Revolut / STARLING BANK / N26 / monzo

The past decade has seen the emergence of a whole cohort of Monzo-like digital banks. As these digital banks have mushroomed, the number of customers at physical branches has plummeted. As many as 60 branches a month are disappearing from the UK high street, with nearly 3,000 vanishing in the past three years.

But the legacy banks are trying to fight back, innovating (and imitating) with their own digital offerings from shiny new apps to instant spending alerts. So can traditional banks survive, or will they go the way of the Blockbuster video rental stores? Already in the UK, the market share for current accounts of the big four legacy banks – Barclays, Royal Bank of Scotland/NatWest, HSBC and Lloyds – is shrinking rapidly, from 92 per cent of all bank customers a decade ago to around 70 per cent today.


Some challenger banks – such as Metro Bank and First Direct (owned by HSBC) – have physical operations: First Direct with its call centres, and Metro with its rapidly-growing network of high street branches, easily recognisable with their distinct blue and red logo that first appeared in Holborn, London, in 2010.

The horsemen of the fintech revolution, however, are digital natives, with Monzo, Revolut, N26, Atom and Starling Bank in the lead. Even mighty Goldman Sachs is getting in on the act, with its rapidly growing, digital-only Marcus savings accounts.

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The online banking revolution started nearly eight years ago, when the chief operating officer of Allied Irish Bank, Anne Boden, sat down for dinner with an ambitious 25-year-old Oxford law graduate. This was Tom Blomfield, now CEO and founder of Monzo, who had just founded his second startup, a direct debit payment service called GoCardless. The two would team up in 2014 to launch Starling, the UK’s first mobile-only bank, offering current accounts via an app, as well as other financial products such as loans and mortgages. For most people, who were used to queueing at their bank branch, managing money at a click was a novelty, to say the least.

Boden didn’t come out of nowhere; a stalwart of the banking sector, she had held top roles at UBS, the Royal Bank of Scotland for more than a third of a century. Then the financial crisis hit the world – and she knew something had to change.


Starling began to accept beta customers to open current accounts through its app in March 2017. To date, the bank has raised £74 million and is not about to stop. But it’s pushing along now without Blomfield – who left in 2015, reportedly due to some friction with Boden. He set up a rival venture, now known as Monzo. Both target millennials, hoping to lure them away from the big four; unlike Monzo, Starling now also offers business accounts.

Monzo, however, has enjoyed skyrocketing success, with £212m total funding and plans to expand to the US. Andrew Wu, assistant professor of finance at the University of Michigan, says the key to this success is in Monzo embracing APIs from the get-go.

“They designed a series of APIs that allows different fintech front-end systems – robo-advisors, crowdfunding platforms, other banking and saving products, and so on – to communicate with Monzo's back-end core systems: the management of bank accounts,” Wu says. As all of these services would invariably require a bank account from the user, developers can simply piggy-back on Monzo as their provider of a bank account and account services.

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Despite more and more people switching to digital-only banks, only a small minority are actually choosing a challenger bank to provide their primary current account (for example to receive their salary), says Toby Coppel, the CEO of Mosaic Ventures. Instead, people use these secondary accounts to pay bills and track their monthly spending.


Some of these banks, especially Monzo, even manage to get a sense of community spirit, with a thriving online forum, where customers give feedback on potential new features, branding (they voted on the name change from Mondo to Monzo) and even some fee structures. “This is an important feature as it helps being more relevant and having a constructive dialogue with the people that will end up using your services as well as develop additional products on your platform,” says Markos Zachariadis, an associate professor of information systems and management at the University of Warwick.

Another startup making plenty of noise is Revolut. After the collapse of Lehman Brothers in 2008, CEO Nik Storonsky joined Credit Suisse, where he met Vlad Yatsenko. Fast forward a few years, and the pair decided to jump ship and founded Revolut in 2015. Today, Revolut is Europe's fastest growing fintech unicorn, opening around 10,000 new accounts each day with four million customers signed up across Europe.

At the start, the bank drew in customers by letting them spend and transfer money abroad at the interbank exchange rate – at a much better spread than most banks’ rates. Now Revolut is expanding its features by offering spending analytics, budgeting controls, savings features and cryptocurrency exchange, among other services.

Revolut is “pivoting towards Starling and Monzo by seeking a banking license, via Lithuania,” says Coppel. The three companies will compete head to head, he adds, “although Revolut is geographically more diverse and has ambitions across Europe and in the US”.

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Still, argues Coppel, neither Monzo, Revolut or Starling are betting strongly on the lending side of things, such as overdrafts – an important feature for many customers. And the legacy banks are rapidly improving their mobile experience. “Their strength in the lending side of the business is much greater given their low cost of deposits, so their core economics are strong, despite being saddled with the cost of their branch network and legacy IT systems,” says Coppel.

There are others, too. Coconut, with its 4,000 users, offers a current account for freelancers and small business owners – and helps them do their taxes. It updates a customer’s accounting details, and automatically gives an estimate of the tax they will have to pay at the end of the year.

N26 already operates in 24 countries across Europe and has more than 2.3 million customers. Atom Bank, another prominent digital-only rival, has already secured £369m in funding. It doesn’t even have a card but uses facial and voice recognition to help customers access their accounts and make money transfers.

So are all these fancy new online banks a threat to the established brick-and-mortar ones? Will legacy banks disappear?

Not necessarily, says Zachariadis – there will always be customers and products that need more personal attention. “A lot of traditional banks suffer from the fact that they are unable to seamlessly and interchangeably use chat, phone, branch, and mobile app as there are restrictions on the various transactions that are allowed to each,” he adds. Zachariadis suggests a “phygital” approach, where a customer would have a full choice and could blend ad hoc.

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Wu thinks that legacy banks will need to take the digital strategy seriously and transform. The back-end IT systems of legacy banks – particularly in account management, risk and fraud, and so on – are excellent, he adds. It's usually at the front-end – user interface, customer service, new products and suchlike – where they have seen challenges. So the trick is for legacy banks to focus on their excellent back-end systems and imitate the Amazon Web Services strategy, he adds. Build a great system, and then open it up for everyone to use.

Blomfield, for his part, doesn’t think legacy banks should vanish completely – but they will offer very specific services, he believes, such as loans and mortgages, while more and more customers will switch to digital banks for their main accounts. Ideally, he wants Monzo to be a sort of a finance hub, from where users would manage all their money at Monzo and in other banks, too. One thing he’s certain about though: no matter how hard legacy banks try imitate challengers, he says, “they won’t be able to catch up”.

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