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Start-up banks: Can they take on the big players?

Challenger banks – upstart lenders looking to take on the major retail players – are fast becoming all the rage with U.K. lenders such as Metrobank launching on the London Stock Exchange. However, there are big questions about whether they'll be able to attract customers, or even if their business models are any different.

There's certainly appetite from investors. Trading of shares in British lender Metro Bank, which was founded in 2010, began on the London Stock Exchange on Monday. And Spain's BBVA said it had acquired Finnish business banking start-up Holvi after pouring a £45 million ($63.7 million) investment in British mobile-only bank Atom last year.

And just last week, another U.K. mobile-only bank called Mondo raised £1 million via equity crowdfunding site Crowdcube in just 96 seconds.

"I think what we're doing and some of the other challengers are doing is trying to appeal to a different segment of the population, the kind of people who live their lives on their smartphones and who expect everything to be doable in a second or two in a single touch," Tom Blomfield, chief executive of Mondo, told CNBC in a TV interview on Monday.

Mondo is a licensed bank in the U.K. and has a free app which allows people to track their spending and get notifications when they use their card. Blomfield said that unlike traditional lenders, Mondo does not charge users fees.


‘It’s a slog’

But a snazzy app might not be enough for Mondo and other upcoming challengers to really take on the banks. Some investors ,have already voice concern that the business models are radically different.

"You'll get the early adopters then after you do that it's a slog. You are fighting against the likes of Santander but the growth I think will pop then flatten out," Rob Kniaz, founding partner at London-based venture capital firm Hoxton Ventures, told CNBC by phone.

"I think if you look at the space, I'm cynical that the app will make that difference. There is long term value, but in the shorter term, if I'm an existing customer at HSBC for example, I'm not that excited about Mondo. I've played around it, am I going to move all my business? Probably not."

Mondo will pay zero percent interest on deposits but said on overdrafts it expects the interest to be between 18 and 20 percent. Blomfield admitted that this is the same as a regular bank.

"You are seeing average retail lenders on an overdraft might be charging 18, 19, 20 percent interest, and it just gives you a business model straight off the bat, so you don't have to go charging customers. In fact we have no fees or charges whatsoever, we can rely solely on that net interest margin, based on the ultra-low cost base," Blomfield told CNBC.

"Customers come to us for the functionality, ease of use…it's more than just a bank account -- it's your entire financial life in an app," the CEO added, explaining how he believes Mondo is different.

Trying to convince the population that the offering is differentiated from traditional lenders will be key.


‘Find an angle’

Mondo

Mondo is of course not the only start-up bank. In the U.K., Atom and Tandem are two others. Both are predominantly mobile-based offerings. The appetite from regulators has been strong with new banking licenses being given to the upstarts.

Neither Mondo nor Atom and Tandem have any customers yet as they have not officially launched. But acquiring the customers will be tough work,

"One of the difficulties of this market is people don't shift bank accounts that easily," Nicolas Debock, principal at London-based venture capital firm Balderton, told CNBC by phone.

But while acquiring customers might be an "uphill battle" against the deep-pocketed lenders, the winning challenger banks will be the ones that can build a niche before looking to attack the mainstream crowd.

"You try to find an angle, part of the population that is not served by regular banks and you try to reach them," Debock said.