Transcript: A - Z of Tech Episode 6: F for Fintech

Louise Taggart

Hello listeners and thank you for joining us in episode F in the A-Z of tech podcast. Today, we are talking about F for Fintech, and I am Louise Taggart.

Hugo Warner

I am Hugo Warner and we are delighted to have with us today, Jason Maude, who is head of technology advocacy at Starling Bank and Arthur Hughes-Hallett, who is the financial services lead for the disruption team, welcome.

Jason Maude

Hello, good to be here.

Louise

To start with a nice simple easy opening question. Jason, how would you describe what Fintech is?

Jason

I think Fintech is a subset of the finance industry, which has decided to solve the problems you get in finance by using technology and using technological practices that they have taken from the big tech firms, and it’s using these new modern technology solutions to deliver financial products and services to people in ways that they haven’t been delivered before, generally speaking over channels such as mobile or the internet, and so on. It’s that sort of thing that allows them to really disrupt the industry via the use of technology.

Louise

You referenced a series of technologies that make all of these possible, in a nutshell what are those.

Arthur

Smart phones is obviously one, most of the challenger Fintech banks deliver their accounts to customers via smart phones, and another one is cloud and cloud-based computing. It becomes a lot easier to run a bank, scale a bank, to try developing new features, and then get rid of them if they don’t really work. If you don’t have to maintain your own service, if you don’t have to log a server about everywhere with you, we can control the service we need to control via web browser.

If we want to say, ‘would this work, let’s try it out.’ We can create another instance, as we say, of a particular application, remit in the cloud, see if it works, and if it doesn’t work, we can just drop it. All that costs us is the time we took to run it, it doesn’t cost us a whole another server, which we have to buy, which we are then obligated to use, because otherwise it is a big capital investment that we’ve just wasted.

Louise

Brilliant, Arthur, you are from PwC’s disruption team, would you agree with that?

Arthur
Yes, I would agree with that, just kind of building on it a little, I suppose, is we talk a lot about the idea of thinking, yes it’s about technology and how it enables this change in the way these financial products are consumed, whether that be by business or by customers. At the core, I think a lot of the Fintech movement is about changing customer perceptions of what a service really looks like from the bank. The fact that you don’t necessarily get charge and overdraft fee immediately, or you don’t necessarily have to pay your insurance for a whole year, or making everything slightly more consumer centric. I think it’s all been enabled by the technology, but we are seeing a lot of consumer centric practices, starting off in Fintech and then I guess moving back out to the incumbent as well.

Hugo
Jason, Starling came around in 2014, and is part of a flurry of similar kind of financial sector start-ups, but it wasn’t always the case?

Jason

No, in fact, before the flurry of Fintech banks, if you look at banking licenses granted by the Bank of England, there was Metro Bank, who got one in the past few decades, but before that we really have to look back a long time to find another new bank, as it were. There were a lot of building societies that converted themselves into banks, but a brand new financial institution is something that you have to go a long way bank to find. The industry was ripe for revolution, ripe for a change and disruption, and that’s what Starling Bank and all other Fintech players have come along and done.

Hugo

What do you think had changed at that point?

Jason

There were several things, one was the financial crash in 2008 that definitely shook things up, and it definitely shook up the government, because they realised that there were some banks that were, as the phrase was coined at that time, ‘too big to fail.’ They didn’t want to be in a situation again, where they had to bail out a bank, because otherwise it would crash the economy.

They started down the road of encouraging more banks to exist, to expand competition out. As such, they changed slightly the way that the rules around banking licenses were put in place, not to make it easier, so not to make it less safe for a bank to exist, but to make it more easy to obtain path to getting your banking license.

When Starling first got its banking licence, we did not get a full banking license, we got a partial one. Then we had to prove our worthiness to be a bank for a time, before we were granted a full banking license, after we had proven the technology and the solution that we were going with.

Louise

What is about these digital challenger banks that allows them to disrupt what we might have seen as the status quo more traditionally, Jason?

Jason

That is the tech portion of the Fintech, that’s the disruptive element. Essentially, what we can do, the great strength we have as Fintech is the ability to move fast. The ability to see an opportunity, see something that we can change in banking and change it very quickly. What Starling Bank has done is, it has come along and offered features that you have never seen in banking before.

We are joined in that by other Fintech’s as well. These are things like the ability to freeze your card, for example. Before we came along, if you lost your card, the only option was to cancel it, and you had to remember the special number, you had to call to cancel your card, or find the obscure bit of paper that you had filed away somewhere with the number written down on. Then you had to call up the number, tell them to cancel your card. They would immediately invalidate it, and say they would send you another one in a few days, but until then you are without a card, and then you found the card down the back of the sofa, but it was too late, your card has been cancelled.

Starling came along and said, ‘well, why not give people the ability to freeze their card.’ You can go into the app, you can turn your card off temporarily, and then if you find it again down the back of the sofa, you can re-enable it. This sort of thing was enabled by technology and allowed us to say, ‘we are offering you a banking experience with different features,’ which is not something that banks had previously done. Previously banks competed on price, so they competed on what interest rates they gave you or what overdraft fees they charged you; and they competed on customer service, how good their customer service was; but they never really competed on what you could do with your everyday banking. That wasn’t something that they decided to try and compete on. Then as soon as Starling came in and started disrupting things by offering new features.

Hugo

But interestingly people are still wedded to traditional banks. I remember a comment that you made in a conversation we had previously about how most people are, for example, turning to challenger banks, to new banks like Starling, and so forth, making use of your services, but for the things like, for example, salary payments, they still rely on traditional bank.

Arthur

Yes, I heard this rumour, and seen a few talks about the notion of like, how many people get their salaries paid into the challenger banks, or their regular banking accounts.

I tried a live test in one of our internal events, where there were 400 people in the room, all who worked in financial services. I said like ‘I want you to stand up, who has a challenger bank account,’ probably two-thirds of the room, looking quite smug stood up, and ‘well, I actually have a challenger bank account.’ Then I was, ‘okay, everyone stay standing, who gets their wage from PwC paid in every month,’ and there was only one person. I would have expected it to be like 30% to 40%, maybe. This is all around trust, I guess, is an element of that. That’s certainly something, which the incumbents still have due to how trust is built over time.

Hugo

What are your thoughts about that?

Jason

I agree with you to a certain extent. I think that there is still this notion in the back of people’s minds that if you have a physical building somewhere, that you are somehow safer than a bank that has no physical branches, and that is still a thing that people even subconsciously associate trust with that physical presence.

I think that’s going to go away though, and I think that’s for a number of reasons. One is that as more and more people become comfortable with the digital, and more and more comfortable with digital challenger banks as a thing, more and more of them will go, ‘well, they are a fully licensed bank, they are backed up by the government, they are regulated, they have the financial services, compensation scheme guarantee, so they are just safe as a bank that happens to have a branch somewhere,’ but I think it will be a slow process.

People are inherently conservative with the small c with their money for good reason. It takes a long time to transfer trust over from bricks and mortar to the digital.

Arthur

If you think about, like, I think, I can really agree with that statement. You can see it even within the places where we’ve seen Fintech has really kicked off around retail and consumers, so your card or something like how you buy stuff online, like companies where the trust barriers are relatively low. But if you think about something like your savings or your pension, or even the insurance of your house, these trust barriers, where things are larger, people are less keen to take a punt basically. Although, you are right, it is not even a punt, because our regulator guarantees 85K in your bank account, so you are never going to lose that, but yeah, in people’s heads, because of how trust is build that is still a punt.

Louise

I will be interested to know little bit more about how this might develop in the future then. If we are, maybe, seeing at the minute most people who have a challenger bank account are using it for things like, maybe household budgeting, for example, or keeping track of their daily spent, what sort of developments are in the pipeline, and Jason particularly, that might begin to change these kind of stereotypes?

Jason

I don’t think there are any specific developments that we or indeed any challenger bank are putting forward that will help rapidly increase that trust. That trust comes from a longer-term relationship. As a person uses challenger banks more and more, first for things like household budgeting, or going on holiday, for example, and as they use it more and more, grow more and more familiar with it, then their trust in it will increase and their trust in it will hopefully increase to the point where they go, ‘you know what, I am going to start putting my salary in here, it is just as reliable if not more reliable, more trustworthy than the bricks and mortar banks.’

Hugo

Fantastic, what do you see as being the potential of Fintech to address questions like financial inclusion? There is still about two million people or so in the UK, who don’t have a bank account. In many instances that just compounds problem, for example poverty, then for example gambling addictions that people have, which financial technology might be able to assist with?

Jason

Absolutely, one example of that is of tackling that sort of thing is Starling banks gambling block. We have the ability in the app for you to go and say, ‘my card should not be used for spending at gambling establishments.’ If you turn that on, what will happen is, anytime you go into a gambling establishment and try and spend money there, your card will be declined, because you’ve asked it to. We have got lot of anecdotal evidence that that has helped people, and helped them in their recovery process.

Obviously it’s not the whole solution, but it is certainly something that can help. It’s this sort of thing, which internally came about through a very, someone noticed that we could do this. They noticed that we were, well its part of the message that we are getting back about where you are using your card. We get back information on what type of merchant it is, and there is this specific codes for gambling merchants. We can look for that code and say, ‘right, well we could block that if you asked us to.’

That all came about very quickly. The technology setup that we have allows us to do this. Allows us to notice potential synergies, potential new features, we could release and release them very quickly. In terms of financial inclusion, Fintech would be very helpful, because we can move faster, we can deploy features faster, we can come up with innovative things and try them out, and it doesn’t cost us a lot to do that. We are more likely to do that than would be an incumbent bank.

Hugo

Its fascinating that, because it’s good, although it is may be at an early stage, you could transform your relationship with your bank entirely. The bank is no longer, where I hold my money, but the bank is actually making me a better person. I tell the bank what my proclivities are, and it helps me manage them.

Jason

We, at Starling want to help people live healthier financial lives, that’s our aim. When we provide people with these banking services to help lead healthy financial lives, and help take the stress and confusion away from banking, because money can be a big source of stress, it can be a big source of worry for people.

If they have both information at their fingertips, and also more levers that they can pull to help them manage their money, whether it be the gambling block, or whether it be our roundup feature, which helps you save, this sort of thing. Those extra levers can help them tailor their banking experience to fit in with their financial life in the way they live it, rather than them having to tailor their financial life to the one or two methods that the bank provides for them.

Louise

Arthur, in the wider context, are there any other particular benefits that you see Fintech and digital banking bringing to the wider public?

Arthur

I think, there has been an interesting movement, if we think over the last few years, if we think like personal wellbeing, and then we moved on to wellbeing, where we are thinking, and it is much more common to hear people talking about this now in a public area, financial wellbeing, as you said, is one of the main causes of stress for most people.

Fintech have a real role to play, although I am often interested by, we are recording this in London, and actually not too far away from where most Fintech are based. There is an element of, how we can spread this out into the broader parts of the UK, particularly around, there are some barriers, and it’s the same enablers, which help Fintech spread so quickly, are also in some way the barriers, which is namely, you need a smart phone, which therefore means you’ve got to pay a contract of some sort, and therefore how do you get that if you don’t necessarily have that.

We are gradually starting to see this with other Fintech, as well as Starling using what they already have to help people. This kind of large economics, like how do you just make people, even a sense check for 3 seconds might stop them doing it. I see this as a broader trend. I think it’s a super interesting space, it can only grow.

Louise

If you were to do a little bit of hypothetical crystal ball gazing, are there any particular developments you will be excited to see in the next 10 years that would affect the Fintech space, Jason.

Jason

Yes absolutely.

There are a lot of the exciting developments, will I think be around things like open banking and PSD2. These are the legislation and technology surrounding that legislation that mandates that customers should be able to take their financial data from banks, and transfer it to other financial providers if they wish to do so, and that they should be able to do that in a secure manner. That opens up a world of possibilities, where someone can take their financial data from their bank, and give it to a mortgage provider, or a pension provider, and so on, and have them process not all of their financial data, but only the bits of their financial data that are relevant in a safe and secure manner.

This allows for the start-up of very small boutique, almost outfits that are offering products and services in a very specialised space, so that’s definitely one thing. That also allows for things where you can try and prevent fraud, for example, by one bank saying to another bank, my customer wants to transfer money to this account, is this account registered under this name, which they have put down, and the other bank can say, ‘yes it is’ or ‘no it isn’t,’ and do that in a secured manner again. That can help them prevent fraud by going, you say you are transferring money to John, but the account number and soft code you’ve typed in aren’t John’s account number and soft code, are you sure you want to do this.

Also, going beyond simply financial data, we could move into a space where someone’s identification data can be transferred. Banks as part of setting up a bank account have to do a lot of due diligence to make sure that customers are who they say they are. But then, if you go to another institution, you have to go through that whole process all over again, whereas if a bank became a trusted provider of identity, then you could have your identity transferred from one place to another. To prevent you having to log in again and provide all of your photograph, address, data of birth and so on again.

In the same way now that you could log on to a website saying login with Facebook, you could login to your mortgage provider with your bank account, for example. These are all potential things, whether they will come about or not is another question, but hypothetical ball gazing, I can see those as a number of areas we could go into.

Louise

Brilliant, well we will check again in ten years’ time and see how many of those predictions are true. Arthur, anything in particular you are imagining in the not too distant future?

Arthur

Well 10 years is a long time. So ten years ago, it’s like 2009, probably everyone got their statements still posted to them. Banks were public enemy number one, I think. Over the next ten years, from a Fintech perspective, I think we are going to see more scrutiny on Fintech. The sheen will come off as they get more mature. I mean for me I hope, particularly from a retail perspective, stop being seen as banks, like you don’t necessarily, if you say they are a way to manage your money, there are way to manage your identity, I think we are going to see more and more of that.

Louise

Brilliant, thank you.

Thank you both very much for coming in to speak to us today. There was certainly some interesting crystal ball gazing going on, and it would be really interesting to see how the Fintech base develops over the next few years and begins to build that trust that you were talking about with wider public.

Hugo

If our listeners want to go further and learn more about this vast and fascinating topic, where should they go to, Jason first.

Jason

Well, you can apply for a Starling bank account by downloading the app. Wealth of information on what we do and how we do it.

Hugo

Fantastic, PwC has recently launched a disruption in financial services campaign?

Arthur
Well, we have indeed, so if you google PwC currency of collision, it will give you bit more an understanding about where we think financial services are going.

Louise

Brilliant, thank you very much, and we hope you will join us in the next episode, which is not just one G but 5G.

In the meantime, you can follow me on twitter if you would like to I am @LouTagTech.

Hugo

I am @HugoWarner1.

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