If you’ve ever experienced money suddenly leaving your current account days after making a card payment, you’ll understand the motivation behind ClearBank.
BusinessCloud’s No.1 FinTech Disrupter for 2019 is using cloud technology to transform the way that payments are moved between financial institutions.
Based in the City of London, it became the UK’s first clearing bank in more than 250 years when it was founded by serial entrepreneur Nick Ogden five years ago.
But what exactly is a clearing bank? “If you are a building society, bank or regulated financial institution, to clear your payments every day you’d have to go through one of those banks,” CEO Charles McManus explained to BusinessCloud.
This applies to all major UK payment schemes including Swift, MasterCard, Visa, CHAPS, BACS and Faster Payments. Although historically there were 16 clearing banks, an era of consolidation, mergers and acquisitions had reduced that number to four by 2014.
“[For example] Midland went into HSBC and NatWest became part of RBS. By 2014, there were only four genuine full-scale clearing banks left: Barclays, HSBC, Lloyds and The Royal Bank of Scotland had the monopoly on that,” continued McManus.
As the ‘big four’ high street banks were also the ‘big four’ clearing banks, regulators expressed concerns over a lack of competition and potential price fixing. Smaller banks, credit unions, building societies and FinTech start-ups were reliant on the ‘big four’ and unable to challenge the status quo. That is, until Ogden’s eureka moment.
An entrepreneur with over 30 years’ experience in banking, payments and FinTech, he began to question why there were no new entrants into that marketplace.
“Digital banks Atom and Metro and Starling and Monzo were beginning to face off against [traditional banks in] retail, offering the consumers a brand new service,” said McManus.
“Nick said ‘right, I’m going to go to the Bank of England, the payment schemes and all the regulatory agencies, and I might just be stupid enough to have a go at trying to create a new clearing bank.”
Ogden raised £25 million from billionaires Petr Kellner and John Risley, with each taking 35 per cent of the business. The remaining 30 per cent is held by management.
His proposition was for a cloud-based platform which would allow any third party to get access to the full UK clearing system through an API plugin. Such infrastructure would allow for payments in real-time.
After three years of secret development ClearBank launched, with Ogden comparing it to the arrival of discount retailers Aldi and Lidl in the UK supermarket sector. “What regulated financial institutions love about ClearBank is we know what we do and focus on doing that one thing well, rather than doing 10 things badly – and our sole purpose is to do payments well,” said McManus.
ClearBank is already enabling billions of dollars of transactions and has partnered with the likes of challenger lending bank OakNorth, which placed fifth in our FinTech Disrupters ranking. “Rishi Khosla, the CEO, grilled me on his settee for three hours before we won the contract!” revealed McManus. In revealing the high-profile tie-up, Nooriala described ClearBank as “best in class”.
That sentiment was echoed by Simon Hamilton, MD of Nationwide for Business, when the building society became the first high street name to launch a business banking account using ClearBank’s cloud platform.
“With those that are on leading-edge technology, it takes their developers just a few days to scaffold against our API and create that connection; when you go to the likes of Nationwide, which has 20-year-old legacy IT which is about to collapse, it is a massive challenge – it could take six to nine months of build,” explained McManus.
“Nationwide for Business are now building their core banking engine on the latest technology and connecting ClearBank to it. There are a number of others that are retooling their banks in IT spend that we’ve been talking to for some time.
“We’re now moving up to bigger-scale and more complex IT projects that take 12 to 18 months to execute compared to a small FinTech that can be on [our platform] in three weeks.”
Speaking to McManus, a former CFO at RBS Ulster Bank, I get the impression that the ultimate aim is for ClearBank to become the dominant underlying platform used for clearing by all financial institutions, including the high street giants.
The fact that it doesn’t offer consumer bank accounts itself can only assist that ambition. “We want to be neutral and independent: we don’t want to compete for our customers’ customers,” said McManus.
“All financial institutions in the UK need their payments settled every day – and most of their CEOs just want it done so they can concentrate on developing their propositions and servicing their customers.
“The reality, unfortunately, is the COOs in those banks are going to them saying: ‘I’ve got all these problems and reconciliations, I’ve got all these failed payments, I’ve got all the delays, it’s costing a load of money, it’s inefficient, it gives me nothing but grief’.
“Also, if you’re a legacy bank IT, the cost of servicing a current account is about £70 a year. If you’re Monzo or one of the digital banks, it’s about £30. So if I’m going to compete in the long term, I need to get my 70 quid down – but it’s 70 quid because of the depreciation of all the crap IT that I’ve been built.
“We talk about an IT cliff edge: those financial institutions are going have to address their IT legacy stack at some point if they want to stay in business. When they do so, it gives them the opportunity to move to cloud technology.”
Even the challenger banks have been hit with expensive IT infrastructure bills which ClearBank could have helped them avoid, according to McManus.
“It took Metro Bank a year and £10m just to connect to Faster Payments,” he said. “When we launched, Craig [Donaldson], the CEO of Metro Bank, said to me ‘gosh – had I known you were coming, I could have connected to your API within about six weeks. It would have cost me nothing – and connected me to all the payment schemes at once, not just one’. So that gives you a view of how the world has moved on.”
There is also the potential to turbocharge the UK’s economy. “There are so many inefficiencies in terms of suppliers being paid by customers: if it was real time it would knock all of that noise, friction and delay out of the SME conversations,” observed McManus. “The survival of small businesses is all about cash flow management.”
Ogden has stated that he expects ClearBank to be his third billion-pound turnover start-up. He also founded Worldpay, which was acquired in a $34bn deal earlier this year, and Voice Commerce Group, now known as CashFlows.
The fast-growing firm is in the process of establishing a bank in the Republic of Ireland to support the processing of euro currency while it has also been awarded a £60m grant to develop the UK business banking marketplace with Tide, another of our FinTech Disrupters.
ClearBank hopes to achieve at least eight per cent market share in the business current account market by 2023. “The most important hire in this sector is no longer a key FX trader – it is a cloud IT developer,” concluded McManus.