In the winning essay of the 14-15 age group in our Young Financial Journalist competition, Will Lawson looks at how challenger banks and cryptocurrencies are changing banking and finance and examines how this will impact retail banks on the high street.
In 1994, when Bill Gates said, “Banking is necessary, banks are not,” it would’ve seemed far-fetched. Now, with new technology revolutionising the world of retail banking, it doesn’t seem that outlandish at all.
Challenger banks like Monzo – which alone has over one million users – question what it means to be a bank, providing a strong alternative to the standard banking model.
And the rise of cryptocurrencies, through their increasing effectiveness and reliability, looks to change not only established high street banks, but the entire retail banking system. Technology is totally reforming retail banking, and over the next 20 years the system we have grown to recognise, could go forever.
The rise of challenger banks
Challenger banks have rapidly risen to prominence over the last decade.
Focusing on online banking, they are able to avoid all the costs which arise from running high street branches, allowing them to offer more competitive interest rates, and still make a profit.
This is made possible through the major increase in mobile and internet banking, which continues to become safer and simpler for the user.
This explains its rapidly increasing usage. In 2015 we transferred over £1bn each day by mobile devices, and in 2019, 73% of people say they use internet mobile banking regularly – a rise from just 30% in 2007 (BBC News, 2015).
It is difficult to see how banks can continue to run these branches without suffering losses, with so many customers preferring to use mobile banking. And in 20 years’ time a high street branch could be a rare sight.
Challenging high street banking
However, the impacts of this will be wide ranging.
In 2016 only 53% of single pensioners had internet access, and four in ten said they struggled to use a computer due to poor eyesight or stiff fingers (Claer Barrett FT, 27 March 2017). Clearly these changes could be difficult for some.
On the other hand, online banking is far more convenient for customers who can access it, and also makes banking more accessible for young people. The banks were quick to reject the government’s “last bank in town” proposal and the steady reduction of high street branches shows banks have every intention of withdrawing from many high streets around the UK.
The newfound competition from challenger banks will force established banks to continue to change. And if they do not abandon their high street branches, then challenger banks will continue to loosen the grip of the established banks, on the retail market.
Cryptocurrencies and alternative money transfers
In a similar vein, cryptocurrencies, fintech and other online payment systems offer a viable alternative to transferring money through banks. Cryptocurrencies have proven to be safe, reliable and secure offering, for the first time, a strong alternative to bank transfer.
With cryptocurrencies there is rarely a transfer fee and their systems are effective in preventing fraud and identity theft, making them a good option.
The Bitcoin bubble showed that there is an excitement around cryptocurrencies, clearly many people are keen to use, and confident in, this new technology feeling there is money to be made here – indicating there is a lot of potential for other cryptocurrencies.
If people do make the change to use this new ‘currency’, then it will completely change the whole banking system. Banks will no longer have a monopoly on all transfers of money and may have to rethink their entire organisation.
There would however be wider consequences if this were to occur. As cryptocurrencies are not regulated by the government, the currency would be less stable and not backed up by any authority. Whilst the lack of regulation could lead to a surge in online crime, with criminals using the cryptocurrency to secretly transfer money.
The growth of PayPal – another alternate way to transfer money – shows that people are willing to move to use other systems to move their money. Perhaps a swing towards cryptocurrency could be nearer than we think.
Retail banking is certainly changing, and whilst I wouldn’t go as far as to say banks are not necessary, I would certainly say they are now in a far more competitive market.
Through the power of technology smaller businesses like challenger banks are starting to rise and cryptocurrencies now offer an alternative to using banks to store and move money. Technology has revolutionised modern banking, and as far as I can tell it will continue to do so.
In 20 years’ time retail banking will be slimmed down, with banks focusing on their online services, and high street branches may be a far rarer sight.
Will Lawson is the winner in the 14-15 age group of our 2019/20 Young Financial Journalist competition, which we run in partnership with the Financial Times. A student at St Olave’s School in Orpington, Will is considering a career in banking and finance, and enjoys reading the FT.
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