At the heart of a successful bank is a successful customer service organization – especially today, as the banking industry is being roiled by a new breed of firms called “challenger banks” that are using digital technology to connect with customers in whole new ways. In our first interview in this series, The New Banking Landscape, ISG spoke with Monzo Bank. In this second installment, ISG finds out what is driving another leading “challenger,” UK-based Tandem Money Limited.
Established in 2013 with the help of a group of customers it calls its "co-founders,” Tandem expanded during a short sign-up window in 2016. In an unconventional move, the bank promised five percent of the company stock to co-founders in return for helping grow the Tandem bank community and participating in market research. Today, the bank is operating a waitlist for potential customers as it finalizes the takeover of Harrods Bank in anticipation of its banking license.
Chief Customer Officer of Tandem Bank Ruth Handcock helps Tandem define its “challenger” approach to customers. She recently spoke with ISG partners David Locke and Owen Wheatley about the company’s journey.
ISG: You’ve said Tandem thinks differently than other banks about the needs of its customers. Can you say more about what you mean?
Handcock: No matter where they sit in our business, our people think about how well something works for the customer. We’ve embedded that culture from day one – it’s in our DNA – which is easier to do when you’re starting from scratch. Are there trade-offs we have to make because of that culture? Absolutely! We have to ask ourselves, “Do I build this piece into the digital customer journey because it makes it easier for the customers, or do I spend that money elsewhere?” We make these kinds of commercial business decisions day in and day out – but profit is never more important than the customer. Our business model works because we’re doing the right thing for our customers – and they know that.
ISG: What kind of growth are you seeing in customer numbers?
Handcock: We had a unique launch approach with 10,000 co-founders, as we call them. They are our early-adopter group, but they’re really the people who are building the bank with us. I think for any new bank, you have to consider how quickly you want to scale. We have huge aspirations for our app. Like Monzo’s app, ours is built to be used whether you’re a Tandem customer or not – you don’t have to have a credit or deposit product. We want to build our balance sheet steadily. Unless you have a limitless supply of equity, it’s very capital intensive to grow quickly.
ISG: The larger, established banks’ greatest fear is of being completely disintermediated and losing primary access to the customer and their data. Is that how you see it from your side?
Handcock: This is an opportunity for us because, to some extent, we do seek to disintermediate. Through the Tandem app, for example, you can see all your bank accounts, regardless of where you opened them. The core provider of that current account will still get data, so I don’t think established banks need to fear the data piece. But they may rightly wonder if their app is getting opened day in and day out. People often ask us why we are a bank instead of just a money-management platform.
On the other hand, I don’t really believe in the disintermediation argument. To use an example, in the dot.com boom of the late 90’s and early 2000’s, everyone thought we would shop all over the internet because suddenly it was so easy. But what do we all do? We go to Amazon because it’s just easier. And human behavior drives us toward simplicity because most of us are time-poor. The same is true of banking. So if you have a relationship with someone you trust to give you insights about how you’re spending your money, why wouldn’t you also want to get your banking products from them? The reason banking relationships have become more fractured is because banks tend to price and give service differentially, depending on which bit of their balance sheet they’re trying to build. Customers feel they can’t go to one place for everything. They say, “I love my current account, but I wouldn’t get my mortgage from the same provider because their rates are terrible.” Tandem gets around that by providing products that are always fairly priced but also we refer customers to other people’s products if we think they’re better for them. This way we provide one place where a customer can fulfill all their financial needs.
ISG: Do you have limits on that aspiration? Do you say “I will never manufacture mortgages,” for example?
Handcock: Not really – we don’t draw a hard line. We seek to manufacture where we think we can meet a customer’s currently unmet need. Would I manufacture a mortgage right now? Probably not because rates are so low even though there’s probably a niche set of people who aren’t being well served by the market for whatever reason. Would I manufacture a different type of personal loan? Probably. There’s a big customer barrier to taking out a loan even though it’s often a better product for people than a credit card. Personal loans make up an area of the market that needs a bit of a shake up if we can think about them in a new way.
ISG: You’ve said you wouldn’t rule out any genre of customer, but then you also mentioned the characteristics of your target customer. Can you describe that target customer?
Handcock: We describe our customers behaviorally rather than demographically. We think we will best serve customers who want a certain amount of guidance rather than being incredibly self-directed. Self-directed individuals tend to gravitate toward price comparison sites because they use the data to direct their decisions – they are willing to commit time to doing that. Our core segment likes to know they’re getting the best deal, but they don’t want to make the decisions from scratch because they don’t understand it or they don’t have time or they just find the process stressful. Behaviorally that’s our target customer. We don’t have branches, and there will be certain segment of the population that doesn’t want fully digital banking, although I think that segment is decreasing almost daily. Beyond that, I think the behavioral characteristics of our target customer are fairly common across the population.
ISG: How have you been growing your customer base?
Handcock: Our early-adopter customers are really our co-founders. They make up a peer-to-peer network that started with personal connections with the people in this building and grew from there. It got a big boost when we conducted a crowd-funding initiative last spring because our co-founders wanted a share in what they were helping build.
ISG: Do you use customers as a focus group as well?
Handcock: Yes, they are what we hope will become our strong early customer base, but they’re the people who have helped us build the bank. So we have breakfast and they come in. We pose a problem to them and they get surveyed. We have a core group who have spent so much time helping us get an unbiased point of view, they almost feel like staff.
ISG: I imagine you get good engagement from this group and their interests align well with your mission. How do you balance their aspirations with your capabilities?
Handcock: The challenge for all of us across the sector is that we want to create a perfect experience in every aspect of banking, and it’s just impossible to do from day one. We believe customers who are helping us find the answer are more tolerant of continual improvement over time. If you launch and say, “We’ve done this. Look here it is!” then people expect it to be right, whereas, if you say, “Can you help us get there?” you have a different relationship with the customer.
ISG: How do you handle talent acquisition?
Handcock: We’ve built what we think is an incredible team across the business, and being in London, being in the center of fintech, there’s a huge amount of talent. We’ve been very keen to recruit from a range of industries, so we have people from retail banking and from fintech as well as people from outside the sector. Getting that blend has been very important for us. Ricky Knox, our founder, believes that if you’re based within five minutes’ walk of a mainline rail station your ability to attract talent is greater. And that’s been true. Of course, hiring great software engineers is still a struggle – there just aren’t enough of them, even in London. They are the hardest roles to recruit.
ISG: Would you recruit software engineers as employees rather than associates?
Handcock: We do both. We partner with a company in Poland for development, and we also do some of our development here. When you’re a start-up, you attract a certain type of person who is very excited about joining a start-up. Then, as you become a bit more established and you get a banking license, that’s great for some people and less good for others, so you dial up different bits of the employee value proposition as you evolve the business. I think tech is always a challenge for a new bank. There are some big decisions to make. For example, whether to partner. We’ve partnered with FiServ for our core banking system, but we’ve built the digital journey ourselves. We feel this is the right compromise, but it comes with its own challenges. Tech strategy is one of the things that differs across the challenger banks. Some have gone the DIY route, which means they can probably be more agile and flexible but maybe not as scalable. Others have outsourced elements like application development.
ISG: With larger banks, the temptation has been to build rather than buy, but they’ve ended up with a spaghetti legacy of things that they’ve written themselves and can’t support anymore.
Handcock: Building everything yourself is so capital intensive – it’s just not an option for a new bank.
ISG: Do you also use that philosophy for other middle or back-office areas? Do you partner with people on HR, Finance, sourcing?
Handcock: Generally, where we think there’s someone out there doing it really well, we’ll partner with them. If we think that either it’s core to our value proposition or we can’t find anyone that’s good enough, we’ll build a solution, and I think that’s going to be the way of fintech from now on. We’re not going to come up with every good idea. Someone elsewhere will come up with better ideas, so why wouldn’t we use them rather than trying to reinvent it ourselves? Anything core, though, we build ourselves, like our customer interface.
ISG: And how would you define success in terms of a customer base?
Handcock: I wouldn’t want to put a number on it. I think long term it’s about influencing a significant number of people’s lives. Everyone has a business plan they put into the regulator that includes the actual number they’re aiming for. What I know about the way you build a balance sheet and the capital requirements and what’s possible leads me to think that all those business plans put together probably account for less than five percent of the population in the UK.
ISG: Acquiring a million customers is a big ask, but it’s difficult to make money from 10,000.
Handcock: That’s true, you have to hit scale. But you also have to stay true to your customer focus – the thing that makes you different – and not just chase customer growth. The work we are doing now is to make sure customers know why they would come to Tandem. When we look at different models like partnering we try to make sure the customer value proposition will work and not just be a huge diversion. But there is not infinite capital, and Brexit has made that worse. The challenge for challenger banks is raising sufficient capital to hit our business plans. My personal view is that raising capital will be the driver for consolidation rather than customers.
ISG: ISG’s view is that raising capital is the easier part and lending is difficult, do you agree?
Handcock: Yes. Raising deposits is extremely easy, and raising equity capital to fund your balance sheet is much more difficult. Raising sufficient equity to hold your risk-weighted assets is the tough bit.
ISG: You have 10,000 customers today. What is your marketing and brand awareness strategy to grow your customer base?
Handcock: I remember vividly the day Metro launched. You’d walk past and see people in roller boots giving out popcorn. They had to make a huge splash – and you still have to do that when you suddenly appear on the High Street. But I don’t think that’s how any of the challengers are going to launch. We are developing from the bottom up with our early adopters and trying to drive advocacy amongst our customers. So, for us, it’s less about marketing and more about proving to customers that we can deliver what we said we were going to deliver. And making sure we have enough brand awareness so people don’t think “Who the hell are these guys?” Eventually, we may want to be shouting on TV and bus posters, but I think we have to build a digital presence and some loyal users before we reach that point.
About the authors
David Locke is Client Partner and Managing Director in the UK ISG Business. He leads ISG business relationships with flagship global and UK clients. He is privileged to lead, motivate and support talented colleagues in building highly effective solutions that enable his clients to become the most competitive in the world.
Owen Wheatley has built a decorated career, serving clients across multiple industries with a special focus on enterprises in the financial services sector. Advising clients on IT strategy and the digital agenda, Owen leads high-performance advisory teams to design and implement major transformation programs, structure complex transactions, negotiate with service providers and advise on a broad range of market trends and sourcing activities. Most recently, Owen worked with a large European bank to develop a new workforce strategy that optimizes internal resources and unlocks significant savings. While at a major UK-based retail bank, he led a large advisory team to define and implement an IT sourcing strategy that led to associated savings of more than £250 million. Owen holds a BSc in economics, is a chartered accountant fellow with PwC and has been widely published in his capacity as a recognized thought leader in his field.