The established order of big banks in the UK is being challenged by nimble digital banks. Regulators, eager to drive competition, are lending support.
When EU banks came under scrutiny after the global financial crisis, the European Commission adopted numerous measures to restrict and rein in the financial sector. Issues around competition continue to be among the most closely watched. In 2016 the UK Competition & Markets Authority (CMA) reported that just four banks – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland (RBS) – hold more than 70% of Britons’ primary checking accounts. Add the British arm of Santander, Spain’s largest bank, and the proportion exceeds 80%.
This has set the stage for a classic David and Goliath story, with a number of other banks coming to claim their share of the market in recent years. Authorities have been encouraging entry, providing support in terms of both funding and services. Not all are start-ups, and not all are purely digital. They are, however, trying different approaches to traditional retail banking. Metro Bank, for example, has opened 55 “stores” since 2010. But unlike typical bank branches, they are open late and on Sundays, and offer different services.
Among the digital banks vying for business in the UK is Monzo, which was founded in 2015 and obtained its full banking licence in 2017. Its smartphone app includes a number of features, such as expense tracking, and the ability to block and reactivate debit cards with a tap. The bank currently has more than 370,000 accounts. Also among the challengers in this space are Monzo’s biggest rival, Starling Bank; Tandem, which recently acquired Harrods Bank; and Atom Bank, part-owned by Spain’s BBVA. More are springing up elsewhere in Europe, such as Germany’s N26.
Banks that received bailout assistance from the European Commission are being required to make room for more banking sector competition. RBS for example, the market leader in small-business banking, is being required to give up territory and money to competitors in repayment for its rescue by the government, The Economist reports. The £425 million RBS hands over will be used to build up the capabilities of rivals and entice customers to switch banks. Entrants to the small-business banking market also have access to payments systems, which help untether them from big banks.
In terms of sheer size, however, the challengers are far outweighed by the UK’s more entrenched banks. To stay in the competition, they will need to not only sign up new customers, but lure them away from their existing banks. “For us, the salary is the holy grail,” says Tom Blomfield, Chief Executive of Monzo. His intention differs from that of large banks, however, in that he aims not to use deposits to fund loans, but rather to learn more about customer spending habits. This data could be used to offer other services, in much the same way technology firms mine data for growth opportunities.