The options we have for our everyday bank accounts are increasing. Virgin Money, Tesco Bank and the Post Office have recently entered the personal current account market, and prospective entrants include Atom, Starling, Civilised Bank and OakNorth.
But could the biggest competition to our traditional banks be hiding in plain sight?
There are various factors that companies need to consider when entering the personal banking market. These include: attracting the right customers; setting competitive interest rates for loans and savings; and not least, being able to raise the capital to be able to lend, invest and meet regulatory requirements.
Banks decide who to lend to and what interest rates to set by using complex mathematical and statistical models. The more accurate the models, the fewer defaults on loans, the more precisely interest rates can be matched to the risk of defaults, and the more attractive banks can make themselves to credit-worthy customers.
Models are crucial to competition in banking markets. Lenders go to extraordinary lengths to maketheir models as accurate as possible and academics are energetically researching more accurate and informative modelling methods. When talking about hundreds of thousands of loans, the impact of one model being a bit more accurate than another can be enormous.
But there might be a bigger issue on the horizon for our banks. They no longer have a monopoly on modelling expertise, or access to serious funding. Amazon, Alibaba and Paypal are all reportedly exploring SME lending.
If tech companies are beginning to creep into the finance market, there's one company above all others that banks need to watch out for. The last reported balance sheet for Google suggests cash and equivalent assets of over $18.3 billion, and investments that could be turned into $46 billion – considerably more than the shareholders’ equity of several established UK and US banks.
That’s a lot of money to start a banking business with. What's more, Google’s search engine is based on extraordinary modelling expertise and data processing capacity.
In a sector where predictive power is king, Google already has a huge amount of data about us which they could translate into accurate – and attractive – interest rates for consumers.
A survey from uSwitch last week found that a quarter of millennials say they'd rather bank with Google than with their current bank. It seems the writing is already on the wall, and banks need to act now.
Fortunately, there are ever-better models being developed that banks can use to stay ahead of the game. 400 credit experts from around the world will meet in Edinburgh later this month where some such models will be unveiled, including one that could take risk modelling into a new generation of tailored interest rates on loans and mortgages.
Banks are extremely good at modelling, but they can't be complacent about the new kids in town.