Digital banking space set for further disruption

Digital-only banking is set to become even busier this year, with several industry experts predicting launches from existing High Street brands and new startups, as well as the possibility of acquisitions and partnerships.

The Confederation of British Industry and PwC’s Financial Services Survey for the first quarter of 2018 stated that competition from new entrants is seen by banks as a key barrier to growth over the next 12 months.

“In fact, competition from new entrants is now at a joint survey record, suggesting that traditional banks are feeling under threat from challenger banks,” the report read, adding: “this is further supported by banks’ focus on organic growth and in particular activities to retain and cross sell to their existing customer base.”

Dan Jones, head of UK digital capability at management and technology consultancy firm Capco, explained that existing banks are starting to take notice and get worried about traditional revenue lines and market share.

“It’s likely we’ll see more digital-only banks come to market this year, not just from existing institutions as defensive plays, but also from other Monzos and Starlings that are just a bit later in the lifecycle,” he added.

Rumours have already surfaced that major banks are looking to leverage their brands with mobile-only offshoots, although the most Royal Bank of Scotland would say in responding to speculation was that it is “focused on using automation and technology to deliver a more efficient banking experience that better reflects the changing way our customers now bank”.

Dave Wallace, who heads up financial services consultancy Mirum Finance, predicted that some of the current crop of challenger banks will be acquired by industry incumbents. “All the existing banks have functional, transactional apps and websites, but it’s all very passive. Digital-only challengers are making things active – take Revolut’s excellent FX interface for instance,” he commented.

“The problem is that these FinTech’s aren’t full stack, they can’t offer the same breadth of product and service, so customers will stick with the big banks out of an inherent desire for security,” continued Wallace. “But I’m hoping that the adoption of some of these better user experiences driven by open APIs will help create a renaissance in the banking industry.”

A recent survey from MoneySuperMarket revealed that three quarters of Brits would be willing to choose a digital-only bank for a financial product, however 37 per cent did not trust these new banks enough to allow them to access their financial data from existing providers under the new Open Banking rules.

The research found the most public awareness was around Atom (19 per cent having heard of the bank), followed by Monzo (10 per cent), Loot (eight per cent), Revolut (seven per cent) and Starling (seven per cent).

Revolut founder and chief executive Nikolay Storonsky commented that High Street banks have taken far too long to launch some form of digital option. “We believe that traditional banks are failing by not offering effective technology platforms, they aren't integrating customer data properly for better suggestions and they aren't serving customers with enough machine-learning intelligence embedded in their processes – in other words, banks are living in the past,” he stated.

In terms of how the market will develop, Storonsky said: “We anticipate a ‘land grab’ for the most promising technology platforms and start-ups, with an increasing number of key partnerships, mergers and acquisitions between challengers and incumbents.”

Meanwhile, a Starling Bank spokesperson said there is no doubt the challenger banking space will become increasingly competitive this year, as the leading mobile-only banks become better known and grow their customer base.

“Traditional banks are watching our every move and are all keen to launch their own digital services, but they are hamstrung by legacy IT systems, which make digital transformation extremely difficult and expensive,” stated the Starling spokesperson. “The big four banks are nowhere near to arriving at the kind of agile and disruptive mind-set you need to provide our kind of service.”

PwC research last year explained that while digital-only banks have low cost bases, profitability is tough, given small customer numbers; all the more so, since their customers tend to be younger, multi-banked and less financially mature.

“The recent influx of new entrants into banking has broken a half-century long trend of consolidation,” stated PwC’s report. “Whether this continues will depend partly on new entrants’ ability to differentiate themselves and win market share from incumbents, but also on whether the market grows, as innovation drives new products and services.”

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