Describing itself as the UK’s first truly digital bank, Atom Bank got its official license from the Bank of England back in June. With all customer interaction conducted through an app, the start-up is poised to shake up the whole finance industry.
CBR spoke to Edward Twiddy, Chief Operations and Innovation Officer at Atom Bank, to discuss what Atom has in store.
CBR: How much of the digital banking revolution has been driven by mobile?
Our model is basically app-only, so it will never be anything other than an app until the next thing comes along, as it inevitably will. Actually the whole business model is made possible by the penetration of mobile technology into people’s lives, their homes, their businesses and increasingly onto the high street, so that you can use your money when you want and where you want to.
CBR: What will the app constitute? Obviously a bank fulfils a lot of different functions.
There isn’t going to be a browser version of Atom, so everything from account opening through to starting the decision on a mortgage through to completion of that mortgage to servicing that mortgage, both secured and unsecured personal lending, current account opening, the whole identification and verification process, and authentication are all done in the app.
So when we say it is the first digital bank, we kind of mean it; others have got an app but actually the functionality is generally a shadow of the browser version. Even then they require you to send in documents, they require wet signatures on things and they’re looking for you to present yourself to a branch to an individual to advise on a mortgage and that kind of thing.
Where that advice is required, we’re outsourcing it. Where the presentation of the documents is required we are using the technology in the device to overcome the need for you to turn up and sit in a queue to hand over your passport to have it photocopied.
All of those things will just disappear and be consumed in the app.
CBR: There are still, presumably, many functions of a bank that cannot be automated?
There’s absolutely an underwriting function, just as there is a fraud function and a money laundering function: all the things that protect the individual and the bank. Then there is support for those instances where customer circumstances change and there is a power of attorney to act for them.
That’s one of the few areas of law where we have to ask for paper-based evidence of that power of attorney. Even then we are creating an app that enables the power of attorney to act on behalf of someone else.
CBR: The license was granted by the Bank of England in June; is this the first time they’ve had to carry out these processes on a digital bank?
As far as we’re aware, they haven’t taken anybody else through the process right to the point of completion either with a yes or a no. We’re certainly the first bank in the UK to be authorised which will have no branches and is not just an internet bank but an app-based bank.
It really is optimised for mobile devices and for people who are choosing by preference to be self-service, bank directly and take technical support and technical advice where they need it, but are really making the choices for themselves.
That’s not a unique business model; direct banking has been around for some time. There’s no coincidence in the preponderance of people in the senior team here at Atom who have come 50 miles up the road from First Direct in North Yorkshire.
CBR: How have you integrated your infrastructure with existing infrastructure?
We wanted to do the payments scheme directly and be a clearer in our own right. I think that’s probably the ambition of all new entrants, to avoid any sort of relationship with others.
The plain fact of the matter is, given the timetables of the market, it’s impossible to do that, so we’ve got a clearing bank arrangement with one of the major clearers. Our payments infrastructure is bundled into theirs and we piggyback on their tried and tested system.
This is fine because we get to choose which of the clearers we work with. There are some that are better than others and could offer the real-time functionality that we require, and others that are perhaps more guarded in what they offer to their clients.
CBR: Is there scope for established banks to become fully digital?
There will only be if they’re willing to create completely new business. Otherwise they are going to find it just as difficult to release themselves from legacy real estate and legacy IT systems, but most importantly, legacy revenues.
The real freedom for a new business is a blank canvas. Yes of course you’ve got reputational advantage and cost advantage, yes of course you can employ the people you want and create the culture you want.
However, one of the huge advantages we have, and this will sound perverse, is that we don’t have revenues. Some of the established businesses would find it fantastically difficult to re-imagine their revenue streams and wean themselves off one sort of revenue and onto another.
That’s kind of fundamental. They’ve got to tell their shareholders that they’re not going to have a dividend for five years.
CBR: Which revenue streams will they lose from moving to digital?
They have a very stable idea about what charges they can charge. If you look, there is very little difference in the price you pay for a CHAPS payment. The actual price you pay bears no relationship to the cost of that transaction.
What you’ve got is a number of businesses that are all the same. They are not competing in a number of areas because it suits them to keep that revenue there, because they can’t get themselves off the old, antiquated systems they are working on, most of which are a product of an investment they might have had in the 80s or 90s.
It’s a very under-invested sector, retail banking. They’ve either got old systems, in the best case. In the worst, it’s the product of a series of mergers, acquisitions, take-overs and nationalisations.
One of the great ironies is that the so-called challenger banks, such as TSB, are actually just facsimiles of the business that they have been taken out of. If I was involved in one of those banks I would have wanted to take the TSB brand, but why on earth would I take 600 branches?
It’s no challenger, it’s just different. It’s just saying let’s have another one but a bit smaller.
It solves one problem, but it doesn’t solve the real productivity challenge that the sector needs to be facing up to. The sector has a cost-income ratio at best in the high 50 percents and at worst in the 80s. It’s still laying off tens of thousands of people and not changing that cost-income ratio.
CBR: A lot of these de-mergers were driven by ‘too big to fail’ regulation.
It’s met the challenge of systemic risk, but what it hasn’t done is present the consumer with something fundamentally different. It’s not that you couldn’t imagine a wholly new technology, but it’s just that the shareholders wouldn’t wear five years of zero growth.
We have investors who are looking for us to make an impact and they’re investing on that basis; they’re aware that that is the risk-reward equation they are working with.
CBR: Why has it been so difficult for a new player to come along and why has digital changed that?
Until around 2010, 2011, when people really began to think about what the route to market for a genuine new entrant is, and they took some of the experience that they’d seen from Metro, but probably equally importantly, they looked at what sort of banking landscape they wanted in the future.
It has been difficult for people to face a capital mountain and a technology mountain and a people mountain. The old regime required you to have all these things in place before you applied.
There’s a huge upfront risk that any investor has to face, which is that I’m going to put all my balance sheet capital up, build a technology stack, employ all of these people and sit them around for 12 months while I wait for this binary yes or no.
That all had to change and has changed. So there is now a more welcoming regime and a genuinely supportive environment in the PRA and FCA towards new entrants.
The fundamental thing which digital brings is what it’s always brought, which is huge processing power at very little marginal cost.