Free from frills, start-up takes on Big Four banksBack to Media
26 August 2014
High street banks are notorious for underinvesting in IT, but hearing that some still rely on programmers who predate the microchip comes as something of a shock.
Alex Letts, founder of the online current account start-up Ffrees, is fond of a possibly apocryphal tale that, he says, highlights how remarkably outmoded high street banks' technology has become.
When one of the Big Four lenders suffered a serious technical glitch recently, it needed an expert in a computer code that was designed in 1959. Mr Letts claims: "There was a certain instance when a nursing home was rung up because that's where the original programmer was now living."
He admits he is not convinced that the anecdote is true, but insists that it is "well sourced" from the City. "What is true is that in some of the big retail banks, the software has to convert your current account money from decimal to pounds, shillings and pence as it manages it. Banks build lots of new technology, but it sits on top of something that's 50 years old."
Luddite lenders are good news for small companies such as Ffrees, Mr Letts argues. His business is one of a small, fast-growing group of British financial technology - "fintech" - start-ups aiming to improve everything from overseas money transfers to small business lending and consumer finance.
"The UK has failed to produce a big consumer internet success story partly because our market is so much smaller than the US one," he says. "But retail banking is trillions of pounds a year in the UK. Fintech can spawn new services that have the scale that some of the great American stories have."
Mr Letts, 55, who has run successful insurance and advertising businesses, hopes that eventually Ffrees will fit the bill. The company offers a no-frills, online current account that "doesn't care if you're rich or poor". It has been backed by Big Society Capital, the government's "social bank", Nesta and the European Investment Bank in its drive to offer accounts to those excluded from mainstream banking. "We don't make our money from unexpected fees, selling products or speculating on our customers' money. It's a completely different approach."
While most of Britain's promising fintech companies are based in London, Ffrees is based in Sheffield. Why is Mr Letts, a committed southerner, trying to start a financial revolution from a city better known for engineering of the physical sort? Frankly, because he followed the money. When looking for start-up funds in 2012, Mr Letts found that the only willing backer was Finance Yorkshire, a government-backed regional venture capital fund that insists its companies have their headquarters in the county.
The move has had its pros and cons. "We found great offices at a very low cost which are very flexible. We found a terrific talent pool of engineers without the London prices. For a start-up, it's hugely advantageous when you're trying to protect yourself from cash-burn."
However, with the majority of the "deals, connections and [technology] community" based in London, Mr Letts finds that he is often on the road. "In terms of creating a cohesive company, it isn't ideal to be an absentee landlord. "That's the price you pay for the flexibility, low overheads and the talent." The Ffrees concept has taken a while to develop: even after the money had been raised, its founders were talking about building a student savings business and for a while it was merely a prepaid shopping card.
"It's never easy going back to an investor and saying: 'We've had a better idea'. It's a credit to our investors that they had the courage to say: 'We backed a team.' Too many investors look at the spurious detail of a five-year business plan, not the quality of the management team, when these are the people who will turn their money into a good investment."
Nine months on from its relaunch, Ffrees has opened about 30,000 accounts and has been adding 1,500 a week. Many of its early customers are those with poor credit histories who have been attracted by the fact that Ffrees does not run credit checks, Mr Letts says. Eventually, though, the plan is to attract anyone who feels "underserved, overcharged and underwhelmed by the current bank account service they get.
"Whether you're wealthy or poor, it makes no difference to us, but it does to the banks. Banks lose money on 60 per cent of their retail customers, and it's those customers who get deficient service and are massively overcharged when they do something wrong. Our underlying ethos is to give everyone in this country the same [basic] financial services regardless of their wealth."
Ffrees charges for its services, therefore, either on a pay-as-you-go basis or up to £10 a month. Mr Letts says that his biggest challenge over the next six months is achieving "parity" of service with conventional current accounts. He acknowledges that present deficiencies include the lack of faster payments and direct debit, and that a 75p charge for ATM withdrawals on the basic account may be unattractive.
"By March next year, there's no current account service from a bank you won't be able to get from us," he says. "That's when I'll say: 'Measure us against a bank.' At that point I can't see why someone would go to a bank rather than us. Unless you want an overdraft, that is."
Ffrees will not be granting overdrafts and its accounts do not pay interest. "It's not a problem today, but if interest rates go up, while people make very little on current accounts, there will be a perception problem for us. We have to plan ahead for that."
Ffrees is aiming to have 100,000 customers within a year - at which point, Mr Letts says, it should be able to break even - and one million over five years. He says that running a fast-growing company is like trying to keep a straight face on a rollercoaster. "You need to stay calm and controlled, however exciting or despairing it gets.
"My son runs a music business and when he's had a great day, I say: 'Tomorrow will probably be bad.' How you handle the unexpected is a big factor in whether you succeed."
Spreading the talent - and the wealth
Finance Yorkshire is not the only organisation trying to convince small technology companies that London isn't the be-all and end-all.
Cambridge has a long-established and thriving collection of technology businesses, but newcomers including Birmingham, Bristol and Manchester are working hard to tempt start-ups to join the ranks of their emerging high-tech clusters.
As well as dedicated local investment funds for companies willing to locate in their regions, other assistance can include subsidised office space and discounted business rates.
Alex Letts says that regional clusters will seem more attractive as a "talent war" gathers pace in the capital's "Tech City".
"In Silicon Valley, a good app developer wants a [huge salary] and equity. In [London] the fintech revolution has only just started and you're going to end up with a similar situation quite soon."