Cloud-based Redwood Bank has become the latest challenger bank to make a profit as success stories of the fintech revolution move to the next phase.
In its latest month of business, UK challenger business bank Redwood, which describes itself as being “born in the cloud”, received more income than its costs for the first time since it was launched in 2017.
With 5,000 customers, the Hertfordshire-headquartered bank has lent more than £400m to UK small and medium-sized enterprises (SMEs) and attracted deposits of over £400m.
Startup banks, many of which differentiate through the modern technology they use, make heavy initial investments to get up and running, which means profits are often years away.
Redwood, which operates in the SME business sector, is no exception, with an initial commitment to build a modern digital environment in the cloud. To this end, the bank used specialist software-as-a-service (SaaS) platforms to underpin its business. This included its core banking platform, which it sourced from Microsoft partner DPR Consulting.
CEO and co-founder Gary Wilkinson said there has been limited choice for UK businesses when it comes to banking. “That has changed with the arrival of new challenger banks, which can provide a more nimble and dynamic service, with tailored solutions,” he said.
“Many traditional banks are hampered by cumbersome lending practices and legacy IT systems. However, Redwood Bank is perfectly positioned to help British SMEs take advantage of commercial and residential property opportunities by offering a highly tailored lending service for customers and brokers alike, built around a team of very experienced regional managers and efficient, nimble, customer-led processes.”
In a 2018 whitepaper entitled Redwood Bank: born in the cloud, the bank said that because of concerns with the cloud in the finance sector, not many banks had committed to the technology in Redwood’s early days. “In late 2016, very few financial services organisations had really embraced the cloud,” it said. “Concerns were prevalent globally within financial services IT regarding security, loss of control and the ability to conform to financial regulations.”
Read more about digital challenger banks Despite an acceleration in the use of digital banking services, challenger banks face the obstacle of winning customer trust. Traditional banks face challenges in the coming years due to an increasing number of millennials only using digital banks. App-based challenger bank Starling has seen a huge rise in its number of business and retail customers, despite the Covid-19 pandemic. Redwood said its own journey started when attitudes toward the cloud were changing among regulators and financial services firms. “This coincided with the views of Redwood’s own stakeholders, with its founders and investors being strongly of the view that the cloud was a secure, timely and cost-effective platform on which to build a new bank,” it said.
The bank looked for cloud service providers that offered established SaaS/IaaS platforms that had already been implemented at financial institutions regulated by the PRA and the FCA.
Digital challenger banks are turning heads in the business banking sector, proving that they are more than just consumer-friendly apps.
This was highlighted earlier this year in the SME business banking customer satisfaction ranking from the Competition and Markets Authority (CMA). Using figures compiled by BVA BDRC, the CMA reported that digital challenger bank Starling came top in terms of customer satisfaction in three out of four categories in which it was ranked.
While Starling, led by the charismatic Anne Boden, also stole the headlines when it became the first of the new wave of UK challengers to make a profit, there are more digitally led challengers building deeper foundations in both the consumer and business sectors.