CEO briefing: Creating a bank for the digital age has been hard work but changing regulations are making it easier.
Challenger bank Mondo has set itself the task of taking on the likes of Barclays, Royal Bank of Scotland, Lloyds, and more with a strategy revolving around technology innovation in order to re-think how banking is done.
The first notable difference about the bank, which is waiting for full regulatory approval from the Bank of England, is that customers interact just through a mobile app, no bricks and mortar overhead costs to worry about.
The significant thing about this is that it is a bank designed for a digital age, where people of all ages are often glued to their phones.
In October 2015 the challenger was faced with the prospect of choosing a co-location data centre provider that would run its core business and hopefully help it to scale, the problem was that the company had no expertise in this area and didn’t really want the IT overheads.
Then in November 2015 the FCA paved the way for cloud computing to be used by financial services.
Under the guidance the regulator said there is: "No fundamental reason why cloud services (including public cloud services) cannot be implemented, with appropriate consideration, in a manner that complies with our rules.”
Mondo founder and CEO Tom Blomfield told CBR: “Looking at all of the overhead we’d have to maintain in terms of an IT operations desk with 24/7 coverage it was looking really painful.
“And frankly it’s not something we are good at…then basically this FCA guidance piece dropped out of thin air and it was a godsend for us.”
The financial regulators in the UK have been proactive in their support for fintech companies and this one piece of guidance opened up the opportunity for Mondo to use Amazon Web Services.
With a background in start-ups, the challenger’s founders had a history of using AWS, the advantage of which means that the bank didn’t have to have an IT operations desk and didn’t have to plan capacity, with cloud leaving the founders free to innovate.
Although the technology is now much more accessible to fintech start-ups, it doesn’t mean that success is guaranteed.
According to RSA research more than half of new businesses don’t survive beyond five years, with causes such as too much competition, burden of regulation, lack of bank lending, and too much red tape just some of the reasons as to why they fail.
So despite the technology being available, there is still plenty of risk involved, but this is something that Blomfield feels is necessary.
“I think it is important that we as a society, and regulators more specifically, don’t take a zero failure approach, because they way you get innovation is that you try lots of different new things, some work really well and you get an AWS and some fail and go by the wayside and you’ve never heard of them in 5 years.
“So some element of risk taking and inherent failure there is really important, because if you want to eliminate your risk of failure then you never end up innovating at all,” said Blomfield.
Talking about the need to take risks is all well and good but it may not be something that all customers would look for as a characteristic of their bank.
Blomfield said though that it is doing things differently, engaging customers early and operating in an open and transparent way; for example it publishes its technology roadmap for the next 12-18 months on its site.
“So rather than, sitting in a walled off office and strategising for two years and launching with a grand unveiling and sort of hoping that somehow you’ve tapped into what people want, you figure out a plan and very early on talk to users, prototype, you release that prototype early and you get feedback," he said.
The idea of small continuous deployments is designed to reduce the pain of a big update. Blomfield said that a small release to a select group of people allows the bank to see if it works and if it doesn’t then it can be rolled back and any problems fixed.
While this may not sound too new for many technology companies and businesses that already adopt this approach, it is something that banks have not been able to achieve.
Blomfield said: “Compare that to an IT change that brought RBS down for two weeks, Ulster bank, Natwest, RBS you couldn’t take money out of their cash machines for two weeks because it’s a mainframe you have to deploy everything at once and their roll back strategy is, there is no roll back strategy, it’s sort of really scary.”
It is regulatory changes that have allowed for a new model to be created when building a financial services organisation and more are on their way to further disrupt the industry.
In May the Competition and Markets Authority recommended the creation of open application programming interfaces (APIs) and data sharing in order to force greater transparency for account holders and to increase competition between banks.
Blomfield welcomed this as a huge innovation, something that will stop banks from relying upon “customer lock-in” and will make it much easier to do things like robo-advisors, and comparison between different products.
“That’s huge for us because ultimately what Mondo wants to be is a marketplace of banking, an app store of banking, so it really is reversing the model,” he said.
The challenge created by fintechs, while clearly focused at disrupting the incumbents, also has to deal with the other start-ups that are trying to do the same thing. Mondo isn’t alone as a challenger bank; others such as Tandem and Atom also exist.
So it is still necessary for Mondo to create a differentiator, Blomfield said: “I think the big difference actually is that challenger banks up to now have basically taken the existing banking model of cross sales and interest rates and used the mobile phone to sell those traditional products slightly more cheaply.”
This means that they are in essence offering a mortgage 0.1% of a fixed term savings account 0.1% better paying, said the CEO.
“It’s the same old sh*t, there’s not a huge amount of innovation it’s just like a price competition.”
So to separate it from the rest, Mondo is trying to rethink what the relationship is between a customer and a bank is.
Blomfield said: “The idea that your bank could be looking out for your TFL transactions and telling you when you forgot to tap out or recommending that you take a monthly travel card rather than a day by day one is kind of eye opening for a lot people that think my bank just gives me a credit card and a mortgage.”
So basically Mondo wants to help to make people’s lives easier, cheaper, or simpler in the same way that a Google Maps, or WhatsApp does in other areas of life – but it hasn’t been helped by the recent Brexit vote.
On one hand, a recent a survey by Innovate Finance of 100 member firms revealed the fears about London’s fintech hub in the wake of the referendum with the call for a ‘Brexit Blueprint’ and numerous concerns.
Meanwhile a PwC piece of research found that challenger banks would not be put off launching in the UK.
For the Mondo CEO it ranks on a scale of, “bad to really, really bad,” believing that a narrow look at tech of fintech shows it is, “undeniably really, really bad.”
“It will damage capital investment into the country from abroad, it will damage our ability to passport across Europe and access 500 million customers, it will damage our ability to attract and retain the best talent across Europe, it’s really bad,” said Blomfield.
The CEO didn’t have a great deal of positivity to add when it came to the impact that the result will have on Mondo’s roadmap.
“It means we will probably be looking at a second license in Europe which entails millions more in costs, it probably entails opening a second office somewhere like Berlin, it means we will hire staff in Germany not in the UK, it means it will be harder to raise capital, all of these things are bad for this country, so it’s hard to put a positive spin on it,” he said.
While Brexit may be another large hurdle for Mondo and other fintechs to overcome, Blomfield still believes in the future of his challenger bank with the only probably break on its growth being capital availability.
Blomfield said it would be an interesting few years as it looks towards becoming a full licensed bank, full launch and the chance to appeal to millions of customers in the UK.