Ricky Knox, CEO of Tandem Bank

It’s been an eventful time for Tandem Bank since CEO and founder Ricky Knox last featured in IBS Journal. From multi-millions lost on the eve of launch, the bank has experienced a phoenix-like resurrection with the acquisition of ailing Harrods Bank. IBS Journal visited the Tandem HQ to find out more

It has been two years since we were last in the Tandem offices, which are bedecked in sticky notes, strewn with open-plan desks and abuzz with the excited murmuring you’d find at any startup in London. When we last met Ricky Knox, back in 2016, there was something of a parallel – a fresh-faced fintech reporter undertaking his first major interview, and a fresh-faced bank ready to take on the industry.

The two years since then have certainly been a lively period for Tandem. The bank originally planned a 2017 launch, but instead saw Sanpower, a major investor, back out at the eleventh hour. The Chinese firm, which owns UK department store House of Fraser, was concerned about new government regulations restricting investment overseas – $37.5 million went with it. Tandem was forced to cut staff, reducing from 110 to about 80 employees.

Later that year, though, an opportunity landed in Knox’s lap: the owners of Harrods Bank, Qatar Holdings, offered him the chance of acquiring the ageing institution. The bank, which is more than 100 years old, made a loss of £8.4 million in 2016. The new deal granted Tandem a full banking licence, as well as access to Harrods Bank customers and £80 million ($108 million) of capital. The challenger also gained a £375 million mortgage book and more than £400 million in deposits.

I ask Knox just exactly how it feels, to go from such relative lows to becoming (arguably) the UK’s largest challenger bank. “Well, to answer it simply, it feels great,” he says, with a chuckle. “On 31st March, when House of Fraser came in and said that they would have to pull out of the deal – which they had signed and paid the first £6 million of – was in the top three worst days of my career.”

Once the initial shock was over, says Knox, Tandem reacted straight away. It had to make a change to its focus, since at the time it had been on the eve of a major launch. After spending so much time on building the bank and the companion app around savings, the sudden lack of a banking licence meant it was something it just couldn’t do anymore.

“We had to completely shelve our savings account plans and move forward with our credit card plans,” says Knox. Following the Harrods deal, Tandem is getting everything back into gear and plans to launch its savings accounts in the very near future.

“It was a pretty wholesale 180-degree turn,” adds Knox, imitating the screech of tires to demonstrate his point. It wasn’t sink or swim, though. Tandem had at least “four or five” other bidders hoping to get on board, though Knox told them to hold fire for the time being. It was in June 2017 that the owners of Harrods turned up at the Tandem offices, offering up their banking assets. “To begin with I said: ‘you must be crazy?’,” he says. “Harrods Bank sounded old, manual and full of rich-guy customers. We weren’t targeting any of these things.

An old dog worth new tricks

After discussions had gone a little further, though, Knox began to see the potential of the Harrods buyout. “It was a bank that didn’t have a lot of technology, had a £400 million balance sheet and was making money. The lack of tech was holding it back and making it unfit for purpose.” It was time, says Knox, for the bank to find itself a new home. When he and Matt Cooper (chairman, non-executive director) looked at the products and services of Harrods, they realised that a lot of it could be ported across to fit under the Tandem umbrella. A healthy balance sheet, a few million in capital and a banking licence helped sway the decision, too, of course.

“We have accelerated nearly all of our projects [as a result of the acquisition]. Not only do we have going on half a billion in the balance sheet, our revenues make us one of the most profitable entities in the challenger space,” says Knox. “We’re in the process of moving up our waiting list, both for the app and for credit cards.

There’s also going to be a big marketing splash soon, probably in the next quarter.”

How was reconciling Harrods Bank, one of the oldest in the country which traditionally serviced high-net-worth individuals, with the operating model at Tandem? According to Knox, the “private bank” label given to Harrods was something of a misnomer. “It had a very small base of mortgage customers who were on the high-end and big base of savings customers in the middle range,” he says. When it comes to liquidity strategies, Harrods was operating very similarly to Tandem.

Tandem has been running Fiserv’s Agiliti system, though Knox adds that “a large chunk” of the platform is actually bespoke. He turns in his seat, pointing through the glass walls of the meeting room. “Pretty much every group here is from a technology background. We’ve built a very large part of our platform, which is hosted via AWS.” Agiliti’s role, he adds, is mainly for the back end and for accounts.

Harrods Bank was a long-time user of Misys (now Finastra)’s Bankmaster core banking system. The bank was also midway through an implementation of Temenos’ T24 platform. Knox tells IBS Journal that the migration process to Tandem’s systems was underway as soon as the ink had dried. That was part of the attraction of the deal, too, he adds. The relative age of Bankmaster gave Tandem an opportunity to go ahead with a core banking switch in the middle of the acquisition.

“The guys at Fiserv have been fantastic, too,” says Knox. “Their standard sale involves massive migration projects so they’re super experienced, they know everything inside out and have been incredibly supportive. I won’t even go into some of the historical problems that we had to deal with, but the process is going smoothly now.” The transformation is earmarked for completion at the end of the quarter.

How to win customers and influence people

Now, with the Harrods acquisition propelling it to the top of the challenger bank rankings, how does Tandem plan to differentiate itself in a crowded market? I put it to Knox that perhaps some people are starting to get a little fatigued by the sector, but he disagrees. “I don’t think that’s the right word, but perhaps it is in your line of work,” he says with a smile. “When I started my first remittance business there were about 800 companies in the UK doing exactly what we did.” When it comes to challenger banks, states Knox, his main competitors add up to just a few dozen at most.

“If you take it down to the retail banking competitive set, who we’re really up against, there are 10, maybe 12 names.” Knox adds. He puts it to me that the only reason why the challenger market is so striking is that banking has had little to no new entrants for decades. People get confused between that and proper competition. “Don’t get me wrong, there are other new banks coming into the industry, but how many are going straight for the retail banking sphere?”

Atom Bank, states Knox, does mortgages and fixed-term savers. “You can see there’s a traditional bank balance sheet build going on there, but that isn’t our strategy.” Monzo and Starling, he adds, aren’t building a balance sheet at all. “They’re essentially tech businesses aiming to do banking as a platform.” Tandem has always sat between the technologists and the traditionalists, argues Knox. “We’re not building a bank, we’re building technology business that happens to be bank.” Why? Because of the £52 billion ($73 billion) UK retail banking revenue pool available, current accounts made up only 8 billion in 2013 according to the CMA, and a large part of that is in “overdraft fees that hit you when you’re down”. When you break it down, he adds, the current account market is a relatively small one.

For Tandem, it’s disadvantageous to aim for smaller sections of the market. Why go after pieces when you can aim for the whole pie? Knox says that Tandem operates on the principle of the “honest business of banking”: “If you have some extra cash, you have a number of options for what to do with it. You could lend it to a friend, but he might run off with it. You might decide to invest in the stock market or you might go low risk and put it in a bank and make low rates. What will happen then is your bank will take a risk on a dodgy customer and if he runs away they will take the loss, because they have to still give you your money bank. That’s what I call the honest business of banking: I pay you 2%, he pays 7%, there’s a cost of regulatory capital, there’s a cost of loss and I make a margin of 1% or 2%. Everyone is a winner.”

There’s been a shift in strategy in the challenger market, continues Knox. “What we’ve seen is Anne [Boden, CEO and founder of Starling Bank] sticking to her guns on an API strategy and Tom [Blomfield, founder and CEO of Monzo] – after working with customers, discussing with competitors (including me) and through analysing the market – moving over to create a loans product, creating quasi-savings accounts through the pots system and generally moving the company in that direction.” Tandem already has a selection of financial products out on the market, adds Knox, though it never plans to become a “product sales shop” but to wrap banking products around services that address customer needs. “We were never going to launch with a current account, and we’ll never be dependent on a current account. We believe that PSD2 and Open Banking will enable us to create digital experiences and services built around existing current accounts at other banks.”

Knox offers this by way of a final competitive summary: “I’ll probably compete with Atom for savings customers. To some extend I’m competing for the digital natives with Monzo and Starling but my target market is probably a little different from theirs. It’s a different demographic, a different age group with different proclivities.”

Opening up to Open Banking

Tandem Bank had several Open Banking and API-centric products in the works when IBS Journal first spoke with Knox. I ask how it felt to have been ahead of the game, when so many banks and companies have been caught off guard by such an important piece of legislation. “I built my last business around PSD1, and when we set it up we ended up hoovering up smaller players who were struggling with the regulation,” answers Knox. “So, the first thing I thought of, when looking what to do next, was PSD2 and Open Banking. I looked at how it might change the industry structure and so one of our very first presentations was about a ‘next generation bank’ that utilised Open Banking, as well as everything happening outside in the fintech world.”

Despite the implementation of PSD2, banks today are still struggling to grasp where the value really lies, continues Knox. “If you imagine the banking industry today as a doctor’s surgery, traditional banks are letting the customers in and telling them to help themselves, without any guidance as to what they might need to solve their problem.” Knox illustrates a simple anxiety for a customer: not having enough money to make it to payday. “Do I get a loan? It doesn’t pay out for two weeks. Do I get a credit card? That’ll take a week. Do I need to go to some payday loans company and get saddled with huge repayments? Customers are turning to their banks and thinking ‘surely you can help me out’. Your bank can’t help and it’s one of the keenest problems that customers experience.” Revolut is a prime example, states Knox. It’s not a bank but solves a widespread, specific problem. “They nailed that problem and they’ve built a company with a customer base of more than 1.2 million people off the back of it.”

Tandem is aiming to build solutions around case study problems like the one above, which it hopes will create “a coherent answer” to all the pain points that customers have with financial services. “Sometimes they will be profitable solutions for us and sometimes they won’t be profitable, but they will be huge for the customer. That’s what we’re trying to do.”

by Bill Boyle
IBS Intelligence Senior Editor