The Blog

There Will Be Three Types of Retail Bank in the Future - Will Today's Giants Be Among Them?

Five years into the 'fintech' revolution, several things are becoming clear.

Firstly, it's not really about technology, it's about customer centricity. Secondly, while today's startup financial service businesses are still deep in the first 'enthusiast' sector of the technology adoption curve, there's enough momentum that we can be confident that they are going to reshape the market. Thirdly, the fintech players are moving from the margins of the customer relationship to the core; from discrete products like foreign exchange to 19 new businesses applying for retail banking licenses.

All together, this means, for the current banks' business model, the days are numbered.

To the customer, it can feel like their interests are misaligned with those of their bank. They want a bank that acts in their best interests rather than feeling like it is waiting to pounce on them when they make a mistake, go overdrawn or forget to make a repayment.

From the customers' perspective, the startup retail banks have their interests perfectly aligned with their own. They want to help them buy the things they want, more easily and more cost effectively.

If we analyse the different approaches the startup banks are taking, and think about the all-pervasive tech giants' models and how they might apply them to the banking sector, we can predict three different types of future bank: pipes, stacks and hubs.

Today's banks are stuck in the middle of these three models. They're doing a little of each, but none with excellence. They do a reluctant job of just about maintaining the 'pipe'; the basic banking infrastructure. They're not good 'stacks', with a loose bundle of first-party (or white label) products that don't really work well together. They have neither the open connectivity to be 'hubs', nor the open mindedness to allow their products to be on others' hubs.

Big banks are in this situation for the same reason any established business fails to embrace the change evidently happening in their market. It's too painful to change voluntarily, because these giant organisations are systematically organised around the existing range of products, with semi-independent P&Ls for each. It's hard to imagine a "Card Team", incentivised on selling bits of plastic, rushing to recognise that productised credit cards are well on the way to being an anachronism in today's real-time world?

But the change is coming. And today's banks are 'too big to fail'. So very important choices have to be made. Which of these models can they best transform into? And how are they going to tackle internal vested interests to effect that transformation?

Which of these models can today's banks best transform into?

Let's assume being a stack, while attractively similar to today's retail bank business model, is beyond the capabilities of anybody other than Apple or Google. And let's assume that being a pipe, while the most natural role for today's banks, given their compliance-led competences and cultures, is unthinkable because it involves giving up the customer relationship to become a platform.

So that leaves hubs. One way to imagine a hub bank is to think about Amazon. A fundamental of its business model is that it sells third-party products, (sometimes cheaper and better-rated) right next to its own. The reason it does this is because what Amazon prizes, more than individual unit sales, is being people's default retailer, their shopping habit. And, getting access to all their shopping data, which can then be used to sell more merchandise to them, hundreds of times a year.

Likewise a hub bank would have a whole marketplace of value stores, credit lines and investment vehicles (the realtime financial utilities that will replace the productised savings accounts, credit cards and unit trusts). A big enough range that customers could find one that closely matches their needs. Some might be the bank's own products and some might be from other providers. Customers could select the product they want and add it to their personal hub with one click, with their identity being validated by the hub provider.

Transaction data becomes useful, so the customer can easily see what they spend on 'eating out', for instance, or have expense reports automatically compiled. The hub then becomes not just a dashboard to an individual's financial life, but an intelligent agent, working on the customer's behalf to maximise their money, for example, making suggestions about when money should be moved between products.

To see what a hub bank looks like, try Mondo's beta. It is one of the startups applying for new banking licences, but is already trialling a current account-style product with tens of thousands of customers.

Mondo's difference is that rather than putting a nicer interface on existing bank infrastructure (like US-based Simple or fellow UK startup bank Atom), Mondo is also building the pipe required to provide the open connectivity needed to deliver the hub vision. In doing so, it is, in our opinion, positioning itself to be the Amazon of banking.

How can today's incumbent banks fight their structures to transform?

Despite the hype around fintech though, this race is still the big banks' to lose. Incumbency is a powerful advantage. Banks have huge resources and huge customer bases. And, while the startups have grown rapidly, their customer bases are still measured in the low hundreds of thousands. Moreover, we believe the fintech community underestimates the ambivalence so many people feel towards their finances.

So how can today's banks take advantage of their incumbency to begin genuine transformation? They have all the customers and the infrastructure, but none of the culture. We've rarely seen a better case for a corporate startup.

A corporate startup is a new business unit, with its own office, staff, business plan, tech stack, culture and brand. It is populated by new hires and entrepreneurially minded people from the parent company or industry. It needs a sponsor in the c-suite of the parent company to play the 'investor' role -- giving the startup clear objectives, funding and space, defending it from interference while it builds its product and iterates to find product-market fit. The team need to be remunerated in a more entrepreneurial way than is normal in the parent company, with, for example, highly geared bonuses based on growth.

A corporate startup has an unfair advantage over an actual startup because it has access to the parent company's customers, data and market intelligence. So a corporate startup within a bank, building a new hub offer, has the access it needs to win, but also the freedom to develop the culture and business model required to prosper in the new customer-led world.

There is no downside. Even if it fails, it's an amazing way to learn by actually doing something, for about the same cost as a management consultancy report that just talks about the problem. If successful, the startup has two possible futures. It is integrated back into the mothership, becoming the default new way of interacting with customers. Or it prospers as its own businesses, having found a new customer segment, or even gradually cannibalising the parent company until it becomes the 'new normal'.

It's bewildering that Barclays hasn't developed its Pingit payment app into a full stack startup bank. Or that an existing quasi-independent unit like First Direct isn't pioneering this approach.


Albion is a creative business partner. They help businesses imagine a new future, and then work with them to make it a reality. They've built some of the most successful 'corporate startups' around: giffgaff for O2/Telefonica, and Quotemehappy for Aviva, and have worked with fintech startups like Zopa, Funding Circle, Transferwise and Klarna.