Some things you need to know about digital banks (part three — strategies)

Part three — strategies
This final section looks at a couple of case studies to examine challengers’ models. The focus will be on three particular market entry points: current accounts / foreign spending (Starling / Monzo / Revolut), deposits (Atom), aggregation (Tandem).

Current accounts and foreign spending

It all started with foreign spending.
We were, and, barring the early adopters and some of the early majority, still are being ripped off by ridiculous exchange fees, commission, and charges for spending your money abroad. Enter the new norm, a resetting of benchmark behaviours and services, a new way to treat customers and be rewarded with a loyal following — fee-free foreign spending and better exchange rates on currency conversions.


Revolut was one of the first and continues to be more focused on this area, in particular as Revolut is not just a UK financial services provider, but is EU and US, too.

They targeted the holiday- and business-traveller markets hard, with live in-app interbank exchange rates, holding multiple currencies in the app, and fee-free spending and ATM withdrawals. It was a dream come true at the time!

They’re seeking a European banking licence, which will allow them to offer full current accounts, as currently Revolut is still a pre-paid card, but they want to move far far away from only being holiday spending and be the one card you have in your wallet and the one finance app on your phone.


Monzo’s Tom Blomfield actually worked with Anne Boden at Starling before he spun off to build his own competing challenger bank.

Monzo started as a pre-paid Mastercard with all the same benefits we now came to expect with a new entrant into the mobile-only challenger bank game.

While Revolut is still figuring out the banking licence and current account direction, Monzo have already obtained their banking licence, released their current account, upgraded most of their pre-paid users, and closed the pre-paid beta programme. Like Revolut, their are targeting the States, also.


Where Starling differs from the core mobile-only challenger incumbents is that it came late(r) to the game and came with a banking licence and a full current account.

While Revolut’s and Monzo’s intertia were gained through holidaying and traveller value propositions, Starling came with all of that (free ATM withdrawals abroad, no fees spending, Mastercard exchange rate) and was ready to be your full current account, too, with Direct Debits and the Current Account Switching Service, and the benefits of a full banking licence.

What’s the game plan?

They’re still young
There is a lot of chat around whether or not challenger banks are profitable or if they’re actually making a loss. Accounts are just a way to get folk in the door, build a loyal following and brand equity. Profitability comes with scale.

Challengers have entered the market undercutting legacy banking institutions, have fewer overheads, quicker turnaround of investments, and a lower customer acquisition cost. What might be a loss now, could be a very tidy sum if multiplied by five, or 10, or 20.

Make a loss now, make a gain later
Another reason why it’s putting the cart before the horse when talking about profitability is that challengers very well may be eating a loss now in the hopes of reclaiming that loss when they scale (or are bought). A risky strategy, but not unusual in business. One trend in business’s constant search for the next unicorn is in companies creating speedy unprofitable growth, having multiple large investment rounds, generating huge unrealistic valuations, and then selling out or launching an IPO — essentially cycling debt until the company eventually breaks even.

So, you’re a young challenger and you’re either making a loss per customer or a slither of profit. You put together a game plan for partnerships, expansion, higher-yielding products and services, and an idea of how many customers you need to turn around your fortunes, all the while bridging the gap with investment funding rounds, in the hopes you make that profit before your investors come calling at your door!

Marketplace and business
Aggregator referrals in the marketplace and business banking are two big areas that these challengers are also getting into.

Aggregator referrals is partnering with product providers and suggesting their services to you, the customer, directly in the app. Right now, the integrations are really minimalistic, but here’s hoping we’ll soon be applying for these products directly from our chosen banking up (reminding me of my post about servicing intents via personal platforms).

Starling have launched single director Ltd Co business accounts and are about to launch Sole Trader accounts. Monzo have said they won’t enter, then articles came out suggesting they would — who knows. Revolut have launched business accounts and a business marketplace.

Multiple income sources
This brings us to one of the competitive advantages challengers hold — their agility and ability to quickly launch and tailor many offerings. Through tariffs and deposits, business banking can be quite lucrative, but again, requires scale. Aggregators are just another revenue stream. And that’s the clincher. Although challengers started out with a single proposition of a spending account, they need to diversify and multiple their revenue streams in order to maximise the viability of the operation.

Combined with scale, you have a fighting chance of achieving high profitability. Not all of your customers have to be equally profitable, nor do they all have to use all your services. Multiple choice and many customers increases the possibility of high profitability.


Atom are banking on interest.
Atom launched their bank with a savings account offering market-leading fixed-term rates. Now, they’re selling mortgages. Genius!


Well, this comes down to one of the main ways in which banks make money — interest.

Banks sell mortgages to make profitable returns on the repayments (remember your conversation with your mortgage broker and discussing repayment v. interest only payments?). The interest on each repayment you make goes in the bank’s pocket, while the capital repayment pays off the money the bank lent to you.

But banks need to get that money from somewhere — that’s where savings come in to play (and investment funding)! Say banks offer you 2% on your savings on a five-year fixed-term agreement. That means that you give away your money for five years and later receive 2% profit on those savings. All the while, the bank has used your money to sell a mortgage at 4% — equating to a tidy 2% profit. (Obviously simplifying for illustrative purposes.)

Atom have had very successful investment rounds and huge deposits into their savings products. This means they can offer more mortgages and make even more in interest repayments.


Tandem are playing the long game.
Tandem came into the market with an aggregator app. Unlike the marketplace offerings from Starling, Monzo and Revolut, Tandem’s aggregation was screen -scraping account aggregation, similar to the old-school likes of MoneyDashboard.

What’s account aggregation?
It’s when you can see all your accounts in one place — basically your account view in your normal RBS or TSB banking app, except this time it includes accounts from every brand with whom you bank! So you can see your RBS, Monzo, HSBC, TSB, and Starling accounts (including savings, pots, credit cards) all in one place.

That’s cool, so what?
Well, if you’re the average UK banking customer, you probably don’t care. There aren’t that many customers who have enough accounts to make it worthwhile, really. Most people have one main account. And maybe a second account, or a joint account. The only benefit of this really is if both those accounts are with different brands, but even then there’s limited value.

Also, given current technological implications, aside from seeing your accounts in one place and viewing limited analytics on your spending habits, there’s not much else that aggregators can offer — at the moment. There’s not much of a call to action and there’s limited, if any, cross-selling (where, similar to the marketplace partnerships of other challengers, Tandem could suggest products and services for you).

So what’s really going on?
Tandem are playing the long game — they want your data!

The technology isn’t quite ready to take full advantage of Open Banking and PSD2, but potential reaches include leveraging your spending data to suggest products and then actually apply for them within the aggregator itself (similar to what I suggested for marketplaces above — and the article on personal platformification).

If Tandem become a one-stop-shop for all your financial needs, but don’t actually sell any products, that’s one thing. But aggregation itself isn’t very profitable. So, since launching, they’ve released a credit card and a savings account.

Interesting — what’s that about?
Credit cards are quite profitable and a great business to get into. Also, since Tandem are offering a cashback scheme on their credit card similar to Amex, they’re enticing you to do all your spending on their card. This is good for two reasons — one, they claim your spending data (it’s not another bank’s that they’re importing), and two, the more you spend, the higher the possibility you don’t pay it all off and then incur interest, which is how they make money!

Similar to Atom’s model of gaining savings deposits in order to sell mortgages, Tandem need savings deposits in order to offer credit facilities. And, again, they’ll offset the interest earned on credit balances with the interest paid on credit cashback and savings deposits.

What’s next?

Current account providers will launch business and joint accounts, continue integrating marketplace partnerships, and diversifying their product and service offerings to expand their sources of revenue.

But that still essentially makes them current account providers — is there anything else? Well, Revolut have already launched credit and insurance. I give it a year or so before challengers start offering credit cards.

What I want to see is the credit pot — stretching my current account to create a credit pot, and being able to switch, in-app, between using my debit pot (current account) or credit pot (credit account). All in the one app, single financial ecosystem, and leveraging tech to limit the number of cards in my wallet. That’s where the jackpot is! Next step, loans.

For Atom, I don’t see much changing for a while. Their proposed current account launched has been delayed for about a year. Atom’s not a challenger in the same way Starling are. They’ve gone for the lucrative (and high-risk) interest game. They’ll continue bringing in investment rounds and pushing mortgages for the next while at least.

And Tandem? I think they’re going to go down the interest route, too, but with personal loans instead of mortgages. Also, considering their Harrods buyout, it probably won’t be long before they launch a current account — though I’m not sure if it’s worth the hassle. With aggregation they already have the data, and with their savings accounts, they have the deposits to sell loans.

Who wins?

They all win — yay!

Well, maybe not too far from the truth. Across the board, challengers are targeting various different propositions. The question is whether there is enough value-add from these propositions to continue onboarding customers to reach scale and if there is enough appetite in the customer pool to keep the game afloat, or if customers will stop caring and just stick to what they know with traditional banks.

I believe however, that the winners will be those who can harness and leverage the power of personal platformification. The aggregation or marketplace style offering whereby you interact with one platform for all your financial needs.

We’re probably at least a year or two away from seeing initial indications of its viability, but in order to get there, challengers need to be investing and laying the groundwork now. That’s why aggregation and marketplaces and goals are so important.

Watch this space!



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