We played a role on the panel of the British Banking Association Annual Retail Banking Conference again this year. These are the notes used for the event – while not a transcript, the event took broadly similar lines. Conference moderator and broadcaster Tanya Beckett welcomed the panellists to the stage.
Listening to today's presenters, you'd imagine that an affinity based, community and lifestyle one-stop shop built to provide solutions to 4.9m differentiated intensely loyal affinity customers across their lifetime financial journey would be a winner. We in the Services Family hope so too - in supporting the armed forces and blue light services.
Buying a house or debt, debt which can lead to mental illness and potentially domestic violence, is a life event not a commoditised function as some new banks propose. A blended approach is required, both human face-to-face and digital engagement, numeracy and community support, all to get the correct outcomes for the customers and their family.
We aim specifically, to address their challenges with tailored products and support to provide solutions underpinned with state of the art technologies
So and unlike Fidor, a bank building a community, we’re members of a tight knit community for which we're building a bank or rather a full service solution.
You would think it doable. But I'm sure you'll understand our challenges as the panel progresses. If we can get through the door, the future could be ‘so bright you gotta wear shades’
Q: How was it for you? How challenging are you finding the licensing process?
A: We have found the Bank of England's New Bank Unit is a positive step towards increasing competition but doesn’t remove the challenges. In our case, they have been helpful in accepting a proposed phased approach to prove concept and build a more secure launch pad to achieving our plan of becoming a bank and addressing our views of customer priorities. What customer innovative solutions have been lost because of this first step?
Q: Is there adequate regulatory support for what you are trying to achieve? What more could be done?
A: We'd like the FCA to accept that, as the website suggests, applications can be processed without the expense of employing a large necessary staff at an early stage. However, the NBU/FCA have been supportive in our approach and we are cautious not to ‘over promise or sell’ as it creates even greater uncertainty in the challenger space. Capital requirements will always be raised by challengers but really the real challenge is not regulatory but innovation requires funding – without investment there can be no real challenge.
Q: What lessons can be learned from the Challenger banks who have gone before you?
A: Our phased approach to licensing and mobilisation was based on what we saw and discussed at the BBA through their useful series of challenger meetings. We put addressing the mobilisation challenges in terms of products and technology first and minimising start-up costs and risks. In simple terms, we are an aggregator of proven technologies rather than a Fintech, we have a vision, and are pursuing a plan, for how the best of breed technologies can be harnessed into a new type of service provider.
The danger for the Challenger sector is that examples exist of challengers burning money in the start-up phase with high manpower and consultancy costs which suggests the “fat-cat” cultures are deeply embedded in people as well as institutions.
Q: Has the zeitgeist passed? Are traditional banks likely to be replaced in the long run by more innovative financial services? Or by disintermediation?
A: I don’t think the public trust financial services (rightly or wrongly) to be fair and even handed, skeletons are still coming out of the closet and the appearance of new cultures doesn’t appear to be changing the customer experience or ‘fat cat’ perceptions. Part of the issue for Challenger Banks is the culture in banking; people say you can’t start a bank because you’re not a banker, yet Anthony Thomson wasn’t a banker but Metro is a pretty successful challenger and he still doesn’t claim to be a banker, Elon Musk I doubt is a rocket scientist either!
Even so, Zeitgeist driving innovation are poor stablemates, what should drive innovation is the potential client outcomes innovation can produce.
So, the banking culture and inertia isn’t open to visionary disruption and most of the technology is focussed on better cost/income ratios for the bank or flashy single line customer journeys for millennials as opposed to providing better financial access and outcomes for all customers.
Everything is in ‘Beta’. Our strength is a differentiated customer base, fishing in a different pool, with better services, which some others have achieved, and scalability: What takes a FinTech to scale – used by millions? It must solve a problem they have or might have!
Q: Where/who/what is your market over the next ten years? And how do you see that developing?
A: Our affinity market will be still be there, they seek a trustworthy community bank not just a stylised offering from an institution lacking empathy. If we’re not successful they’ll probably still be misunderstood and to a degree underserved.
There are new challenges like the increasingly punitive approach to regulation and competition – both in terms of applying fines but also increasing severity of fines (GDPR) may have its own impact – either in terms of people willing to fund or in fact challengers willing to enter the market. We’re lucky to be able to protect against these risks right from the start.
Given that a similar bank in the US, the USAA, took nearly 100 years to do what we're trying in 3-5 years, if we can be a decent bank in 25 years and serving our community well, I'd be a very happy man.
Q: What are your thoughts on the investor community appetite for banking? Are pre-licensed banks at risk from the rug being pulled by corporate/foreign investors? If so, what can be done to mitigate this risk? Have you had to make compromises to satisfy investors? How has the investor relationship affected your experience?
A: There is a difficult UK investment environment, for us serving a unique and significant customer group we concentrated on UK investors but with limited success. While narrow FinTech solutions appear to attract funding, the addition of regulatory objectives to our project has proved daunting and often a show-stopper for investment. We have had to broaden our potential pool outside the UK where the Brexit impact on the sterling value has helped to a degree. Even then, the risk assessment varies considerably between investors with specific views or concerns about the UK market based on media and, sometimes, hearsay.
The landscape has been so skewed that there is the inherent belief even with investors that these things must be expensive and if they are not they are bound to fail.
If the only source of funding is from the overseas communities then innovators are forced to take what they can. It often feels that the UK has become too used to the short term double digit return and investors want to be in and out in 3 years, everyone makes compromises to investors every day.
However, the costs of starting are perceived to be high in money and resource terms and this, compounded with uncertainty, has reduced the appetite for risk in investing in financial services. Tax breaks incentives for investors like EIS might help as there appears more funding for pure FinTechs than actual service providers. EIS (tax incentives) for regulated start-ups might help as there appears more funding for pure FinTechs than actual service providers.