Article by Vincent Guereca-Adair
UK banking is in a period of transformation. New and innovative businesses providing app-based banking services – i.e. challenger banks – are rapidly growing in number and popularity. This is forcing the traditional banks to react to protect their market position. In this article I will discuss some of the most recent developments in UK banking and what this could mean for the sector.
This week saw Revolut secure $500 million of funding and a valuation of $5.5 billion in its series D round. This makes the London-based challenger bank the UK’s largest fintech start up, and the joint most valuable in Europe. One notable investor is the venture capital firm TCV, who was an early investor in companies like Netflix and Facebook.
According to its CEO, Revolut is on a mission to create a single app from which customers can manage all their daily finances. In this regard, as well as standard current and savings accounts, Revolut can be used to buy stocks and cryptocurrencies, get insurance and donate to charities. With a user base of 10 million customers, the fintech company is certainly living up to the ‘challenger’ title, and this injection of cash will help push further growth and innovation.
To broaden its appeal, Monzo also offers a variety of financial services. Over the coming months, this is going to include the ability for customers to check their credit score. Monzo will be the first bank to offer this service for free. In order to reach profitability, the challenger is also set to develop its business services offerings and relaunch premium accounts in the near future, following an unsuccessful attempt in 2019.
Earlier this year, Wall Street titan Goldman Sachs entered the UK market with its own fintech savings account, Marcus. As a digital-only savings account backed by a multinational investment bank, Marcus has been able to offer market leading interest rates and attract a steady number of users.
This week it has been reported that JP Morgan Chase, the world’s sixth largest bank, is also planning on launching in the UK. Offering savings, loans and potentially a current account under its Chase brand, the US bank could drastically shake up the UK banking sector. The bank is currently the world’s largest lender by market capitalisation and holds up to $2.45 trillion in assets. If the launch goes ahead, it could be one of the most significant developments in UK banking since the 2008 financial crash. Due to its size and established infrastructure, Chase would be able to offer competitive inducements and user-friendly services, which could pose a threat to both traditional and challenger UK banks.
Understandably, the traditional banks aren’t sitting by idly while the challengers conquer the market. Just like Goldman Sachs and Marcus, many of the established banking providers are developing and launching their own fintech services. Not all of these, however, have had the success of Marcus or the challenger banks.
RBS is particularly struggling to digitalise and keep up with the changes. It’s only been three months since RBS launched Bó, its £100 million digital banking offer, but the company has already had multiple setbacks. First Bó lost its CEO and got caught up in a fake reviews scandal, then in February the company was forced to replace 6,000 bank cards at a cost of £30,000. Things already aren’t looking good for Bó and this isn’t the first fintech play of RBS’ to struggle; previously, the company invested several million in Loot, a current account for students, which collapsed not long after.
While the troubles at RBS show that it’s not easy to launch a digital bank, they also show that traditional banks are trying hard to respond to the threat from the challengers. HSBC is set to launch Kinetic, a digital bank aimed at SMEs, while the success of Marcus might encourage Goldman Sachs to expand its service offerings.
Its notable that neither Revolut nor Monzo are currently operating at a profit. Additionally, while the number of registered users is growing, many of these users still maintain accounts with traditional banks as well. The challengers are trying to encourage customers to use them as their principle bank accounts, such as for paying bills and receiving the salary, but the traditional banks are pushing back. If a traditional bank could crack the challenger formula and provide a user-friendly digital service, while also offering the stability and peace of mind of an established company, this could greatly appeal to the market. Currently they’re still playing catch up and might never get there but it’s definitely something to watch out for.