This month, Admap looks at Drivers of Change in 2019, exploring five key trends and how they will impact marketing over the next 12 months. One of the trends we put the spotlight on is the ‘evolution of banking’.

Trajectory’s Tom Johnson gives his take on the emergence of smartphone-only banking.

Maybe you’ve watched a friend place an unusual looking debit card on the table to pay for dinner, or someone browsing a sharp looking app detailing their expenditure in the past few days, or maybe you’ve seen them advertised on the tube. You may not have had these experiences yet, but you will soon. Challenger banks have arrived and with them they have brought a fresh, modern take on banking, and they are growing quickly.

At the forefront of these new challengers are smartphone-only banks like Revolut, Monzo and Starling, offering pre-paid debit cards and current accounts, catering to consumer demand for technologically augmented versions of existing banking experiences.

Consumer desire for better experiences through technology is nothing new, particularly in banking, and so traditional banks are no stranger to services like online or mobile banking, but here’s where the challengers differ. They’re good.

It’s counter-intuitive in business to view establishment, experience and the large existing market shares that come with them as weaknesses, but this is the situation the big banks find themselves in, and it is one that the challengers are exploiting. In September 2018, customers of NatWest and Royal Bank of Scotland woke to reports that there were serious issues with their IT systems, and for over five hours, IT departments struggled to identify the cause. These issues followed previous IT failures at TSB in April and were followed by another IT glitch at HSBC and TSB later in September.

Solutions were found but the underlying problems remain; the IT machinery of high-street banks is a mismatch of old legacy systems and the newer technologies which must be constantly implemented to remain competitive when it comes to offering online and app-based experiences that can rival those of their competitors. The old technology is robust, but outages occur when new services are not integrated correctly; inevitable given the advances in technology since the implementation of the legacy services, many of which have been in place since the introduction of Common Business-Oriented Language (COBOL) in 1959.

The smartphone-only challengers are unburdened by these legacy issues, allowing for incredible agility and seamless upgrading and expansion of their services. Starting from scratch has allowed challengers a head start in shaping the future of banking.

Monzo launched in 2015. with the initial appeal of fee-free foreign currency transactions. However, founder and chief-executive, Tom Blomfield, feels that it is the instant access to money management that has really served to launch the bank, stating that the provision of visibility and control over day to day spending is the key asset – not foreign exchanges for customers who might only travel a couple of times a year.

This is something that Revolut have also embraced, continuing to provide live fee-free currency transactions – and an effortless transition into cryptocurrency investment – but allowing consumers to set budget limits, analyse their spending by type with automated analysis and the implementation of a ‘Vault’ feature which accumulates ‘change’ from card transactions – the 5p left over from a £4.95 purchase – saving it separately from your current account. For busy, consumers who may struggle to find the time to save, these little extras can be a hassle-free bonus.

These features are ones that consumers and investors have found very attractive. Both Revolut and Monzo have over a million UK customers each – Revolut hit the mark in July 2018 with Monzo following in September. Further, Monzo reached ‘unicorn’ status at the end of October with a £1bn valuation.

As with any new technology there have been some teething problems. In lacking the legacy systems of the established banks, smartphone-only banks lack some of the critical infrastructure that underpins their practise and so it is outsourced. In March 2017, Monzo and Revolut – who depended on the Dubai based payment processor Global Processing Services – saw payments fail globally leaving many customers without access to their money. Both banks have committed to moving their payment processing – and many other processes – in-house; Monzo’s payment processor is already in-house while Revolut’s is due to be implemented by the end of the year.

There are also security concerns with new entrants to the market. In 2016, Peter Thiel-backed German smartphone-only bank N26 had poor security defences exposed by computer science students at the University of Erlangen-Nuremburg which would have left their 200,000 customers in 17 European nations vulnerable to significant losses. The two big players in the UK have yet to experience something like this, and further, have displayed proactive measures when their customers have been put at risk by other businesses. When British Airways experienced a data breach in September, both Monzo and Revolut identified potential victims of the fraud among their customers, reaching out to affected users within hours, producing and delivering replacement cards.

Challengers are succeeding having taken what would ordinarily be a weakness – lack of history, experience, and exposure – and weaponised it. Starting from scratch has allowed the smartphone-only banks to deliver a proposition designed for the customer of today and tomorrow, instead of dragging yesterday’s proposition into the future. These banks are growing among young consumers, creating potential for life-long relationships should they continue to develop their offer. However, these remain new businesses; only 1 in 5 account holders with Monzo have their salary paid into their account. This must change in order to attain long-term success, but Revolut appear to have found the formula, breaking even for the first time in December 2017 ahead of a global expansion.

These banks continue to grow, developing their proposition and building trust with their customers through sleek presentation, excellent customer service and improved reliability. Features like cryptocurrency exchange could contribute to the changing of money as we know it, and these challengers will be at the vanguard. For once, the market leaders are playing catch-up.