The next wave of fintechs in personal banking

Jonathon Bartlett

Financial Services Senior Business Development Manager

10 min read

Our last post on Open Banking explored the regulatory framework being used to stimulate innovation in personal finance and the early impact on the sector. Now, we’re taking a closer look at the next generation of services and likely future ahead.

The rise of the digital challenger banks has been a major game-changer in personal finance. Prior to this trend, research conducted by the CMA showed only 3% of customers switched banking provider in 2018, with most choosing to keep their long-standing accounts with established legacy banks. However, the slick service and iconic cards offered by firms such as Tandem and Monzo have proven irresistible to customers, who signed up in their droves. 


Let’s explore how the digitally focused challengers have changed consumer expectations, disrupted profit models and paved the way for a more collaborative future in personal finance.

Are digital challenger banks really profitable?

As Revolut and Emma announce a major new partnership reaching 4.5 million European customers, it seems the services enabled through Open Banking are proving a continued hit with consumers. However, despite the success of digital challenger banks in terms of user-figures, the way they generate profit is less simple. For example, although Monzo is one of the UK’s biggest fintech startup success stories, the company has yet to report a profit. 


The simple application process can be completed in-app in a matter of minutes, but perhaps it’s a little too easy...Customers are quick to create new accounts, but the majority don’t choose to switch over their main banking activities, such as income and savings. As a result, digital banks have created a number of new chargeable services to counter this and turn a profit from their services. 


Premium accounts are one big trend we’ve seen develop. Revolut charges customers £16.99 a month to upgrade to their ‘metal’ account, which offers a range of added services including personal insurance and even commision free stock trading. The other is a reduction in standard service fees. Many challengers, such as Tandem, have stripped international spending charges from their cards. 


Although the challenge is specific to the digital banks, the shift in services will create an overall change in consumer expectations. As spending abroad without charges and easy-to-use service integrations become the norm, banks who don’t keep pace risk alienating customers - a key example of how tech innovation can change an industry from the bottom-up.

The cultural factors at play in fintech

Market need, cultural habits and convenience all play an important role in the success of any new fintech product or technology. For instance, although the UK has been one of the leaders of digital banking innovations, customers have not always been quick to get on board. When contactless payments were first rolled-out, many users were apprehensive, with security concerns high on the list. 


To counter this, a number of financial incentives were implemented to encourage usage. Transport for London offered preferential rates for passengers who used their contactless bank card or mobile to swipe in and out, making the service an instant hit. Eventually, the convenience of contactless won-out, and usage is now increasing 87%, year on year


Peer-influence is another factor that helps to persuade apprehensive users. The digital challenger banks have been wise to this and created a range of iconic cards to fuel strong brand recognition amongst friendship groups. This is reflected in customer figures where we see very localised usage between the providers across the UK.

Rapid credit and insurance services are on the horizon

Maintaining a strong credit rating is essential for any customer wishing to take out a loan or secure a mortgage, but many don’t understand how to improve their score or how it’s calculated. 


Open Banking aims to help this through enhanced control of finances and the use of expenditure trackers. The granular level of detail in spending habits will help to show sensible financial activity to secure good rates on loans and mortgages and reverse years of bad debt. This will be supported further as Experian and Equifax, the two main credit-score companies, move to digital models. This will enable faster approvals for credit applications and real-time reporting so users can better understand how their rating is influenced by their habits. 


And, as more services shift to digital, the opportunities for better service grows. For example, Lemonade, a US-based insurance firm, are offering near-instant payout approvals. The real time data-sharing and transparency enabled by Open Banking means it’s only a matter of time for personal insurance in the UK to see a similar model.

Financial collaboration will be the future of personal finance

The financial sector has invested a great deal in security spending. However, even with peer-influence at play, trust will always be a major factor for consumers. Services and products offered by new fintechs are much more likely to be trusted if introduced to customers through one of the established providers. This means B2B collaboration across the sector is the best way for established providers to benefit from the innovation and for fintech startups to reach a wide customer base.

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