Tandem, the digital bank, has hit 500,000 users after one year in operation according to its founder Ricky Knox.
Tandem has been adding customers alongside products throughout 2018, since it gained a banking licence and £80 million of capital with the acquisition of Harrods Bank in 2017. It now offers two credit cards and a fixed saver account, alongside an app that allows users to manage their money across different accounts in one place.
January 13 marks one year since the introduction of open banking legislation that forced banks to share customer details with rival services. Tandem is gaining traction alongside other digital banks such as Monzo, Starling and banking services firm Revolut in a race to acquire software that will attract users away from traditional lenders. At 500,000 users, Tandem is still significantly smaller than Monzo, which hit 1 million users in September, while Revolut has 3 million.
In January, RBS entered the digital banking market with a £2 million investment in Loot, a startup to help students manage their finances, through Natwest’s digital-only retail bank, Bo.
Providers have so far failed to convert a growing number of users into profit. Tandem made a pre-tax loss of £23.6 million in 2017 and while losses narrowed in 2018, Knox says the company does not expect to turn a profit until 2020.
Tandem makes money in the same way as traditional banks, by charging interest on credit. It also takes commission if a customer switches its utility bill on a recommendation. Knox says it makes less money per customer than the incumbents: £40 compared to £200 or more at the average bank. “We genuinely are trying to make you better off,” Knox says. “That’s not what Barclays' mission is.”
Eventually, the goal is to eclipse the established UK banks: “Our ambition is to be bigger than those banks for sure – and on a much more international scale,” he says. “They truth is the UK banks are tiny, they have around £40 billion market [capitalisation], on average. Monzo with its £1bn valuation is already in swinging distance of the smaller ones.”
Knox is a fintech veteran. He already had four companies to his name by the time he started Tandem in 2014 with co-founders Matt Cooper, a former managing director at Capital One, and Michael Kent, who previously worked with Knox on payments companies Small World FS and Azimo. “All of my businesses are purpose driven at some level,” Knox says. “My main mission is to sort people’s finances out.”
One of Tandem’s goals, when it launched, was to help customers getting through the month without running out of money. Their market research pre-launch revealed that this was a major area of concern for potential customers. “Customers find that more of a problem than saving,” Knox says. “The solution to prevent people running out of money is aligning income with outcome. That's what we focussed on last year.”
The company acquired Pariti, an app that helps users keep track of spending, in March 2018. Pariti tracks how much a user is spending on debt repayments and suggests changes to help someone pay off their debt more quickly.
In September, Tandem introduced an auto-saving feature in beta. It works by topping-up transactions to send excess cash from a current account to a Tandem flexible-saver account, or by rounding-up an aggregate of transactions to set aside as much as someone can afford at the end of the week. “Lots of our customers have told us that they want to save but they can't do it,” he says. “A direct debit is inflexible.”
The company is preparing to roll out the smart savings app to all customers in the coming weeks.
While Tandem was built for millennials, the average customer is more likely to be in their 30s than their 20s. “Our service helps you sort out your finances and that's more likely to appeal to people in the 30s,” Knox says. “I don't know about you but when I was in my 20s I had more important things to worry about!”
He describes 2018 as a year of building the business, while 2019 will be about scaling the bank internationally and integrating all of its current software into one solution. Tandem’s current suite of services is built to appeal to customers who may want to keep their current account with a main provider, while taking advantage of benefits such as free transactions abroad with the cash back credit card, or higher interest on fixed-term saving accounts.
Unlike Mozo and Starling, Tandem does not offer a day-to-day spending account, or a pre-paid card. “If you have an account and want to work with new banking services, but not move your money across, our offer works better in that hybrid space,” Knox says.
The absence of a pan-European bank allowing users to make transactions in foreign currency without incurring fees is one area of opportunity for digital banks. So far, European expansion has proved tricky. When Revolut started in 2015, it focussed on free overseas transfers but later moved into cryptocurrency. Monzo introduced fees for overseas cash machine withdrawals in 2018, claiming that free withdrawals were “unsustainable”.
Knox says Tandem has put plans to expand in Germany on hold until after March 2019 and the UK's exit from the EU: “We were going to open deposit accounts in Germany but then we got a letter saying you’ll be illegal after March.” The company closed the few accounts that it had. “We’re going to see how it pans out,” Knox says.
In the meantime, Tandem is turning its attention to Asia. In November, it announced a £15 million investment from Convoy Global Holdings, a Hong Kong-based financial advisor, putting it on a footing to open one of the first digital banks in Hong Kong. This brings the total funding raised to £39.3 million.
Knox says Tandem will need to double its user base and become profitable before it can consider an IPO. “Ultimately, the challenge is do you have enough scale to support the overheads that being a public company brings,” he says. “Sadly just being a bank brings a massive overhead, which also means you are an appropriate size to IPO.”
But it’s not just scale Knox is working towards: “Could we IPO within a couple of years? Certainly. Is it on my priorities list? I think we probably want to run private a little longer than that.”
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