App-based bank Tandem, which plans to expand into Hong Kong before the end of the year, is determined to take on the giants in the financial industry and grow into a “trillion-dollar business”, its co-founder and chief executive Ricky Knox said.
“We are going to be profitable in about four to five months’ time, but if we go big in Hong Kong, we won’t be profitable [immediately] because we will keep investing in our growth,” Knox told EJ Insight in an interview. “But we should be able to run as a profitable entity from next year.”
As one of the “challenger” banks in the United Kingdom, six-year-old Tandem provides credit cards and savings accounts to over a million customers in its home market.
Unlike traditional banks that have physical branches, challenger banks, or neobanks, use mobile apps and online platforms to provide services to customers.
Founded in 2013, Tandem offers savings products and lending services through credit cards, pitting it against other challenger banks, like Monzo, which focus on current accounts as the center of their service offerings.
Tandem has obtained a UK banking license after it acquired Harrods Bank, the banking arm of luxury department store Harrods, in early 2018.
While attracting big venture capital investments, challenger banks are under pressure to leverage their popularity to meet targets for revenue and profitability.
Knox told EJ Insight that Tandem’s revenues were boosted by the mortgage business it acquired from Harrods Bank.
Its main income streams come from unsecured lending, credit cards, and savings products, unlike peers who rely on transaction fees from current accounts.
In 2017, Tandem recorded revenue of 5.1 million pounds (US$6.5 million) and a pre-tax loss of 23.6 million pounds (US$30 million).
Its revenue last year reportedly increased to 23 million pounds (US$29 million) while its losses narrowed.
It trails fellow challenger banks Revolut (8 million customers reported, 15 million customers projected next year, according to Knox) and Monzo (3 million customers) in terms of customer deposits and revenues for 2018, according to FT research, but remains ahead, along with Starling Bank, against peers in pre-tax profit.
Knox said Tandem earns 20 pounds (US$25) a year from each customer, after deducting all associated costs.
It may not be too difficult for Tandem to achieve profitability as it adopts a more “traditional” business model, focusing on savings accounts and lending products.
“Because when you get this [banking] license, you can have infinite money, for free, or 2 percent interest, why will it be hard to make profit?” Knox said.
As for other challenger banks, the focus is more on customer numbers and engagement at this stage.
However, “everybody is quietly shifting to do more in personal loans business, selling third-party insurance products … basically what a bank does, to make their economics get better.”
The UK, an early adopter of digital banking, has become a cradle for banking startup in recent years. The problem is that consumers regard challenger banks as their “second account” to complement their existing current accounts (for salary payments) in traditional banks.
With an aim to make Tandem its customers’ main bank account,
Knox wants to make the Tandem mobile app the financial control center for its users. One of its app’s unique features is that it allows customers to aggregate their non-Tandem bank account data from other bank accounts and credit cards, and Tandem provides financial analytics based on such data.
Utilizing the massive transaction data derived from third-party bank accounts, Tandem is able to provide more and more customer-tailored financial products, thanks to its artificial intelligence (AI) engine, according to Knox.
The bank has set up various machine learning and deep learning models to generate financial analytics, which helps customers predict cash flow, upcoming bills and expenses, etc. The AI models also help the bank in tackling fraud, marketing optimization, and assessing customers’ personal credit for lending products.
“Based on the transaction data of the customers, we will analyze their spending and income patterns, say, how they spend through the month, when they run out of money, excess cash flow leftovers, whether they make large purchases on credit late in the month, etc. [And these data are] coupled with their credit and default history and the social data, which ultimately drive our own internal credit score for a customer,” Knox explained.
One of the personalized financial services emerging in the horizon aims to address the customers’ “end-of-month” financial problem, which is running out of money shortly before payday.
Tandem’s developing product can be a notification feature that reminds customers right before the point of purchase on its impact on their budgeting for the month, while another feature, based on analytics technology, would be a personalized mortgage offering to help first-time homebuyers to get on the housing ladder and begin the mortgage journey.
As challenger banks disrupt the banking sector, the larger incumbent banks have restructured themselves and revamped their digital banking services.
On the competition with traditional banks, Knox believes there is a 10-year window for those lagging behind in digital bankin services to catch up. “There is even a 10- to 20-year timeframe for some of the big banks to adopt AI in the same way we are [using it now].”
Knox takes its one-button “freeze card” feature as an example, which allows its credit card users to suspend their cards through the app and then unfreeze them again.
“We built this feature in about two weeks and launched it last year,” he said. “It took about eight months for Barclays to design that feature, and Lloyds announced the launch of that feature 23 months later,” said Knox.
“So [traditional banks] are going to keep copying, and in 20 years’ time, they will probably have the feature set that I had back in 2019, and they will have it in 2039,” he said. “[Among traditional banks,] HSBC is a slightly nice bank, but it is still full of bureaucracy inside… [Traditional banks] built an organization that is so siloed within its departments.”
However, while challenger banks like Tandem are making ambitious plans to build a “new bank”, as they grow larger and focus more on profitability, are they resorting to a business model that is fundamentally similar to those of the incumbents?
“Avoiding the growing pains is one of the hardest things,” Knox admitted, “and we manage the ratio of bankers to non-bankers internally.”
He said Tandem has about 160 staff, and about a hundred of them work on product engineering and “almost none of them are bankers”.
There are only six people comprising the banking products team while eight people make up the compliance and risk management staff.
The reason is that in general, bankers are easily held back by compliance and other regulations from developing new products and services.
In the end, “it’s all about the mindset of the people you hire”, he said.
Sharing his dreams for Tandem, Know said: “I think half of the UK population (or about 33 million people) will have a digital bank account within 12 to 24 months, and hopefully we will have 3 million to 4 million customers in the UK in a few years time.”
While its rival digital lenders like Monzo and Revolut are rushing to expand overseas, targeting markets such as the United States, Japan and Singapore, Tandem hopes to kickstart its move into international markets with a launch in Hong Kong before the end of the year.
“As we build out a profitable business in each geography beyond the UK, I seriously think this is a trillion-dollar business to build in the next ten years, so it’s pretty exciting,” said Knox, without revealing the target markets his bank is eyeing.
New funding round
Amid the wave of fast-growing digital banks raising new funds, Tandem has started talks with investors for a new funding round, which is likely to be larger than the 80 million pounds it secured last year, to support its overseas expansion, the Financial Times reported in April.
FT said Tandem hoped to secure the investment in three months, citing a source close to the bank.
However, WeWork’s failed initial public offering (IPO) last month has rocked the global startup and venture capital community, and affected market sentiment.
Knox said the progress of the fundraising round is not hindered by the WeWork woes. “We are not in that kind of space [as shared-office provider WeWork], we are nearly profitable, we’re in a very different business.”
“There is a regulatory process we have to go through. We’ve got a few more regulatory boxes to tick before we’re ready to announce anything,” said Knox.
Offering no details on the size or valuation of any prospective deal, he said the bank has got “a very sizable fundraising coming down the tube, but it’s not there yet”.
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UK challenger bank Tandem plans to launch in Hong Kong this year