Growing pains for digital banks

Mobile-only "challenger" bank Tandem launched in 2016, raising more than £2.3m in an hour on crowdfunding platform Seedrs. Since then, it's not all been plain sailing it lost its banking licence earlier this year after a £29m planned investment from Fraser Financial Services (owned by China's Sanpower Group) fell through. But last week, Tandem announced plans to buy Harrods Bank, which has been in business since 1893 but has been loss-making for many years. If the deal is approved by the financial regulator, Tandem will get Harrods' banking licence, along with £200m of loans, and £300m in deposits, reports Lynsey Barber in City AM. That would propel it from also-ran to one of the bigger digital banks. So how are the other challengers Atom, Monzo and Starling getting on?

Atom Bank which boasts entrepreneur and entertainer will.i.am on its board wants to become "the most efficient lending bank in the industry". It secured its banking licence in June 2015 and now offers three products fixed-rate savings, secured business loans and mortgages. Its savings products consistently make the best-buy tables it offers 1.9% on its one-year fixed saver account, rising to 2.4% for five years. By March 2017 it had nearly 18,000 savers and £538m in deposits. It made a loss of £42m for 2016-17. But these are still early days.

Monzo which has created a lot of buzz on social media received its full banking licence in April. It now boasts almost a quarter of a million pre-paid accounts and is rolling out "beta" current accounts 5,550 so far, with the aim of having them available to every customer by the end of the year. Overdrafts of more than £20 will be charged at a flat 50p a day with no interest payments.

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But Monzo has had its issues too. Problems with its back end saw chief executive Tom Blomfield apologising to customers for outages that meant payments could not be processed. Customers were urged to carry a back-up card from another bank. In the year to the end of February 2017, Monzo lost almost £7m, or £50 per customer 40% of which was down to overseas cash-machine fees. The bank is consulting customers on what to do about this, but insists this will "not be a profit-making exercise". It looks likely to introduce a £200 monthly limit, with any withdrawals over that incurring a 3% charge.

Starling is perhaps the most developed in terms of day-to-day banking and has a more sober feel. It aims to create the "best current account in the world" it pays 0.5% on balances up to £2,000 and 0.25% on those up to £85,000. It offers an overdraft at 15% AER, and a maximum charge of £2 a month. It charges no account fees, no fees for using the card at home or abroad, and no unauthorised overdraft fees.

The new players are all well-placed to take advantage of "PSD2" the EU Payment Services Directive that opens up banking (my colleague David C Stevenson will go into this in more depth next time). Neither Monzo nor Starling plan to offer savings accounts or loans instead they will invite customers to connect with other providers. "We don't want to be a full-service bank," says Monzo. "We want to be a platform or marketplace that gives people visibility and control of all of their money, whichever providers they use. The future of banking is data and identity." Starling similarly positions its account "at the centre of a wider financial ecosystem". It already has relationships with foreign-exchange app Revolut and MoneyBox, an app aimed at first-time investors, and has introduced a "marketplace" to its app where third parties will be able to offer services to Starling account holders.

Metro Bank: a more traditional challenger

Britain's original challenger bank, Metro Bank, is going from strength to strength. But it has taken a different path to the mobile-only digital banks (see story above). It was the UK's first new high-street bank in more than 100 years when it launched in 2010. It now boasts more than a million customer accounts, with deposits up 49% year-on-year to £9.8bn in the three months to the end of June 2017. While other banks shut branches, Metro plans to open a further eight to ten this year, expanding beyond southeast England. Losses fell to £17.2m in 2016, from £56.8m in 2015, and the bank expects to make its first full-year profit in 2017. It listed in 2016 since then the share price is up by more than 50%.

In the news this week

The shift of banking from physical branches to the internet, and specifically to mobile phones, "implies a more persistent danger to the financial system than many people realise", says Patrick Jenkins in the Financial Times. Regulators see money held online as less "sticky" than that held in-branch, and more likely to be withdrawn should a financial crisis rear its head. Banks are required to hold 3% of branch-based deposits as cash, and 10% of online deposits. But the line is blurring: money held in a branch can usually be accessed online, after all. And the extra mobility brought by PSD2 and the UK's Open Banking rules, both of which make it easier for people to move their money around, says Jenkins, could "further undermine the solidity of the system".

Gibraltar is hoping its experience regulating the gaming industry will give it an advantage in setting up one of the world's first regulatory frameworks for distributed ledger technologies (DLT) and businesses built on the back of the current craze for cryptocurrencies. The government of Gibraltar has put forward a set of proposals that will provide a "progressive, well-regulated and safe environment" for blockchain-based businesses. Speaking in London this week, Albert Isola, Gibraltar's minister for commerce, said the territory wanted to attract quality companies, and would have laws in place by the beginning of 2018.