Articles

Monzo, Revolut, Starling: Meet the disrupters changing the way we bank

8 minutes

We ask finance and banking experts on why you should consider giving one of the new challenger banks a go

  • What actually are these banks?
  • What are the benefits?
  • Does it affect your credit score?

Would you trust a purely online bank?

There has been a shift in the way that consumers bank, with start-ups such as Monzo, Revolut and Starling all competing with the more traditional high street banks for your money. Targeted at a millennial audience, the digital-only, app-based companies’ bank cards have become a staple in the wallets and purses of anyone under 30. In fact, Monzo’s homepage claims that 1.5 million people are using its service, with a reported 28,000 people opening an account with the provider each week.

Their appeal isn’t universal, though. A study from 2018 found that 83% of UK consumers are ‘unsure’ about fintech (or financial technology) companies. Just over a quarter (27%) cited a lack of understanding about the technology as why they would stick with a traditional bank, while 22% claimed it was down to an absence of physical locations [1].

But with the sector changing rapidly all the time, and the giants of banking starting to get in on the action, it’s time to see whether these fintech alternatives could work for you.

What actually are these banks?

Most of the first wave of start-up fintech banks are just that – banks. The likes of Monzo, Revolut and Starling all have banking licenses and are subjected to the same rigorous regulations as the staples of Barclays, HSBC or Santander. The main difference is that they are digital-only and don’t have any high street premises – with everything done either online or on an app.

Also, like other banks, any money you deposit into the accounts is protected (up to a certain limit) if the company were to go bust. Both Monzo and Starling are part of the Financial Service Compensation Scheme, which guarantees up to £85,000 in a current account or £170,000 in a joint account, while Revolut accounts are safeguarded under e-money regulations.

“The whole ethos of this new waves of digital banks is to be very friendly, on the consumer’s side build a bit of a fan base, and really get away from the stuffy image of men in suits that traditional banks have, explains Carl Roberts, financial advisor for RST Financial Planning and editor of Money Tech Coach.

“They’re really going out there and emphasising customer service,” adds Catherine Morgan, financial coach at The Money Panel. “They offer a rich banking experience where they can focus on and embrace the fast development of technology, and bring that to their proposition in a way that rivals can’t.”

What are the benefits?

First things first, they’re extremely easy to set up. There are no meetings with bank managers, scanning of utility bills or being put on hold with call centres to create an account. “The approval process is very simple with these new banks,” says Roberts. “You can download an app and be set up with an account in a minute or so from your home.”

But it’s not just the ease of setting up an account that has made them such a success. “They’re able to give you incredible valuable insight into spending habits,” says Morgan. “One of the things I love about Starling bank, and I know Monzo offer a similar thing, is the categorisation feature. It enables you to see and track where you’re spending your money. You can easily identify areas of overspend that you might want to tackle and create better habits around.”

“They really teach you and help you towards saving,” adds Roberts. “It’s even possible to set up separate saving pots within the current account and automatically deposit your spare change into them.”

They also have some great features that most big banks can’t compete with. Monzo allows you to transfer money to family and friends via the app without having to dig out sort codes and account numbers. Revolut, meanwhile, is ideal if travelling abroad as it doesn’t charge any fees for transactions.

Will they affect your credit score?

“Your credit score is affected mainly through lending, which I think some of them have only just recently started offering,” says Roberts. “I’ve not seen any issues with credit records by using these banks or by being a customer of them.”

If you’re using a digital-only bank account like a cash card – where you are only able to spend what’s in your account and keep your overdraft functions switched off – then it won’t have an impact on your credit score at all.

However, if you opt in to an arranged overdraft, then the bank will have to perform a credit check, leaving a ‘hard print’ on your file that future lenders can see. If you’re worried about affecting your credit score, all you have to do is keep this function switched off.

Are there any downsides to fintech banks?

If all of the above sounds a bit too good to be true, then there are reasons to still be wary about the sector. It’s still very new, and Roberts believes there isn’t enough space in the market for all of the current players.

“There is the risk that I don’t think they’re all going to survive. There could be some consolidation going on in the future, or one of the incumbent banks could make a bid and buy one out from the technology side of things.

“While your money will be fine, if you get comfortable with a certain bank and you’ve got various strategies and saving pots saved up, you may find that at some point in the future that bank won’t exist in its current form, which could be a hassle in terms of transferring money. Ultimately, that’s the biggest risk – not in terms of to your money, but more functionality and registration hassle.”

Morgan also adds that, in terms of interest rates for savers, there might be better places to put your money with “other banks offering reasonable interest rates on a current accounts that maybe have a saver attached”. Even so, she recommends giving them a go: “For some people, it’s not necessarily about changing your main bank. It could be about testing out some of these accounts first and seeing how they get on.”

Sources

[1] RealWire, 2018. 83 percent of UK consumers unsure of fintech, according to wide-ranging survey. https://www.realwire.com/releases/83-percent-of-UK-consumers-unsure-of-fintech-according-to-survey