Shortly after the financial crisis in 2008, a wave of new UK challenger banks and fintechs began to emerge. The challenge facing this new breed of business was stark. How could these upstarts challenge the incumbent behemoths without the vast scale, established branch networks and centuries old name recognition held by the high street banks?
Over a decade later, it’s true that major UK banks maintain a dominant position in the market. But a report published by the FCA last month shows that this dominance appears, at long last, to be waning and that there are signs of real competition in the sector. So why has it taken so long, and what’s changed?
Well, there are those ingrained advantages for a start, as the old saying went, you’re more likely to get divorced than change your bank account. It holds true that, even if a challenger has a compelling offer, they might not be able to get that all-important “primary” relationship with the customer and perhaps many people just don’t want to think that much about their bank account.
But, they will start to take notice when they don’t get what they need from a bank, and there are other options in front of them.
For the clearest example, we need to look at small business banking, where the nearly six million small companies that provide the overwhelming majority of private sector jobs are consistently overlooked and poorly served by high street banks. But these venerable giants are poorly placed to serve many of the customers that need them most.
If you’re a sole trader, freelancer or start-up business, not only will you find the process of opening a high street business current account bureaucratic and painful, but you’ll also struggle to get a small loan, even if it’s just £500 for a laptop. That’s because, as a new business you don’t have a credit history, and big banks don’t want the expense of getting you started. Even if you have millions of pounds of funding sitting in the bank, high street banks still decline business credit card applications all the time; according to Cashplus data from last year, there is around £6bn of unmet credit demand.
The strength and innovation of our world leading fintech sector, and credit where credit is due, the increased pace of licencing and introduction of pro-competition measures from UK regulators, has started to eat into the revenue streams available to big banks. As the FCA’s report also identifies, low interest rates have also put pressure on profitability and big banks are saddled with legacy costs and that pricey (if dwindling) branch network. So, if you’re a small business that’s not eligible for a chunky fixed term loan that might actually be an attractive proposition for a high street bank, forget it.
Many challengers fighting in this space are heavily loss making, and there’s likely a strong, narrow generational appetite for digital banking, but this doesn’t mean high street banks can relax.
Challengers are coming to the fore allowing a wider set of customers to enjoy better, smarter services, designed around them and built for the digital age, so it isn’t a surprise that businesses and consumers are considering, and switching in ever greater numbers.