A major UK lender just launched a digital bank to compete with Monzo and Revolut | Interview with Bó CEO

CNBC | Chloe Taylor | Nov 28, 2019

RBS NatWest Bo - A major UK lender just launched a digital bank to compete with Monzo and Revolut | Interview with Bó CEOBritish lender NatWest has launched a digital bank to compete in the U.K.’s thriving fintech space.

NatWest — a subsidiary of RBS — launched cloud-based bank Bo on Wednesday, with the service going live on both Apple’s App store and Google Play.

Those who sign up to the digital bank will be sent a bright yellow Visa card and access their account via Bo’s mobile app.

Bo was designed to help people manage their money, according to NatWest, and includes features to help users budget, set savings goals and access “great Visa exchange rates” when using their card abroad. Users will also be instantly alerted whenever they use their card.

“As we’re part of NatWest, people can rely on Bo to keep their money safe,” Bo CEO Mark Bailie said in a press release Wednesday. “But as a digital bank, built entirely on a separate cloud-based technology, Bo is also able to harness new technology and develop rapidly in line with our customers’ needs and expectations.”

While banks are under increased pressure to innovate, they’re not facing an existential crisis, Raman Bhatia, HSBC’s head of digital for the U.K. and Europe told CNBC earlier this year. The lenders that will win in the long run, he says, are those that people trust.

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“I think one thing which remains a truism is customers do have a very high degree of trust when it comes to money, their deposits and their identity with respect to established banks,” Bhatia said. “And banks need to work harder than ever to preserve that trust.”

Fintech competitors

But in spite of that advantage, Britain’s challenger banks are continuing to gain both subscribers and investment in droves.

Online-only bank Monzo is valued at $2.5 billion, while its rival Revolut is valued at $1.7 billion, making the companies some of the most valuable unicorn firms in Europe. Elsewhere, SoftBank-backed OakNorth was valued at $2.8 billion in February, while money transfer start-up TransferWise was valued at $3.5 billion this year.

Both banks are setting their sights on global expansion. In October, Revolut struck a deal with Mastercard to help it expand into the U.S., while Monzo launched in the U.S. in June. Meanwhile, U.S. fintech unicorn Plaid has expanded its service across the Atlantic into the U.K., Ireland, France and Spain.

One major lender that has already made some progress in offering a standalone digital service is HSBC, which in 2018 launched a money management app in the U.K. and signed 300,000 people up to the service in the first year.

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Oliver Wyman | Nov 2019

Interview with Bo CEO Mark Bailie - A major UK lender just launched a digital bank to compete with Monzo and Revolut | Interview with Bó CEOInterview With Mark Bailie, Former Group COO Of Royal Bank Of Scotland And Current CEO Of Bó

Many people in the UK have no savings. They are one misfortune away from being pushed into a debt problem from which they might struggle to return. A large proportion of consumers are either under- or over-insured.

Their financial struggles aren’t being addressed by the existing financial system. RBS concluded that its current attempts to digitize may not be enough, on their own, to address these needs. With the support of Oliver Wyman, RBS decided on taking a new path with a new offering, with a new brand, built on a new technology stack.

Bó represents a new breed of financial institution – a greenfield digital bank owned by an existing incumbent.

Oliver Wyman: What started the journey that led to RBS building Bó?

Mark Bailie: When he became RBS CEO in 2014, Ross McEwan made clear we had to start putting the customer at the heart of everything we do, and become customer, rather than product, centric.

From that foundation, there have been two key enablers we’ve needed to help us build Bó; first, having our customer data in one place and really analyzing our customers’ situations in depth. This has allowed us to see some of the issues our customers’ face – and what could be done to help them.

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The second enabler came from the growing potential to deliver technology and services at scale, and the rapid development of machine learning, AI, and cloud computing capacity.

When you put these together you see the potential for major changes, and opportunities. We can see a combination of customer need and the potential for highly personalized financial services.

What was the thinking behind taking a greenfield approach to the build?

We knew the kind of outcome we wanted would be a long and hard journey for an incumbent bank to deliver, with product-centric legacy infrastructure. So, for us, the question we discussed was, “how long have we got?”

If it's 10 years, you can probably transition the existing core into a truly customer-centric business, because you can do almost anything in 10 years if you're good and you can execute - and we still have a Plan A around this.

But if customers start accelerating their move toward new offerings, and you’re not already operating in that market, then the downside risk is asymmetric. If you don't know the timing, and you can see the potential for a material impact, then you need to cover the risk, so long as the cost is sensible.

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Greenfield lets you sidestep the challenge of legacy infrastructure and get to a truly customer-centric offering faster — it’s the pragmatic solution. However, greenfield isn’t a cost-free strategy. It creates other issues, which we’ve got to learn to manage: we will have two tech stacks, and two brands. That has taken a lot of thinking through, and in the end you have to make your choice.

How did you reach the decision to build Bó?

We didn’t wake up one morning and decide, "let's build a new greenfield bank," or, “we're going to spend X, go away and come back when it's done.” This was done in measured but quick, incremental steps.

We took a very small amount of money and gave ourselves three months to see if we could put together a proof of concept, using enough of the components, and make it work. Having done that, we went to the next step, to see if we could make it work in a real-time environment with live connection to payment rails. Once we got there in the time period we’d set, the next step was to put it into a production environment, and then into beta.

How much did the threat of new challenger banks motivate Bó?

So far, we don’t think anyone is managing to deliver truly customer-centric financial services, and no-one's yet proven that you can disintermediate the existing banks. This has led to a relatively common response: “The challengers are never going to make any money, their business model is unsustainable.”

I think that misses the point; it's still a very young sector. Customers are using the new services and capital markets are funding them. The product isn't perfect, but some customers clearly like it, which is why you can see the adoption levels increasing. Although what they're doing today isn't yet the full answer, these business models will evolve and develop over the next five years.

What customer needs is Bó focused on?

RBS is a large bank, with just under 20 percent of the current account market in the UK. We serve everybody and are able to put together quite a detailed view of how people deal with their finances.

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We know that 40 percent of working-age adults in the UK – that’s just under 17 million people – have less than 100 pounds of savings. That’s not just down to incomes – relationships with, and understanding of, money are also factors. So, we see a clear need for services that can help those millions of people to manage their money better, but crucially, delivered in a way they are willing to engage with.

What is the secret to building a new digital bank within a large existing bank?

For me, there are three things we have found to be most important.

Number one is having full support from the chief executive and the chairman. Unless the CEO is driving the vision, there’s no point in starting, and the board needs to be willing to back the CEO. If these elements hadn’t been in place, we wouldn’t have started.

The second is, you have to separate it out from the core business, but still ensure the new business has Exco-level sponsorship.

The third thing, when you are a large existing bank, is that you have to build it within your existing risk appetite framework, and it must be aligned with your existing policies. You have to build these things so they can co-exist together in the long term.

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