The head of innovation at one of Britain’s big high street banks told me earlier this year that he has a mantra when approaching a new problem: “What would Monzo do?”
Monzo, for those who don’t know, is the fast-growing and much-hyped British startup bank that has no branches and operates purely on people’s smartphones. Earlier this year, it was valued at over $1bn and its CEO told Yahoo Finance UK the bank is signing up 100,000 new customers a month.
Traditional banks are struggling to keep pace as Monzo pushes the boundaries. The startup sends smartphone push alerts when you spend money, knows when you’re abroad, lets you freeze your debit card if lost, and offers chatbot customer service — all through the app.
All of this has raised customer expectations. It’s no wonder “WWMD?” is catching on as a motto in Canary Wharf innovation labs.
“Monzo’s done very well, they’ve certainly gained a lot of attention from end customers and they have showed that there’s nothing inevitable about having to use the mainframe style of banking,” Paul Taylor, the CEO and cofounder of Thought Machine, told Yahoo Finance UK.
Monzo’s success has helped Taylor’s startup turn heads at traditional banks. That’s because Thought Machine has the potential to help traditional banks be more like Monzo.
‘In Google, I was exposed to the benefits of cloud computing’
One of the things that allows Monzo to be more innovative than traditional lenders is that it is one of the first banks to be built entirely in the cloud.
Cloud computing is basically the use of remote, pay-as-you-go computing power. Rather than buying your own expensive mainframes to build your bank on, why not just rent the bandwidth you need from someone like Google or Amazon?
“The hardware cost is a fraction of what it is before, because it’s a ‘use what you need’ model,” Taylor said. “Also, the reliability is very, very robust. You can upgrade it without any downtime. That’s something that the man on the street would see immediately because quite often if you log in on Sunday morning, the bank says it’s down for maintenance.”
READ MORE: Startup bank Monzo is a ‘unicorn’ after raising £85m — and CEO says it’s signing up 100,000 customers a month
Thought Machine is building an operating system for banking built on top of cloud computing. It powers the banks central ledgers and the systems needed for offering products like current accounts and loans.
Taylor had the idea for the business at Google, where he worked for 3 years after selling his text-to-speech startup Phonetic Arts to the search giant in 2010.
“In Google, I was really exposed to the benefits of cloud computing,” Taylor said. “I thought, if we bought cloud computing to retail banking we could really bring the benefits to something that just had not experienced that before.”
‘We have national banks coming through our doors every week’
Taylor hadn’t worked in banking before taking on core banking but said it’s “easier for me to learn how banking works than someone going from the old world and the mainframe world to get the systems to run on the cloud.”
His confidence was validated last month when Lloyds Bank, the 253-year-old giant of UK banking, invested £11m in the startup, valuing it at £110m. Thought Machine is also working with Lloyds to bring its core banking platform, Vault, to the lender.
“It’s been a great relationship, they’re super forward thinking,” Taylor said of Lloyds.
The two companies have been working together for two years now and Taylor said: “It’s been very constructive for us that a bank of that scale would take us so seriously and, of course, that seriously that they go all the way to investing in us.”
As well as Lloyds, Thought Machine has commercial engagements with around half a dozen banks, Taylor said. It recently signed a deal with Atom, another app-only, startup bank in the UK.
“The level of interest is simply amazing,” Taylor said. “We have tier 1 banks, national banks, regional banks coming through our doors every week. Everyone’s fascinated about it, everyone’s super keen to do something and I guess it’s a tipping point.”
Indeed, re-engineering core banking, as this part of the tech stack is known, has become a hot area of financial technology in recent years. Former Barclays CEO Antony Jenkins chose to try and build core banking systems on the cloud with his startup 10X Technologies.
‘Our revenues are very healthy’
Taylor expects the first banks to go live on the Vault platform in early 2019. He said: “We’re very proud of the stability, robustness and security features of the product, but there’s nothing to be gained by rushing there.”
Bank’s IT managers saw their nightmare played out this year when TSB migrated onto a new operating system that hadn’t been properly tested. The result was many users were unable to access their accounts, some were given other customers’ information, and the bank became a magnate for fraud. CEO Paul Pester was eventually forced out as a result of the scandal.
“It’s better to be safe, it’s better to sure,” Taylor said. “It’s important that we get buy in from all the different levels of the bank.”
Thought Machine currently employs around 100 people in London and plans to use the recent investment from Lloyds to grow its headcount to around 300 by the end of 2019. Taylor wouldn’t comment on whether the company is profitable but said: “Our revenues are very healthy indeed.”
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.