Are UK customers ready for turning? Charles Wheeldon talks to Alex Letts, chief ‘unbanking’ officer of UK-based challenger U. Letts believes that consumers are ready to opt for banking transparency in return for a modest monthly fee but, in the current market environment, is he right?

Located in a Sheffield, with a staff of just 35, U has become one of the latest challengers to take on the established banking model with the professed aim of providing a more transparent fee structure to millions of UK banking customers who U claims are being short-changed by a system that is treating them unfairly.

U offers the concept of ‘unbanking’ – the idea that customers do not really need a bank, that money and services can be obtained from financial services providers in the form of loans, insurance and mortgages.

U claims it is not a bank, but ‘will reconfigure the supply chain to put in place a platform in the middle to service products and provide a different way of dealing with customers’.

The man behind the new venture is self-styled chief unbanking officer Alex Letts, who says U’s target customer base is the 16 million UK banking customers currently paying unexpected overdraft fees of up to £100  ($124) a month, with the average customer being hit with a monthly £55 charge. “These are the people who can least afford it” Letts tells RBI. “And to be brutally frank it’s not in the banks’ best interests to help them.”

He points to a Competition and Markets Authority report published in August that highlighted the banking industry is skimming £1.5bn annually from people who believe they are receiving free in-credit banking.

Not so, he says. In fact, only 44% of such customers have free banking, with the remainder paying because they slip into their overdraft, or are paying a fee to arrange one.

“These are Theresa May’s JAMs – or people just about managing” says Letts. Usually earning £20–30,000 a year, these are the customers who end up being given unarranged overdrafts and who end up paying £1.25bn a year between them.
Warming to his theme, Letts cites three examples of the consequences of borrowing money for a typical JAM customer. One hundred pounds borrowed for 20 days from payday loan provider Wonga costs £10.40 with an APR of 1,500%. An arranged overdraft with a high street bank over the same period costs £20, with an APR of £2,500%. But having an unarranged overdraft with a bank for 20 days, at £5 a day, actually costs £100.

Letts says the established banks can only offer free banking if they stick with this model because it is linked to their inflexible technologies, their operational scale and the way they are structured. He acknowledges that by law they have to offer basic accounts, but points out there are only 7.7 million UK basic banking customers – 11% of the market – compared to 43.4 million so-called free in-credit customers – 62% of the market. Because it is so difficult to levy fees onto basic customers, banks are encouraging them to upgrade to free-in-credit. And, with the exception of just three banks, free-in-credit customers cannot opt out of unarranged overdrafts.

Letts’s antidote to this is the online U account launched at the end of October which, with £8m in backing so far. Running for two months, it trailed with an initial customer base of 5,000, with 70% accessing via smartphone and the remainder via PC.

He claims all the functionality of a current account plus extra features. These include visualisations of customer activity in the form of graphs and pie charts that enable customers to see where and when they have spent money, which U is able to provide by analysing the merchant codes from where goods and services have been purchased. Letts claims this as superior to the list-based account information of bank statements.

But one of the most important features, Letts claims, is the ability to set up sub-accounts to ensure that money is available for customers’ regular essential spending. Typical U customers are transferring £50-100 a month into these accounts to ensure their basics get paid. Customer information is also provided via a user-friendly dashboard which serves as an executive information system with data such as account balances and payments pending.

For this U charges a monthly fee of either £5 or £10. The £5 option carries a 50p charge for direct debits and ATM withdrawals, but allows customers two free sub-accounts a month (50p per account thereafter). The £10 option allows customers all these options free. This payment structure, Letts claims, allows customers to know in advance what they are spending on banking services.

Letts claims to have devised an antidote to banking models set up to make customers incur charges to their detriment. Underneath his model is a platform designed to manage and process data. The next stage in the U evolution is to use that data in collaboration with customers ‘to offer others an intelligent banking service’.

An example of this would be customers who are running out of funds by a certain date each month. They would be invited to call a number for an interim loan.

Another development is providing competitive insurance quotes from providers with which U intends to share the introduction fees ‘with the lion’s share being rebated to the customer, so it becomes a collaboration’.

Despite U’s website promoting the notion of unbanking, Letts maintains: “We couldn’t do this without the wholesale capability of a bank behind us. We are not anti-bank, we are anti the current model. We are relieving pressure on the banks.”

Letts goes on to speculate that the changes his model will bring about in the market will lead to banks of the future having less pressures from government and the Financial Conduct Authority ‘because we will be in the front-end for a large part of the mass market, but continue to offer wholesale capability at the back-end’.

U’s agency banking relationship is with Barclays and its agency intermediary bank is Germany’s Wirecard.

Whether the U-turn in UK retail banking takes place as Letts envisages will become clearer as U takes on the extra customers wishing to sign up. Letts says U is ‘overwhelmed by interest’ and could double his current customer base if he wished, but whether the notorious consumer indifference to swapping banks will be countered by unbanking is yet to be fully tested.

And perhaps the U product still has one elephant in the room to address. By ensuring that its customers cannot go overdrawn, at heart is it not simply a bells-and-whistles basic bank account – with fees?