Atom bank’s blend of technology and banking expertise is the key to profitability

Over the last decade, a new category of digital banks has emerged, favoring digital-first customer experiences rather than the traditional branch approach incumbents prefer. The concept resonated well with consumers; a handful of digital banks report exceptional growth in their customer bases. However, historically, many have struggled with profitability, although recent news suggests the tides may be turning for a handful of disruptors.

We connected with Atom’s first employee and former Chief Operating Officer and Chief Technology Officer, Stewart Bromley, to learn how digital-native Atom has consistently posted profits since June 2021. For fellow digital disruptors, Stewart might just have the solution to your profitability challenge, but for incumbent banks; this should serve as notice that Atom and its peers are here to stay. It turns out the magic mix is old plus new—digital technologies plus traditional banking net income.

The challenge facing digital banks: profitability

When a wave of digital banks emerged, promising the shiniest new technologies and unrivaled customer experiences, it caught consumers’ attention. Take Monzo, for example; since its inception in 2015, it has put more than six million customers on record and announced in its most recent annual report that new customer volume is growing by approximately 100,000 per month. Now, you might think this is a great digital success story, but if we dig a little deeper, we’ll find all is not what it seems. In the same annual report, Monzo reported a £119.0 million (approximately $145 million) loss, following a £116.2 million (approximately $142 million) loss in the previous year.

This problem isn’t unique to Monzo; for example, European and US digital bank N26 also reported losses. However, the cloud over the rest of the market isn’t so dark. We’ve already mentioned Atom’s first quarter of profitability, but Starling Bank also reported a £32.1 million (approximately $40 million) profit for the year ended 31 March 2022. When we asked Stewart what makes Atom Bank profitable, he explained:

It’s important to have bankers to complement the tech people—someone that understands the industry. Some digital banks are focused on current accounts and collecting ‘bad money’ —overdraft fees, for example—and it’s why they’re struggling with profitability.

— Stewart Bromley, former COO, Atom Bank

HFS research has found that while the threat of digital banks to established incumbent banks is certainly real, it generally does not keep them up at night. The lack of profitability continues to paint digital banks as a lower threat, as Exhibit 1 depicts.

Exhibit 1: Traditional BFS firms are overlooking digital native disruptors

Sample: 67 banking and financial services executives from Global 2000 enterprises
Source: HFS Pulse 2H, 2021

Banking expertise allowed Atom to curate a selection of complementary offerings that drive profitability

Atom recognized many of its peers target the current account market, which provides limited revenue opportunities. In fact, Stewart branded the revenue “bad money,” predominantly coming from penalties such as overdraft fees. In contrast, Atom offers three main products—savings accounts, mortgages, and business loans—and notably not a current account service, or a checking account as it’s known in the US. Stewart described this as the perfect formula: customers’ deposits into savings accounts fund lending for mortgages and business loans, which in turn generate profit through interest charged—the classic margin-based business. He noted that the company endured a significant fundraising period to support Atom’s early days. This product mix allows Atom an impressive cost-to-income ratio, which Stewart told us is one of a bank’s most important metrics. In fact, he described the cost-to-income ratio as more transformative to the industry than digital customer experiences. He explained:

It’s not just digital experiences that are transforming the industry; it’s cost-to-income ratios. The cost-to-income ratio of most high-street banks is in the sixties, but Atom’s is half that.

— Stewart Bromley, former COO, Atom Bank

Atom’s improved cost-to-income ratio ultimately led to its first quarter of profit in June 2021, followed by three consecutive quarters of operating profit. But this wasn’t the only driver of profitability; it placed a significant emphasis on its technology approach.

Atom Bank adopted a plug-and-play approach to its technology landscape

To complement its product portfolio, Atom curated a technology ecosystem enabling the company to quickly adapt to shifting market dynamics and deliver digital customer experiences. In fact, Stewart told us that Atom’s lack of legacy baggage means that the bank can bring new features and value to customers at speed while the incumbents are still figuring out where to start.

Adopting the plug-and-play approach as part of its initial curated technology stack enabled the bank’s transformation at speed. Atom Bank was clear from inception that technology would enable experience, but it knew it could not own everything. It prioritized ownership of four elements:

• Front-end apps drive customer experience and brand. Atom Bank develops its apps in house.
• Middleware is a bank’s glue. It defines how well a bank can plug-and-play third-party solutions.
• Data fuels analytics and modeling to drive decision making and scenario planning.
• DevOps practices enable releases of new app versions almost every week.

For other technology needs, Atom integrates with best-of-breed third parties, the heart of its plug-and-play approach. Stewart explained that Atom works with approximately 65 technology vendors with more than 600 microservices, all of which contribute to Atom doing useful things like issuing mortgage offers in seconds rather than days and weeks.

The Bottom Line: A blend of technology and banking expertise allowed Atom to drastically reduce its cost-to-income ratio, develop a bank in hours, and realize profitability.

Digital banks have taken the consumer market by storm, and growth in their customer bases shows little sign of slowing. However, there’s a limit to the number of unprofitable funding rounds investors will endure before they look elsewhere, meaning digital banks must turn their attention toward profitability if they hope to survive. Atom is a great example of how digital banks can blend technology and banking expertise to dramatically reduce cost-to-income ratios and drive profitability while fulfilling stellar customer experience – fellow digital disruptors should take note of how their blend of technology and industry-specific expertise enabled this. We’ll see if Atom’s path leads it to a successful IPO in the future. Sexy but unprofitable digital banks take notice. Incumbent banks still treating digital as a channel: Atom is coming for your margin business.