In the first of two blogs, Gren Manuel explains why UK challenger banking is like Premier League football, with the mid-table players finding it hard to compete with the top-tier ones.
The fierce rivalry among the 50-plus challengers that aim to disrupt the UK banking industry is not as it seems. Look closely and the competition looks more like Premier League football.
A handful of big names control the real budgets and have their eyes on playing in Europe, with the rest facing a very uncertain future.
However, while mid-table football clubs can count on lifelong fans to buy season tickets, mid-table fintech players may find the outlook more difficult. And the gap is widening between the top tier – whose core names include Monzo, N26, Tandem, Revolut and Starling – and the rest.
Even the leading fintechs will not find it easy. To the consumer, all the challenger institutions appear similar. Their websites show happy millennials checking their balance while skateboarding and they boast of transparent, simple fees. There is nothing there – at least in terms of visuals – that incumbents cannot copy, and nothing to make an obvious case for switching banks.
However, when customers do start looking for a new home for their money new players are making some progress in making it to top of the list – at least in terms of raw customer acquisition.
BACS switching data for the last quarter of 2018 shows traditional banks offering £100-plus cash for new accounts are still the biggest draw. HSBC and Nationwide stand out, even in net terms.
But Monzo and Starling are enjoying accelerating switching rates and between them were attracting switchers nearly as fast as Lloyds.
The real dividing line
But look at the actual line-up and the two-tier system becomes apparent. While the top players have built their own technology and secured a banking license, most of the challengers have taken a low-cost route – building a current account-type service on top of pre-paid card infrastructure provided as a one-stop solution by firms such as Wirecard or Prepay Solutions.
“Frankly, if you have £10,000 and go to Wirecard you can get one of those programmes started,” says Ricky Knox, cofounder and chief executive officer of Tandem, which holds a full banking license.
The problem with that approach is that the card commissions are largely retained by the processor leaving very slim revenue streams for the challenger. The processor also holds the accounts balances, which means the challenger only needs an easy-to-obtain e-money license but also means they cannot generate an income stream from lending out customer funds.
“The real dividing line is ‘do you have a banking license?’” says Mr Knox, “and therefore is holding a load of customer money helpful and profitable for you?”
Breaking into that first tier, though, is getting harder.
First, venture investors increasingly want to double down on existing success stories rather than funding new ones.
Data from CB Insights shows global venture funding into European fintechs was up 24% in 2018 to a record $3.53bn. But the number of deals fell as more cash was pumped into fewer players.
The chief executive of a frustrated second-tier challenger looking for funds told me that he was finding that investors “don’t want to invest in the next Monzo or Revolut, they want to invest in the actual Monzo or Revolut”.
Even if second-tier players get a cash injection to raise their game, they will still be competing against challengers free from the ‘not invented here syndrome’ whose new systems allow additional features to be quickly rolled out.
The traditional banks are also moving faster if they see good ideas.
A good example is fractional savings. Buy a Cappuccino using contactless for £2.20 and the 80p “change” will be put into a savings account.
This formed the foundation for some savings account launches in 2018 but was quickly offered as a feature by Monzo, Starling, Revolut and Tandem – and, less quickly, by Lloyds.
“We can move pretty quickly and I think that’s true for our competition as well,” Mr Knox said.
Centre for Digital Banking and Finance
Gren Manuel has been European editor for Dow Jones Newswires, European executive editor of the Wall Street Journal, and editor of Financial News. He now works as an editorial and media consultant.