I had the opportunity of meeting and asking questions to Monzo’s founder, Tom Blomfield, at an Accenture event last week. 

It was really interesting to hear directly the voice of a digital native bank and to be witness first-hand to the differences between the traditional banks, which I regularly work with, and these new institutions, which are set to disrupt the industry and the way consumers understand banking. 

As more and more industries are being disrupted and fundamentally changing the way we do things, it is increasingly obvious how much room for change still exists in the banking industry. Users that order a taxi, share a ride, arrange a date, order a pizza, do their laundry or order a cleaner, all on their mobiles while tracking in real-time the location and progress of their command, cannot possibly be satisfied by their banking today. At least not by the propositions currently available at most of their traditional banks.

Hearing Tom B. confirmed my thoughts around the state of the banking industry today. Firstly, no end of the spectrum has the answer. Big banks have the customer base but not the right culture and set-up to be innovative; whilst native banks have the right innovation culture but struggle to scale. Secondly, there is a very fundamental structural difference between a digital bank and a physical traditional bank. The difference is so big that the change is not feasible through mere “transformation” of what exists today in the sense these efforts have been managed before. It requires eliminating what is not needed anymore (i.e. legacy infrastructure), building what does not exist (digital infrastructure and tools), with a complete new focus (i.e. customer) and new ways of working (i.e. agile)

Here are in my view some of the key differences between traditional and native banks:

• Culture of innovation – innovation is the blood of the business in the case of start-ups, their reason for breathing. At traditional banks, innovation is just another item in the agenda, deprioritised as soon as cost and regulation demands kick in, seen more as a cost cutting mechanism than a new way of relating to customers. See for example, the mobile channel, seen by most traditional banks primarily as a “cheap channel”, a way to lower their cost to serve and sell the same products cheaper. Another example of how the focus is wrong. Mobile and smartphones can do a lot more than that. They are a small computer in your customer’s hands. An item that participates in almost every aspect of their lives and a tool that can provide enormous amount of information about what customers do, where they are, etc…
• The pace of innovation. While start-ups innovate on a daily/weekly basis, it takes traditional banks months, even years, to roll out new developments. In a market that is constantly changing and where customers are increasingly used to uninterrupted innovation in other areas of their lives, banks risk losing relevance at high speed
• Customer focus. Fintech start-ups are born from a customer problem and evolve their proposition with constant client feedback. Their raison d’etre is very closely linked to a customer need. Traditional banks struggle with customer-centricity, slave as they are to their own internal structures, processes and politics
• Agile development – Everyone talks about “agility” these days. The word “agile” is now used constantly around delivery projects, however very few are truly faithful to an agile methodology. Monzo, as many other start-ups, issues new functionality and modifies the existing almost every day in direct response to how the product is being used by their customers and what customers say about it. This leads to my next point…
• Co-development – Including the customer in design must be an iterative process. Developing the product with direct client input is one of the reasons why Monzo generates high customer engagement. Customer’s feel part of it. Not only because they have been able to crowdfund it in many cases, but more importantly because they feel Monzo is listening to them and cares about their feedback. Traditional banks do focus group (5 people or even 100); Monzo uses its whole client base (30,000) and this is possible thanks to the next point…
• Tolerance to failure – Tom B. talked about “undervaluing the perfect analysis and overvalue trying”. Again another very popular term is “test and learn”. However, traditional banks continue to be quite poor at it. There is an element of analysis-paralysis that is amplified by the amount of change needed and the complex organisational structures they operate in. A lot is learned by launching a prototype and letting customers tell you how they want to evolve it. As Tom said “ we launch things and people understand we are working on making something good for them, if we do not get it right they trust us enough to believe the next release will be better”
• Having less to lose – there is indeed a structural issue in that a start-up has a much higher tolerance to risk than a bank. Being in constant lack of resources and “about to go bankrupt” makes you take risks, maintain a healthy tension of innovation vs results. This I something that banks can’t do. A lot of the innovation gets stopped by having “too much to lose”, too many customers to upset, too many potential fines to pay, too many internal and external stakeholders to satisfy…” 

A business case based on delighting customers

One thing that resonated from the talk with Monzo was that they have understood that the business objective needs to change. Monzo aims to “delight” its customers. It looks to provide an “awesome” experience and solve problems their customers do not even know they have. By doing so it builds a loyal an engaged customer base. One that will hopefully remain with the bank as it develops and grow with it. Maybe it is time we factor in business cases a “delight customers” factor, as a source to loyalty and future revenue.

The challenge for traditional banks

Traditional banks are labelled “secure”. This is one of the key values associated with banks that nowadays still make them relevant despite the progressive move to digital. As a result, customer’s expect different things from the Monzos of the world and the big traditional solid banks. 

This places traditional banks into a challenging position as they are expected to match Monzo’s usability and innovation but within much stronger security constrains. A difficult equation to balance.

The challenge for native banks

I asked Tom B. the difficult question i.e. how do you expect to scale? and how do you hope to maintain the innovation culture as you become a corporate over time?

As expected he did not have an answer. 

Looking at the examples to date, there is a strong possibility of many of these native banks being acquired by traditional banks in the pursuit of a fast route to innovation, following the BBVA example acquisition of Holvi or part of Atom. Or a chance for moderate growth in a particular niche.

However, I maintain that the banking industry is now at the beginning of a tipping point and a deeper transformation is required by traditional banks at a much faster pace, if they are to remain relevant in the coming 5-10 years