Why the future of banking is mobile-only

"No one who has disrupted any industry was a traditional player"
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WIRED Money takes place in Studio Spaces, London on May 18, 2017. For more details and to purchase your ticket visit wiredevent.co.uk

With no physical branches and an emphasis on convenience, mobile-only banking is becoming increasingly popular, promising customers a slick, fast and common sense approach to managing their money.

Read more: How AI is transforming the future of fintech

N26, founded in 2013 by Valentin Stalf, is one such bank. Designed for your smartphone, it's packed with a variety of useful features such as contactless payments using a pre-paid debit card, real-time purchase tracking, detailed budget reports and free overseas spending.

While N26 is one of the earlier alternatives to traditional banking in Europe, there’s plenty of competition, with companies such as Mondo, Atom and Starling nipping at its heels. However, N26 has continued to expand, and by 2016 it received its official banking licence, making the company a fully fledged bank and allowing for the introduction of free current accounts, overdrafts and direct debits. Indeed, its success is even turning some influential heads, with Peter Thiel investing €10 million (£8.4 million) in the bank early last year.

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“I think the success of digital banking is very simple,” Stalf told WIRED in a Skype interview. “If you look at traditional banks, they have built up companies over the last 40 to 50 years and I think the difficulty is they are non-digital companies. They have a big workforce and it’s very hard to transform a company that has maybe 50,000 employees into a digital company.

“Also, the shift in user behaviour has been massive. Ten years ago you did your banking transaction on the telephone, today you do it online or on mobile platforms. Smartphones have had such a strong evolution over the last few years. If you compare current iPhones with older generations, the difference in what you can do with the development language has obviously changed rapidly. We can now have a much better interaction with our customers through the smartphone, which is far more cost efficient than opening a bank with a physical branch. Therefore we can offer products at a much more competitive price and a much better service.”

There’s a lot of truth to Stalf’s thoughts. More than 600 high street bank branches closed down last year in the UK as an increasing amount of people continue to switch to online services. Additionally, those who are using these services are expected to do so through their smartphones. According to a report from the British Bankers Association, “... [mobile] will increasingly cannibalise the channel share of more traditional online banking activity, particularly as younger customers leapfrog the laptop and jump straight into a banking experience revolving around touch-devices”.

This desire for mobile banking is true across Europe, with nearly half of phone owners managing their bank accounts through their mobile devices, according to a report by ING.

More people are also paying by mobile. Of those surveyed, 40 per cent in Europe said they’ve used an app to pay on the go in 2016, which is up from 33 per cent in 2015. Furthermore, “56 per cent of mobile device owners say they expect they will ‘certainly’ or ‘probably’ use a mobile payment app in the next 12 months”.

On top of this, people just don’t seem to trust or understand banks as much as you might think. Only 28 per cent of those surveyed by the BBA believed banks to be trustworthy and only 33 per cent believed them to be easy and convenient to deal with.

Moreover, apps like N26 are unique in what they can provide. They’re not just digitising existing banking services like some of their high street competitors, but rather they’re also introducing new features, such as the ability to freeze your card if it has been lost rather than cancelling it entirely, very helpful for those moments when you’re not sure if you’ve left your card at home or if it has been stolen. N26 and other similar services do this while listening carefully to customer feedback, allowing these companies to deliver fast and targeted updates, leaving high street banks in a constant state of catch up.

However, Nick Williams, consumer digital director at Lloyds Banking Group says there is, “some truth to the statement that the banks had merely digitised existing services, but there are new digital developments that offer customers value and propositions which they simply can’t get outside a digital world (e.g. Lloyds’ 'It’s on us' or Halifax 'cashback extras')."

But Stalf isn’t worried about competition from the aging old guard looking to imitate:

“I think it’s a question of philosophy. Do you trust traditional players to be able to build the greatest digital products? I think what history tells you is that was never the case. No one who has disrupted any industry was a traditional player. But in the end, the customer has to decide. The customer needs to decide on what product they like best and I’m not fearing competition on the digital experience of our product and what we’re offering. I think most traditional banks will have difficulty catching up with us and keeping pace.”

Yet despite the clear desire for an easy mobile banking solution, N26 and its competitors still have a lot of trust to earn from consumers and they leave some questions unanswered. Many older people, for instance, do not own smartphones and may find the loss of their high street banks negatively affecting their daily lives. How can a transition to digital also ensure older people do not get left behind?

“I think first of all that it’s a myth that it’s easier for old people to go to the bank branch,” says Stalf. “I think it’s much easier for them to use a great mobile experience and do their banking from home, especially if they’re not so mobile anymore. We see in our customer base that more and more older people are using our product.”

“As for trust,” continues Stalf, “I think people trust us because of our transparency. If you were to download our app, you can go in the app store and look at the ratings. That immediately creates a lot of trust if you have good ratings. The same if you go on our Facebook page, our Twitter, you can see everything transparently.”

But then there’s the question of security. A purely digital service managing and storing the savings and vast details of thousands, potentially millions, of people will be a prime target for hackers.

But Stalf is quick to remind WIRED that “every bank is digital now". "If you go to a branch bank, there is a computer in there. What the clerk there does is type into the computer, so it’s a computer system, there’s no physical money. So from that perspective, there’s no difference.”

With branchless banking becoming ever more convenient, trustworthy and secure, it is perhaps only a matter of time before it becomes the norm.

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This article was originally published by WIRED UK