digital-only challenger banks will triple in next 12 months

digital-only challenger banks will triple in next 12 months

A clutch of new online-only challenger banks are set to demolish the UK competition by scooping up 35 million customers in the next 12 months, according to research by Accenture. It means harrowing times ahead for the retail arms of legacy banks like Natwest, Barclays, Lloyds and HSBC. In the first six months of 2019 alone, 5 million people opened an account with a digital-only bank.

The likes of Starling, Monzo, Revolut and Tide are showing the dinosaurs how online banking is done. Barclays et al are seeing more than just stiff competition. Their retail banking businesses face being wiped out. The Accenture research predicts that traditional UK banks will grow by less than 1% by 2020, based on current modelling.

all regulation focused

Crucially, these challenger banks are doing so well because they take the time to work with UK regulators to register for professional associations, meet the stringent criteria of financial regulators and offer all the security you would expect from a traditional bank.

Monzo won its UK banking licence in 2017. Like all other UK banks, it means they are authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority, whose job it is to oversee the markets and to protect consumers. Your deposits are safeguarded, just as they would be with any other bank, by the Financial Services Compensation Scheme up to £85,000. They are not only secure, but transparent, and simple to use.

A recent post from Linkedin’s editors detailing the UK’s 25 Top Startups hammers home this point. The 2019 Linkedin top UK startups are growing fast and hiring even faster, it says.

Is it any surprise that each of the four UK challenger banks we mention are in Linkedin’s Top 10? Monzo bank comes first, Revolut is in second place, Starling takes fourth and Tide ninth position.

Fintech firms dominate this list. They are hiring at a rapid rate and graduates are actually excited to join growing companies that not only speak to them but make products they themselves would actually use.

make it simple

Banking with a challenger bank is easy, frictionless, secure. Apps are prettily designed, the UI simple to understand. Handy features to help you manage your money, like instant payment updates direct to your app, are set as standard.

As a customer, you are treated as a valuable asset, not an annoyance or an inconvenience. Thought has gone in to every step of the process to make you feel valued. Take receiving a business bank card from Starling, for example. The online process takes minutes and the next steps are obvious rather than convoluted. You can do it all from your phone in a couple of taps. Your card comes through the post in a matter of days, in a specially-designed wallet, rather than glued to a sheet of A4 with a couple of paragraphs of ‘Dear Customer’ spiel as you’d expect from one of the Big Four. These are the little touches that make all the difference.

The business model stacks up, too. According to Accenture: “Digital-only banks are accelerating customer acquisition at a current growth rate of 170% as they launch new products, widen their customer base beyond millennials and expand into new markets. These players have also increased the average deposit balance fivefold from around £70 to £350 per customer in the first half of 2019.

“They also retain a significant cost advantage with the average operating cost per customer at £20 to £50, compared to over £170 for a traditional bank.”

keep growing privately

Also in Linkedin’s Top 10 best startups are innovative fintech support businesses like 11:FS, a banking consultancy firm which focuses on user experience and product management, and London payments app Curve.

To make Linkedin’s best startups list, companies must be under 7 years old, have at least 50 employees, be privately held and be headquartered in the UK. This point about the startups being privately held is not to be easily dismissed.

A top consortium of 200 CEOs in the US recently broke with tradition by saying profit for shareholders at the expense of everything else could no longer be the sole focus of public companies. The importance of such a statement is obvious. Large public companies are seeing their market share eroded by taking reputational hits — so many in fact that they have bled out all the customer goodwill they might once have had.

Fintech challengers in are untainted by the frequent allegations of misconduct that beset the legacy competition. Consider banks’ risky casino-style gambling on collateralised debt obligations that heralded the 2007-2008 financial crisis. Since the 1980s traditional banks have been involved in predatory practices, trying to squeeze as much money out of each and every bank account holder and be damned the consequences for their reputation.

Take the PPI scandal, for example. This is what happens when customers are treated as revenue-generating units, from whom profits should be extracted at every available opportunity. Lloyds Bank saw its share price plummet after it admitted it would have to spend £550 million to cover claims against the bank for mis-selling payment protection insurance. Then this week bank bosses admitted they would have to suspend share buybacks and set aside a whopping £1.8bn more. The Royal Bank of Scotland said it was hit to the tune of £900m in a surge of late-stage PPI claims.

Word of mouth travels fast. It’s just that UK consumers have not had any secure, easy-to-use options before. Now they do. Make no mistake. Legacy institutions are facing a fight for their very survival. We know who our money is on to succeed.