A Journey Through UK Fintech: A Spotlight on Digital Banking
Hey! Liam here. I'm a decade deep into my fintech journey and I'm here to share a few things I’ve learned along the way, having worked with leading accelerators and fintech companies. On my blog, I blend past insights with future trends in fintech. Subscribe to stay up-to-date with my latest posts, and leave a comment to get involved with the community.
In terms of fintech that we interact with regularly, our mobile banking apps come a close second to digital payment solutions. Fittingly, I’ve decided to focus on the story of digital banking apps in the second instalment of the 'A Journey Through UK Fintech' multi-part series.
Banks fundamentally do two things: hold deposits and lend money. However, the way they’ve gone about doing this over the past 40 years has changed drastically. Just 20 years ago, the idea of never needing to walk into your bank branch would have sounded absurd. Yet, here I am in 2024, not having stepped into my branch for well over a year.
In this piece, I’ll take you from the days when internet banking couldn’t exist because, well, there was no internet, to the modern day where it’s very possible for some people to have never stepped inside a bank branch in their life. Along the way, we’ll also touch on how this digitisation has created new opportunities in the open banking and cryptocurrency spaces.
🔍: It's important to note that I'm only going to scratch the surface of many topics in this piece. There's a lot to cover, and I want to keep it digestible. I'll likely delve deeper into many of these topics in future articles. For those who want to learn more now, I've included links to the useful sources I used throughout the text.
1983: Pre-Internet Digital Banking
Most people might expect this piece to begin with how the internet laid the foundations for modern digital banking. Although that's true, this story starts elsewhere. It begins with a financial institution known as the Nottingham Building Society and a lesser-known product called Homelink.
For those unfamiliar with the term, a building society is a financial institution similar to a bank. The key difference, however, is that it is owned by its members rather than external shareholders. These members are typically its savers and borrowers. It’s probably fair to say that building societies aren’t known as the most fast-moving or innovative institutions, but the contributions made by Nottingham and Nationwide (which we'll cover later) certainly challenge that perception.
As I mentioned, this story doesn’t start with anything internet-related because Homelink didn’t use the internet. Instead, Homelink operated on something called the Videotex system, which transmitted information via telephone (or cable television) lines. Although the technology ultimately didn’t take off as many had expected, it did help to deliver the UK’s first digital banking proof of concept with Homelink.
In practice, the Homelink system could be used at home (as the name suggests) by connecting to a telephone line and interfacing with a remote computer. This enabled Nottingham Building Society customers to view balances and make payments from home. Considering the status quo was to make these payments either via cheque or at an ATM, this was a massively convenient and efficient innovation.
Unfortunately, like the underlying videotex technology, Homelink didn’t end up being a long-term hit. Few people had the necessary hardware—a telephone connection and a modified television—meaning that the addressable market was limited. However, all of the work done delivered a plethora of learnings that another building society would leverage a decade later to launch the UK’s first internet banking offering.
For anyone interested, here’s a great article from the New York Times from 1984 on the launch and early progress of Homelink. My favourite part of the article is a section about the Managing Director of Nottingham Building Society, Mr. Webster.
“Mr. Webster is fond of comparing Nottingham to Apple Computer, the Silicon Valley company that built the home computer market while established computer companies waited to see what would happen.”
I pulled this section out of the text, in particular, because it is fascinating how both organisations have had a significant impact on digital banking (as you’ll see later), yet only one is a household name.
1997: The Dawn of Internet Banking
Timing is often crucial, and unfortunately for Homelink, it was a bit too early. The margins were razor thin, especially since Homelink launched the same year Tim Berners-Lee created what many consider the most significant innovation since the semiconductor: the internet. It’s slightly misleading to say Homelink just missed the internet era; though 1983 is widely regarded as the internet's official birth year, it wasn’t widely available until the early 1990s. Before then, it was primarily used by government institutions and educational establishments.
One organisation that recognised the potential of this emerging technology in the 1990s was Nationwide Building Society. It was clear that Homelink had addressed a real customer need for convenience, but the technology hardware required wasn't yet commonplace. In the early 1990s, personal computers (PCs) were still not ubiquitous, though their popularity was rapidly increasing, particularly as the internet began to fuel their growth. For context, approximately 48,000 PC units were shipped globally in 1977, but by the late 1990s, that number had soared to over 100 million.
With the necessary hardware and software in place, the timing was ideal for Nationwide to develop the UK’s first internet banking service. In terms of functionality, it was similar to the Homelink system, allowing customers to check account balances, transfer funds, pay bills, and set up standing orders. However, all of this was accessible simply by typing Nationwide's web address and entering user credentials.
Internet banking quickly proved successful, and many other financial institutions followed suit. Although some processes, such as depositing physical cash or cheques, still required a branch visit, many day-to-day banking tasks could now be completed from home. More importantly, with the banking portal hosted on a website, people could manage their finances anywhere they could get an internet connection, laying the groundwork for truly mobile banking.
2007: The Emergence of Mobile Banking
With digital banking experiences now online, consumers could technically bank anywhere they had an internet connection. However, in practice, customers only used internet banking on their desktop computers. This was for a very valid reason: mobile web experiences were terrible at the time. Most websites weren’t optimised for a mobile experience at all, making web pages extremely difficult to navigate. Additionally, mobile applications were in their nascent stages, with mobile developers still figuring out which platforms to build on and what early smartphone users actually needed a designated app for.
Everything changed when the iPhone was released in 2007. The truth is, before the iPhone, touchscreens were a bit of a gimmick. Although the idea of a touchscreen was cool, the implementation was lacking and made for a very poor user experience. The iPhone introduced a user-friendly touchscreen interface and high-speed internet connectivity on a mobile device. The experience was enhanced even further when the iPhone 3G launched in 2008, leveraging the superior 3G network. In that same year, the App Store was also developed, providing all the building blocks for a seamless mobile experience.
In reality, it still took a number of years for the big banks to realise the full potential of mobile apps, but by the early 2010s, mobile banking apps were becoming common. However, mobile banking still supplemented the in-person branch experience rather than replacing it. The conventional wisdom was that people generally wanted an in-person experience when making major banking decisions, like opening accounts or taking out mortgages, for example. Given the new functionality of mobile banking, many started to disagree with this perspective, none more than a new wave of banks: the neobanks.
2014: The Surge of Neobanks
Monzo, Starling and Revolut are the primary institutions that come to mind when the term "neobank" is mentioned. However, the first neobanking proposition in the UK actually came from a lesser-known entity, Atom Bank. Before delving into Atom Bank's story, it’s important to define what a neobank is: a bank without physical branches, operating entirely via a website or mobile application. Today, this concept may seem normal, but the idea of a bank without face-to-face interactions was extremely rare initially. That said, the idea of a bank without branches wasn’t completely novel.The UK’s first branchless bank was First Direct, which began servicing clients by telephone in 1989, a somewhat niche offering at the time.
Based in Durham, Atom was the first bank in the UK to go completely digital, delivering its services solely through a mobile app. Founded in 2014, Atom secured its banking license in 2015 and launched publicly in 2016. Atom's impact inspired the creation of several neobanks, including Starling and Monzo, which followed a similar path. In contrast, Revolut is still an e-money institution, but offers many of the same features as a standard bank but without the ability to lend.
Neobanks didn’t just offer a new banking experience; they also transformed the traditional brand image of banks. Previously, banks were seen as age-old institutions trustworthy enough to hold one’s money. Neobanks, being brand new, lacked a historical track record and thus, initially, did not inspire the same level of trust. This required a different approach to brand positioning. Most neobanks targeted tech-savvy individuals, typically in their late 20s or early 30s, who took pride in being early adopters. This demographic was crucial for the initial marketing of the product. For example, Monzo—originally known as Mondo—was one of the first to depart from the traditional ‘dull’ black or blue bank card in favor of a distinctive coral card. This unique color provided free marketing each time a customer used it in public. Similarly, Starling and Revolut introduced teal and purpley-blue cards, respectively. Some neobanks also cultivated an air of exclusivity early on with initiatives like Monzo’s golden ticket referrals, where new customers needed a referral from an existing customer or had to join a long waiting list to open an account.
Beyond clever marketing, neobank apps often boasted superior functionality compared to traditional bank apps, with features like enhanced spending management and simplified money transfers. Another significant draw was the elimination of ATM and foreign transaction fees, making neobanks very popular with travelers who did not want to convert large sums of money or pay high fees. This feature acted as an initial product wedge to acclimate people to these new institutions. Although many users have started using neobanks for more day-to-day activities, these banks still often serve as secondary rather than primary banking options.
2015: The Advent of Open Banking
PSD2, or the Second Payment Services Directive, is a piece of EU legislation enacted in 2015 that aimed to foster innovation and competition in the financial services sector. Similarly, the Competition and Market Authorities' report on retail banking highlighted competition issues and the need for innovation, specifically within the UK retail banking space. A key takeaway from the report was that customers could benefit from more choices and better service if banks opened up their data securely.
While PSD2 is recognised as the foundation for open banking initiatives across Europe, the CMA report was arguably more pivotal for the UK. It not only clearly articulated the problem, similar to PSD2, but it also uniquely prescribed a solution: the development and implementation of an open API standard for banking. This recommendation led to the establishment of the Open Banking Implementation Entity (OBIE). The UK is often considered the gold standard in open banking due to OBIE’s efforts in standardising APIs across banks and the data shared. Furthermore, with the launch of open banking, the UK's nine largest retail banks—known as the CMA 9—were the first to adopt these standards, ensuring that the vast majority of UK consumers were immediately covered by the new open banking APIs.
After years of building the API infrastructure, real-world implementations of open banking began in 2018, starting with the aggregation of transaction data to enhance personal financial management. Since then, several other use cases have emerged, including using bank data for underwriting, reconciliation, and account verification. On the payments side, open banking APIs are now used for account funding, loan repayments, and e-commerce. It’s important to note that open banking’s best product-market fit still lies in account funding and personal financial management. Beyond these applications, the technology is still in the early(ish) stages of adoption.
Despite the significant promise of open banking, it has yet to realise its full potential. Ideally, open banking allows third parties to leverage bank data and payment rails to offer financial services in innovative ways. This could mean developing entirely new products or finding new ways to extend existing products to end-users who were previously unbanked or underbanked.
2021: The Inception of Central Bank Digital Currencies
It would be fair to say that digital banking wasn’t the default choice for the vast majority of the population from the 1980s to the late 2020s. This reluctance can largely be attributed to inertia. People were accustomed to visiting banks in person, and many did not feel safe conducting transactions through a digital portal. For this reason, digital banking was far more popular with Millennials and Gen Z, who had grown up with the internet, than with older generations. However, it wasn’t necessarily the default choice even for the younger generation. Everything changed with the global pandemic in 2020, which forced people out of the comfort of their local branches and into digital banking.
A YouGov study found that two-thirds of people have used mobile banking services more since the pandemic, with over 79% of adults under 35 and more than 52% of those aged 55+ increasing their use of the channel. Clearly, the pandemic was a major catalyst for the shift towards digital, particularly mobile, banking.
This shift was a game-changer for neobanks, which offered a far superior mobile banking experience and almost overnight became a viable option for those who had previously ignored the proposition entirely. After being introduced to these new neobank apps, two things became abundantly clear to most users. Firstly, it was relatively easy and quick to open a new bank account through one's phone, and the app features made banking remotely quite straightforward. Secondly, it became apparent that there was a significant gap between the digital banking experiences offered by traditional banks and those by neobanks.
In essence, this was the moment when the cat was let out of the bag, and consumers realised that they could be enjoying better banking experiences. This was a massively important moment for both customers and the industry itself. The neobanks were big winners because their apps gained significant legitimacy during this period, but it also led to improvements in traditional banking apps as well. Between 2020 and 2024, many traditional banking apps have improved significantly.
The start of Central Bank Digital Currencies (2021)
I have intentionally not mentioned cryptocurrencies (crypto) until now because they deserve a dedicated section. However, one aspect of crypto that is highly relevant to the story of digital banking is the development of Central Bank Digital Currencies (CBDCs). Before discussing CBDCs specifically, let me provide a high-level explanation of crypto and blockchain technology.
The textbook definition of a blockchain is a secure, transparent, and immutable digital ledger that records transactions across a network of decentralised computers. However, to put it more simply, imagine it as a record of transactions that cannot be changed and must be agreed upon by multiple stakeholders or computers within a network. For public blockchains, these transactions are visible to anyone, enhancing transparency.
Now that we understand blockchain (conceptually at least), let’s talk about cryptocurrencies. A cryptocurrency is a digital currency that operates on a blockchain. All transactions within this currency must be confirmed by the network before being permanently recorded on the ledger.
So, how do CBDCs fit into this picture? The concept of a secure ledger of transactions that cannot be altered is highly appealing to central banks. For example, the Bank of England introduces billions of pounds in banknotes each year but cannot track their movement. A CBDC offers a solution for tracking money, potentially reducing fraud and providing invaluable insights into individuals' or entities' spending habits. These insights have the potential to allow banks to offer both more and better lending and savings solutions as well as other financial products. Operationally, it could instantly resolve issues related to payment settlement and accounting, among other benefits. However, for CBDCs to truly be the golden solution they promise, they must be widely adopted by consumers and businesses.
CBDCs are still in their infancy, with working groups exploring the best ways to integrate them into the existing complex financial ecosystem. If successfully implemented, this new currency could transform the UK’s financial infrastructure, adding significant efficiency and transparency. This could enable financial institutions to assess customers individually and tailor financial products to meet their specific needs.
Final Thoughts
11FS has a great tagline: "Digital banking is only 1% finished." I can’t help but agree. Over the past 40 years, we've seen a digitisation of the banking experience that has not only provided customers with a far superior experience but has also made banking data more readily available and, importantly, usable. We’ve only seen the tip of the iceberg (or volcano) in terms of leveraging that banking data, but over the coming years, I expect that to change considerably. Both consumers and businesses seem primed and ready for the propositions the next phase of digital banking will bring.
What’s next? Expect a rundown of the history of alternative lending in the UK in my next piece. I’ve already done a lot of groundwork for the article, but if you know of any sources I should definitely review, feel free to drop me a DM.