Intro
Ah! There you are. I've been waiting for you...
What do you know about FinTech?
On this episode, I'm going to take a brief look at this relatively new industry, what it is and how you might benefit?
This might be a little ambitious for a single-handed podcast; but I'm going to take a look at FinTech, and more specifically, the rise of Challenger Banks. This is an area in which I take an outside interest. I'm not in the markets, and don't work in the banking industry; but I am interested in how technology changes how we interact with the world around us.
What is FinTech
So, first of all, what is FinTech? Firstly, and this might be obvious, but it means Financial Technology
This is a quote from Wikipedia...
"Fintech is a new financial industry that applies technology to improve financial activities "
Fintech is changing the world of finance for consumers in many ways.
Back in 1967, the first cash machine was introduced, by Barclays, where you had to enter a machine-readable cheque (issued by the cashier in the branch) and the machine then issued the cash. This was followed up with pairing with a 6-digit PIN for security.
Since then we've moved from traditional banking through to banking over the internet, and now, mobile-only banking.
For example, you've been able to open a bank account over the internet, without physically visiting a bank, for a few years.
Now you can do exactly the same thing, in minutes, from your smartphone. You can even turn your smartphone into a “digital wallet” and use it to pay for things using the money in your account.
So what are the potential benefits of this new FinTech industry?
- Fintech products tend to be delivered online and so are easier and quicker for consumers to access.
- The fintech companies probably don't need to invest money in a physical infrastructure like a branch network, so may be able to offer cheaper propositions to consumers.
- As consumers we will benefit from a greater choice of products and services because they can be bought remotely, regardless of location.
- Technology allows fintech companies to collect and store more information on customers so they may be able to offer consumers more personalised products or services.
Of course, there are also some risks too:
- Fintech companies may be new to the financial industry and use different business models to traditional providers. This can make it harder to see if they are regulated, and what your rights will be if something goes wrong
- Financial products that are bought instantly online without ever meeting anyone face-to-face may make it easier for consumers to make quick, uninformed decisions.
- Financial products bought online may leave you more exposed to technology-based risks. For example, your personal data could be mis-used or you could fall victim to cybercrime.
- While technology increases choice and access for most consumers, it most certainly will exclude those who can't use or don’t know how to use the internet or devices like computers, smartphones and tablets.
Challenger Banks
One of the big areas that we see in fintech are the rise of the Challenger banks. Banks that 'challenge' the traditional institutions like HSBC, Barclays, RBS etc.
Traditional banks have had it easy, for too long; and due to rising costs they don't actually make our lives easier.
Full disclosure - as I mentioned earlier, my main bank is First Direct (a division of HSBC). For those of you outside the UK, this is a telephone / internet bank. There are no branches - everything is done remotely.
In fact, when I opened my account, over the telephone, I still had to wait for the documents to be sent to me for signing, before the account could be opened.
I've been with them for about 25 years; and in that time the technology has evolved; but not at the speed of the likes we're seeing with Challengers.
Who are the banks?
So, who are the main challenger banks?
Monzo & Starling
You may have heard of them, but probably the most well known of these are Monzo and Starling. They seem to have gained the mass market appeal.
Monzo was started by the Tom Blomfield who brought us GoCardless (a direct debit payment system), and Starling is run by the Anne Boden ... who, amongst other roles was Chief Operating Officer at Allied Irish Bank. It was here that frustration crept in and she decided to start her own bank!
The main benefit of both of these are that they are built on brand new technology. They are not restricted to the legacy systems that have been in use by banks since hundreds of years ago! OK - not THAT long, but you know what I mean!
With a whole new infrastructure, they can be much more agile in their approach and do things, and react, more quickly.
One big plus is the sign-up process. No more are there tons of forms to complete and visits to branches. In fact - there are no branches. You sign up using a mobile app, record a short video confirming you want to open the account, upload a picture of your ID and that's it - done.
In fact, as these are mobile-only banks you have to have a smartphone to use it.
In fact, this relates back to one of the risks I mentioned, as it most certainly will exclude those who can't use or don’t know how, or don't have a smartphone.
OK - disclosure number 2. I also have a Starling AND a Monzo account. Whilst the Monzo account is dormant; I use my Starling accounts daily; with both personal and business accounts. I'll come on to 'why' a little later.
Features
With a brand-new, built from the ground-up infrastructure, these new kinds of bank can do things that the others just don't have the capability to do.
We are all used to getting notifications on our mobiles, whether a tweet, message, update... whatever and so receiving a notification when we spend (and more importantly, receive) money, then we have instant gratification. When you buy something using a card (or whether Apple or Google Pay) or the debit card, the money is shown as leaving your account instantly. No more guessing when the debit will actually take place. The balance is always up to date.
Another feature is that of Spaces (on Monzo they're called pots); and these are places to squirrel money away. They're not savings accounts; they're just separate areas of the account, but they move your money out of the transactional part of your account, so that you can't 'accidentally' spend it. On top of that, both banks also offer 'Round Ups'.
This means that when you pay by card, the balance to the nearest pound is moved to another pot. For example, something costs £9.60. The 40p round-up is placed into a pot and this is a great way to save.
It's as though you paid with a £10 note, and the 40p change is put into a safe place.
Again, it's not moved permanently, and you can put it back into the main account whenever you like. In fact, you don't even need to turn this on.
You can also choose to double the amount, multiply by 5 or by 10, to speed up your saving.
On top of these nice features, you can also see where your money is being spent, with reports by category (and you can decide on which category you want to use - although at present you can't create your own) and also a view by merchant; so you can see how much you're spending at a particular place.
You can hear a recent episode I published about Money Dashboard; a budget planning application (details in the show notes) and both Starling and Monzo integrate beautifully, giving you a complete view of all your finances.
Importantly, both Monzo and Starling are covered by the Financial Services Compensation Scheme; which mean that deposits up to £85,000 are protected should anything happen to them.
Making Money
Of course, as well as serving their customers, banks also exist for their shareholders, and it's important for them to make money. Since there are no charges associated with running the account, apart from any overdraft charges (and not all customer will have access to an overdraft facility) then how else do they make a profit.
Starling actually sell their platform, as a service, to others. They call is 'Banking-as-a-service' and since they have a full banking licence, they can offer access to their infrastructure to 3rd parties, who can piggy-back on their system to offer additional services to customers.
This allows Starling to benefit, via commission payments, without needing to be involved building and developing in the products. Via the Marketplace, on Starling, you can buy insurance, consolidate pensions, and sign-up for wealth management services. It's a clever way of doing this, with limited risk and allows them to concentrate on their core business.
Why Starling?
So, what do I think of my Starling account, and why did I choose them over Monzo?
Well, if I'm honest, I'm very pleased. I created a business account first, and subsequently transferred all my business banking entirely to them (from HSBC, which was costing over £100 each year).
I then created a personal account. I'm currently running this in tandem with my First Direct account, but I do envisage moving over during the course of this year. They offer the Current Account Switch Service, which is supposed to make it very simple.
They also offer accounts for 16-17 year olds; so the children have also got a Starling account. It makes sense for them. They don't need branches, and they get the instant feedback on the spending (not forgetting also when I've paid their pocket money!)
The Monzo app didn't sit right with me. I've spoken in previous episodes about how the look and feel can have an effect; and there are apps I don't use because they don't 'look' right. Now, I know that is very superficial, and I should look beneath the user interface.
But, I can't. If an app doesn't give me the confidence when I launch it, then how can I have confidence using it.
For me, the Monzo app is too clustered and busy, and it looks like it's trying to do too much. But, what do I know? It's a very popular bank, with a reported 1 million users, so please take this as a personal preference thing and not an indication of the bank itself.
Conclusion
Challenger banks, and FinTech in general, are the future. The consumer market is ever growing and it's great that there is now choice outside of the incumbents, which still seem stuck in their ways. But, FinTech doesn't just stop at banks; it's allowing many new players to enter the markets, as I mentioned earlier, with insurance, wealth management and pensions becoming more accessible.
Do you use one of the new banks?
What are your thoughts?
Does the thought that there are no branches put you off? Or the fact you can only use a mobile phone?
Podcast of the Week
Before I finish, I must give a mention to my Podcast Of The Week
Wonderful Radio Flanagan is hosted by Paul Flanagan. Paul has recently been suffering from what seems to be a very bad cold; which has made it virtually impossible for him to release any new episodes and recently has released a two-part story of when he went travelling in the USA.
Paul likes a giggle, and, don't take this the wrong way; but if you can make someone smile and engage with your podcast, then I think you're onto a good thing.
If you've not listened, then Paul takes a rather irreverant look at all sorts of things; and be careful, he's even done an episode from the shower! I kid you not!
Give Paul a listen at Wonderful Radio Flanagan - details are in the show notes.
Thank You
I hope you’ve found this episode interesting.
If you have any questions about FinTech, or anything else, then please get in touch via Twitter @prodmatters
Links to the challenger banks are in the show notes.
If you've made it this far, then thank you very much. Tweet me the phrase "Fintech is the future" and I'll give you a shout-out in a future episode.
Please don’t forget to follow me where you normally listen to your podcasts.
Thank you very much for listening and until next time, remember, Productivity Matters.
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