As of January this year, the UK was the most disrupted traditional banking market in the world, with 15% of revenue and over a third of new revenue going to new entrants. Traditional banks are obviously fighting back, releasing their own digital solutions.
How did this come about?
Both of the major regulatory bodies in UK banking - the Financial Conduct Authority (FCA) and the Competition & Markets Authority - have been working to improve competition for customers’ sake, and the Bank of England has fallen into step with them. They’ve introduced new rules for financial comparison and accountability, forcing banks to disclose operational or security issues and customer satisfaction data. There’s also the Open Banking Initiative which requires banks to share customer information with third parties if the customer asks them to.
The theory goes that if customers are better able to shop around, and fintech firms offering specialised services now have access to customer information, then customers are able to fragment their banking and take part of their business elsewhere. To remain competitive, traditional banks can no longer get by on offering “the same service with technology on top”, as FCA Director of Strategy and Competition, Christopher Woolard, puts it.
With that in mind: how’s the UK banking market looking six months on?
As of early July, the situation for neo-banks in the UK seems promising. Starling Bank holds more than 600,000 accounts (of which 50,000 are for small businesses); Tandem Bank claims 500,000 users after only one year; Monzo stands out head and shoulders above the rest, with two million accounts open in February 2019 and two hundred thousand new ones opening every month.
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However, these figures shouldn’t be considered in isolation. In January, fewer than 20% of neo-banking customers were primary account customers, with the majority continuing to put the bulk of their business in a traditional bank account at a traditional bank. Here and now, in July, nearly half of the UK’s neo-banking customers keep less than £1000 in their accounts. These customers are “shoeboxing” - running their day to day transactions through an app-based bank that lets them monitor their spend, but keeping savings, salaries and sensitive data like council tax and utility bills in “safer” traditional accounts.
And there’s another crucial matter circling in the air: is neo-banking a boom that’s about to bust? Metro Bank was already struggling in January, its disruptive strategies exploiting gaps in the market that turned out to exist because certain activities - in-branch transactions and high-risk loans - were no longer worth existing banks’ time. By May, Metro was struggling to win investment capital; in July, the UK’s “original challenger bank” has opened talks to sell a portfolio of loans.
The new wave of UK fintechs like Soldo, Credit Kudos and OpenFin are pitching services that exist in the gaps between banks, rather than alternatives to traditional banking. Even relatively small scale offerings such as Tully - an online budget builder and debt advisor app - use open banking data to offer specialised support rather than outright alternatives to traditional financial institutions.
Meanwhile, legacy banks are changing gear. Faced with a 22% decline in market share, the big four UK banks (HSBC, Barclays, RBS and Lloyds) are closing unprofitable branches at a rate of sixty per week and shutting down cash machines. More and more over-the-counter business is being handled at Post Offices - a move criticised by the Parliamentary Treasury Committee, which claims taxpayers are subsidising the major banks’ cuts and vulnerable customers (including debtors) are being cut off from adequate financial advice, since the Post Office staff are not banking specialists.
Instead of branches and ATMs, traditional banks are pivoting into app-based service. They’re also looking to entrench on areas such as overdrafts, where the challengers are generally weaker and the legacy banks have a lower cost of deposits and greater resilience on their side. Even Monzo founder Tom Blomfield admits that legacy banks will continue to outperform in loans and mortgages, even if challengers take over current account business.
The reemergence of TSB as an independent brand effectively created a “traditional challenger” within the marketplace, particularly given TSB’s much-publicised app-based model (compensating for the new bank’s relative paucity of high street presence). But technical faults and security concerns dogged the app throughout 2018, leading to a £105.4 million loss and another £230 million in mitigation costs, not to mention 80,000 customers leaving TSB behind. It’s a cautionary tale for traditional institutions - there’s only so fast they can move, and there’s so much care they need to take.
Online banking integration can represent a poisoned chalice to institutions migrating across from traditional low-tech services, and it can be hard to get investors on board. Forbes caution that digital transformation in banking has yet to show up a significant success story in terms of profitability and ROI, and these are the terms on which fintech advocates in traditional banks need to show success in order to secure and keep investment on board.
Traditional retail banks will endure and prosper by focusing on a service which traditional banks do best - a service like loans and collections - and enabling that service to work efficiently and profitably with smart, joined-up, customer-first technology.