What are app-only banks?
A completely different type of bank is springing up in the UK. Monzo , Starling Bank and Loot are just three examples of this new trend, but their recent success has seen them shooting up the App Store finance charts. Monzo is at number 29, Starling Bank is 42 and Loot is at number 60. What sets these upstarts apart from the traditional banks is that they’re focusing all their efforts on making a great app. Their killer features include instant transaction notifications, budgeting and tracking spending at different shops.
What is Monzo?
Monzo, seemingly the most successful of the top three, started out as a prepaid card. From application to money management, Monzo is based solely around an app. To get around banking regulations and prevent fraud, customers had to take a photo of their passport or driving license and take a selfie video to prove they weren’t stealing someone’s identity. It was a risky business model and took a lot of faith to believe that people would send over confidential information, but their gamble paid off.
Over 450,000 customers in the UK use Monzo’s hot pink prepaid cards, and they’ve been a great success. The app sends instant notifications whenever a transaction is made and allows the user to freeze and unfreeze their card whenever they want. This system helps to reduce the risks of contactless card skimming by showing a customer where and when their card was used and allowing them to deactivate it when it isn’t in use.
Monzo will soon deactivate its prepaid cards
After operating as a prepaid card-only company for two years with great success, Monzo have leveled-up and created a current account. Existing customers will be offered an opportunity to apply for an account, and invited to upgrade by the end of November. The prepaid cards will be phased out, though, which has caused some concern among the online community. Perhaps more worrying, however, are the issues that have faced users over the past year, with cards often failing due to issues with the card provider. Monzo has always described the prepaid card as a ‘beta’ product, suggesting you shouldn’t rely on it entirely. They claim that the current account should avoid these issues, as the company has built an innovative new banking system for it from the ground up.
What are Starling Bank and Loot?
These two companies have already rolled out their new current accounts, which are up and running right now. Perhaps their most exciting feature, which hasn’t yet spread to Monzo, is called ‘goals’. It’s a brilliant idea which allows you to keep some of your current account money in a separate stash within the app. You could use it to save for a holiday or a big purchase, or it’s great for the self-employed, who can keep a set percentage of their income aside for paying tax at the end of the year. With savings accounts earning so little interest, it’s a potential alternative, which might appeal to you. Monzo has a similar feature in the works, which it currently refers to as ‘pots’.
Loot responds to customer complaints
If you’re thinking of downloading the Loot app, you might be concerned, as we were, by some of the negative reviews. Customers had been complaining that the company was acting improperly, but with an average rating of 4.2 stars on the App Store, it’s likely that these issues only affect a very small proportion of their users. We reached out to Loot, who explained the problem:
Should I apply for an app-only bank?
You might think that an app-only bank would be an unreliable way to store your money, but consider the alternatives. Even big banks like Barclays and HSBC can have problems and they often have clunky, slow apps thanks to their old systems. Accessing your accounts quickly on your phone and getting information about spending habits, with extra features like goals, can really help when you’re trying to manage your money.
It could be risky to apply for an app-only bank unless you’ve done your research. Make sure you read reviews and work out whether you’ll have a problem getting accepted before you apply. At this stage, it’s probably best not to keep all your money in challenger banks - make sure you have access to an alternative pot of money to avoid catastrophe if their servers go down or the payment service fails. There are also other ways of budgeting and keeping track of your cash, like prepaid cards and apps including Moneyhub and Yolt (though our experience of these apps is not entirely positive).
When will my bank roll out these features?
2018 is going to see a huge shift in the way that banks operate, as new EU rules come into place to make the industry more competitive. It seems that some companies are already taking this onboard and are working to provide a better service. Features like Android Pay and Apple Pay have now been available for over a year and they’re making things much quicker at the checkout. In 2018, though, you’ll be able to access multiple bank accounts from the same app, which should make it much easier to switch and choose a better provider.
Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.