A new breed of challenger bank

Back in 1989, Midland Bank launched an innovative new bank called First Direct. It had no physical branches customers could only contact it by phone but the lines were open 24 hours a day, seven days a week. And in a challenge to the established banks, which often fell short on customer service, First Direct positioned itself as "better", hoping that customers would "enjoy the experience of banking with us".

First Direct was a big success. By 1995 it was making a profit. Today it has 1.3 million customers. It consistently tops the tables for customer satisfaction. Yet you certainly couldn't claim that it's ushered in a world where everybody enjoys using a bank. The big institutions that dominate the market are seen as remote, impersonal and bureaucratic. And among younger people especially, traditional banks aren't seen as meeting the needs of the modern world. People now live their lives on their smartphones and they want to be able to manage their money on them as well.

That's why a new breed of bank is cropping up, based around smartphone apps. All have a funky website claiming to make everything easier, more intuitive and "collaborative", to keep you more in touch with your money. They offer such features as real-time updates (so you always know exactly what your balance is), biometric security (such as voice and face recognition), and analysis of your spending patterns to help you achieve your goals.

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The first batch is made up of Atom, Monzo, Starling and Tandem. All four firms have received a banking licence, which means they can offer the whole suite of options that people associate with a current account, including standing orders, direct debts, and overdrafts. None of them yet does that, but all promise to offer it soon.

Atom Bank which is backed by, among others, high-profile fund manager Neil Woodford opened its virtual doors to all in October. It has more than 8,000 customers, and currently offers four fixed-term savings accounts that pay between 1.8% for the one-year account and 2.4% for the five-year account. It also offers a "digital mortgage", which is only available through mortgage brokers or financial advisers.

Tandem Bank was one of the crowdfunding world's high-profile successes, when it raised £1m in 15 minutes last year. It opened for business in November, targeting "older millennials" (28-35 year-olds) and wants to give everyone "a better, happier life with money" by building a "feelgood bank". It is not yet offering products to the general public: you have to be invited by a "co-founder".

Monzo was set up by Tom Blomfield, the founder of fintech startup GoCardless, which processes direct debits. Monzo claims to offer "banking like never before". In its crowdfunding stage it went one further than Tandem and raised £1m in just 96 seconds (it's currently aiming to raise another £2.5m). It offers a pre-paid debit card, which instantly updates your balance when you spend, and which can be used abroad for no fee, and aims to offer a current account later this year. Customers receive "intelligent insights" into their spending habits.

Finally, Starling Bank is going to offer just one product: the Starling Account, which it says will be a current account that will be "different to any current account seen before" and provide "real time notifications with in-app insights". Its been launched in beta and comeswith a debit card, and allows customers to set up standing orders, direct debits and make Faster Payments.

Whether any of these start-ups will be a success remains to be seen. They all talk a good game and have slickly designed apps, but until they provide the full range of banking services, it's impossible to pass judgement on them. However, they are likely to be just the start of what promises to be a complete transformation of the way we bank.

Incumbents may eat the apps

Getting a banking licence is a time-consuming and expensive business, so completely new banks are likely to be few and far between. However, the Payment Services Directive which will mean that the big institutions must provide smaller fintech companies with access to their systems means that there should be a flood of new entrants. Indeed, it's entirely possible that the future of banking may be a hybrid between start-ups and traditional institutions. After all, there's little reason to bother with the fuss of taking out a banking licence when you can build an app that sits on top of your customers' existing accounts, providing specialised services and letting the banks take care of the rest in the background.