Mobile-First Bank Gets U.K. Charter — Could It Happen Here?

Atom Bank, a mobile-first startup in the U.K., has scored something that many fintech entrepreneurs in the U.S. have either failed to get or not bothered trying: a banking license.

The year-old company, which was founded by ex-bankers and has raised 25 million pounds ($39 million), plans to open for business this year. It is developing personal and business banking products and services that will be delivered through mobile apps first, followed by a version for the desktop. Atom Bank has not indicated any plans to open branches. Core systems from FIS, the world's largest fintech vendor, will support the apps.

The young venture joins a burgeoning class of mobile-only financial services providers that includes Simple, ZenBanx, Moven and others looking to engage people through their smartphones at a time when branch transactions continue to decline.

Atom is setting itself apart, however, by getting a banking license from the start. Some startups in the U.S., such as Simple, have sought banking charters. But they have ended up going a different route viewed as easier, albeit still time-consuming: partnering with traditional banks (and Simple was ultimately acquired by a large bank, BBVA).

The license — the U.K.'s first for an app-only bank — was granted to Atom last month by regulators who have been working to make the process easier.

"The U.K. government is doing everything it can to lower barriers to entry for challenger banks and to decrease the time it takes to issue licenses," wrote Lawrence Wintermeyer, chief executive of the trade group Innovate Finance, in an email to American Banker. "Atom Bank is a great example of how a financial institution that meets all of the U.K.'s regulatory requirements can get their licenses swiftly. … We will see more of this in the future."

In a June blog post, Atom said getting a license was required so it could accomplish more than slapping a good-looking user interface on the front of a traditional institution. Mark Mullen, chief executive of Atom, wrote:

Yes, it will have a beautiful and intuitive and engaging customer front-end. It will make banking easy and convenient, but it will also have better systems, better processes, better policies and better people behind it. We want it to be simple and transparent and innovative. We want it to be low cost, because price matters to people and we don't see why in this day and age they should be paying for something they don't use.

Zilvinas Bareisis, a senior analyst at the research firm Celent who is based in the U.K., said the government has been trying to inspire more competition in a market that has been dominated by a mere handful of banks.

In 2013, the U.K. government loosened its banking license restrictions, such as the capital it required, in a bid to drive competition from startups.

Could a purely virtual bank obtain a de novo charter in the U.S.? It seems like a long shot in the current regulatory environment, where fewer than a dozen new bank charters have been granted since 2010 (and most of those were "shelf charters" for investors looking to buy failed institutions). But some industry members see reasons to be optimistic.

Jay Sidhu, chairman and CEO of Customers Bancorp, which has an Atom-like subsidiary called BankMobile, said Atom put together a solid business plan, including the capital it has raised.

"I feel that is very possible in U.S. also," he said. "However, it could take a year or two to get all regulatory bank charter-related approvals. Besides that, developing the strategy, putting together the required infrastructure for a bank, recruiting a team, and executing on the plan is another big challenge."

Sidhu anticipates that in five years, there could be five to 10 banks pursuing a mobile-first strategy in the U.S.

A Moven blog post from 2012 spelled out why the "neobank" didn't want a license. "We don't have a charter because it gets incredibly complicated and expensive, which is the reason hardly any new banks have launched globally in the last few decades," the blog stated. Specifically:

[Y]ou have to start with lots of capital to comply with regulations; you have to have even more upfront money to get FDIC insurance licenses; you then need to jump through another bunch of hoops to get approval to start up; and once you get going, you have to heap another layer of cost into the process to ensure compliance with all the regulatory controls.

The challenge that lies ahead for Atom, like any new digital brand, is acquiring customers. "The big question is: will consumers find it compelling?" said Bareisis. The bank is vying with other new entrants to the U.K. like Mondo and Starling Bank.

Atom employs 100 permanent and contract staff with a plan to hire at least another 60 by yearend. With its workforce, the Durham, England, startup is aiming to set the digital banking standard, which will include biometric security and in-app account opening. In the U.S., BankMobile also lets people sign up via an app.

FIS, Atom's processing partner, has been working with the startup for about nine months on what the vendor believes is nothing short of "leading edge."

"Their success and ours will send a really strong message to the legacy banks," said Jonathan Davis, FIS' managing director for Europe, the Middle East and North Africa, who manages the relationship with Atom Bank.

The cost structure will be "a fraction of a big bank's," he said. All told, it's difficult to quantify the savings. But Davis says it would cost a big bank hundreds of millions of dollars to replace a core while a startup can get the infrastructure it needs for tens of millions. For one thing, there's much less customization of the back office, which saves on price for Atom. For another, there are fewer channels, and therefore, lower overhead costs. And lastly, FIS's pricing model with Atom is to pay something per new account.

"It's buying almost by the drink," said Davis. "That's where I believe this market is going."

FIS initially thought the partnership was high-risk as the startup did not have a license, and at the time was working to create a bank that was extremely rare for the region. But the vendor viewed and views the risk as one worth taking, said Davis.

Davis sees the partnership as strategically important for FIS in its pursuit to gain experience working with a challenger bank as the company seeks to replicate the model in other markets such as Eastern Europe. Already, Davis credits its partnership with Atom for stimulating new thinking, including the idea of using game app developers –as Atom Bank does — to inspire mobile engagement.

"It's a mutually beneficial partnership," said Davis.

ZenBanx said it had everything ready for a charter over a year ago and held back. Why? It wants to build its case with its partner bank (WSFS Bank in Wilmington, Del.) so the model could be tested and proven.

Eventually, "I think we can ride the bike without the training wheels," said ZenBanx founder Arkadi Kuhlmann.