Monese — the UK digital bank serving clients shunned by traditional lenders

The app-based lender is among a number of neo-banks in the country cashing in on a gap in the market

Estonia-born entrepreneur Norris Koppel set up Monese after being snubbed by banks when he first moved to the UK due to a lack of address documents and credit history. AFP

Among Britain's digital app-based banks that are attracting monied urban millennials is Monese, which also courts customers neglected by the country's established lenders.

In early 2000, Estonia-born entrepreneur Norris Koppel arrived in Britain and spotted a major gap in UK banking for newly-arrived foreigners who had trouble opening traditional accounts.

Mr Koppel was snubbed by banks owing to a lack of address documents and no credit history — and vowed to help those in a similar predicament.

In the nation's booming financial technology or FinTech sector, mobile phone app-based "neo-banks" such as Revolut, Monzo and Starling have established themselves as plucky upstarts.

Mr Koppel's lender Monese joined them, expanding to 31 nations in Europe with two million customers in only five years of operation.

"Investor trust in FinTechs and the amount of investment being poured into neo-banks is actually very significant; it hasn't really slowed down. 2019 was definitely a peak point so let's see how 2020 goes," Mr Koppel says.

"It's very clear that banking is going through fundamental changes … and there are a group of neo-banks including Monese who are on top of that wave."

The company describes itself as an electronic money institution that provides banking facilities but it does not currently offer credit.

"Monese was born from my own very personal frustration," Mr Koppel explains. "When I moved to the country I couldn't open a simple account and I thought maybe that is something that can be done.

"Monese is built for people who are moving to a different country, starting a new life, finding a better job, retiring, going for studies, or getting married somewhere else."

In Britain, around 80 per cent of Monese customers are foreigners whose salary goes directly into their account.

Groups like Monese that only operate online carry out checks to verify the identity of new applicants to help fight money laundering.

The app aims to compete with Revolut and Monzo, which have eight million and three million customers respectively in a fiercely competitive market. Starling Bank, a smaller rival, reached one million accounts in November.

On Tuesday Revolut said it had raised $500 million (Dh1.8 billion) in a funding round that values the London financial-technology firm at $5.5bn, making it one of Europe’s most valuable FinTech start-ups despite still being loss-making.

The company will use the cash for product development and to increase banking operations across Europe. Revolut said it plans to begin making loans for retail and business banking customers, expand its savings accounts beyond the UK and improve its customer service.

The competition with European players is also heating up. German mobile bank N26 GmbH said earlier this month it would close all UK mobile banking accounts in April. The firm, backed by billionaires Peter Thiel and Li Ka-Shing, blamed Brexit for the withdrawal.

Swedish payments and banking firm Klarna became the most valuable European FinTech start-up in August after new funding pushed its post-money valuation to $5.5bn.

Monese, meanwhile, expects to turn a profit by 2021.

The company, which has a global workforce of roughly 400 people, describes itself as the "Uber of banking", in reference to the popular ride-hailing app.

"It's a good comparison," Mr Koppel says, noting that it was used by a lot of gig-economy workers at Uber and takeaway delivery service Deliveroo.

Britain's traditional banking sector, which is still reeling from the 2008 global financial crisis and a string of product mis-selling scandals, retains a strong grip on personal banking, experts say.

However, Warwick University's Andreas Kokkinis, who specialises in corporate law and financial regulation, says FinTech is managing to gain a foothold.

"The six biggest UK banks have 87 per cent of the market share for current accounts so the remaining 13 per cent is split among smaller conventional banks and building societies, and challenger banks," he says.

"In that sense large universal banks — HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland Group and Santander UK — retain their dominance over UK retail banking market," says Mr Kokkinis.

"However, challenger banks, which operate exclusively online and thus offer cheaper services, are popular among customers below the age of 37."

If current trends persist, "the market share of challenger banks will grow significantly in the near future", adds Mr Kokkinis, which could lead to takeovers.

"This does not necessarily mean that large banks will lose their dominant position in retail banking markets. What is more likely to happen is that large banks will acquire successful challenger banks."

Monese is now in fund-raising talks that could give it coveted unicorn status, meaning that the business would be valued at more than £1bn (Dh4.76bn).

The company is seeking £100m in additional funds from new and existing shareholders, which include US online payments specialist PayPal and British Airways parent group.