worldwide experiment to determine whether mobile-first banks, which compete on experience rather than rate, can win over enough digitally savvy consumers who are flooded with financial offers.

Some of the new U.K. startups acknowledge the influence of Moven and Simple, which created a new way to engage with banking, but they view their pursuits as the next frontier. Approaches vary but the so-called challenger banks share the belief they need to avoid being beholden to older banks that can slow down the creative process of designing an easy-to-use app.

"You just end up limited in a number of a different ways," said Tom Blomfield, chief executive and founder of Mondo.

Convoluted terms and conditions forms caused by having a relationship with two companies when signing up for one app, legacy technologies interfering with modern features, and more cooks in the kitchen to reject an idea are among the troubles associated with linking up with banks.

So Blomfield, who used to work at Starling, is seeking independence in vying for a banking license for Mondo. Not only would a license open the doors for more revenue sources at launch (deposits and overdraft income), but it lets them call the shots without a bank parent interfering.

"It puts you in control of your own destiny," said Blomfield.

The decision to build a bank also gives a company a chance to choose a core processing tech that suits a digital age. Mondo and Starling are building the tech in-house, while Atom Bank partnered with FIS.

Without having yet publically launched, Mondo has been very public with its features. It has teased numerous ones that only a few banks have put in place like: letting customers turn their cards on and off from an app, tying graphics to transactions, sending travel alerts that welcome customers to their new destinations and letting them know their cards work. It also has teased novel transaction alerts like this one:

Such enticing features are meant to win over new smartphone-savvy audiences. Mondo is hoping to create something that feels akin to magic, and eventually, expand into more markets like other European countries and even the U.S. Similarly, Starling is trying to crunch transaction data to help customers rather than cross-sell them silly or charge outrageous fees.

"Does Google charge you when you reject a spam message? No they don't," said Boden.

Alistair Newton, research vice president in banking and investment services at Gartner, says he believes a killer user interface will inspire some to switch. But it remains to be seen whether the challenger banks can get enough customers to sustain their business models.

"There's a lot of hype around it," said Newton.

And even when consumers are willing to sign up with accounts, there could always be issues in identifying them.

Daniel Van Dyke, a research specialist at Javelin Strategy & Research, said he was trying to sign up with a neobank account and was forced to mail in a document to prove he was who he said he was. That's a problem with any service but particularly irksome for a brand that claims to be digitally savvy.

"Living up to the promise is always a challenge," said Van Dyke.

Not to mention: in becoming banks, he says the disruptors could struggle to innovate like their ancestors have.

Whether they endure or flame out like so many startups, mobile-first bank accounts serve as a reminder and potentially a wake-up call for any bank: Sure, branches continue to be the No. 1 sales channel but there are consumers who prefer to sign up with a brand online.

UK startups, however, have an advantage that the U.S. doesn't yet seem to possess: regulators are rooting for challenger banks to enter a market that's dominated by only a few banks. Heck, prior to being bought by a bank in the U.S., Standard Treasury published a paper on its interest in becoming a bank in the U.K. because of the environment.

That doesn't mean it's a cakewalk, though.

Mondo's Blomfield says the process has gone from nearly impossible to excruciatingly difficult and significantly cheaper: What would cost at least 100 million pounds to start a bank can now be accomplished in the tens of millions because of a change in the rules.

Since March 2013, the U.K. government has made available an "option b" process to infuse competition. It grants startups authorization to operate as a bank until they have raised enough money and have tested their processes. The two-stage option helps solve what had been a Catch-22: a startup needed a license to get venture capital money but couldn't obtain a license until having secured the money.

Only time will tell if consumers even want to engage more with their digital money.

Certainly, Starling's Boden believes there is a large group of people who are ready for digital-only banking in a country that already claims real-time payments.

And improving the experience so people, say, know they will overdraft ahead of buying the item that would lead to a fee is being offered more places. But Boden welcomes the race.

"The market needs competition," Boden said. "It's good for customer choice. Customers want something different. They don't [change] banks because it's all the same."

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