In the mid-2010s, a wave of subversive challengers vowed to overthrow banking’s old guard, but the incumbents have stood remarkably firm against the fintech-fuelled revolution – so far, at least
The French revolution took a while to get going in earnest. After the storming of the Bastille kicked off proceedings in 1789, it was three years before the guillotine entered service. Then things really accelerated: Louis XVI lost his palace, then his head, and Maximilien Robespierre’s reign of terror ensued – until the radical-in-chief got the chop himself in 1794.
How safe are members of the UK’s banking establishment from the much-trumpeted fintech revolution? Just a few years ago, the outlook for these venerable incumbents was looking decidedly unsettled. Upstart startups such as Atom, Monzo, Starling and Tandem were aiming not only to compete with them, but to beat them.
Even the normally understated Deloitte was warning that the big high-street players would struggle to shrug off this threat to their dominance, as they’d done so many times before. In its 2014 research report, Banking Disrupted, the firm’s banking leader in the UK, Zahir Bokhari, wrote: “Deloitte sees this time as being truly different. Banks’ core competitive advantages over new entrants are being eroded.”
In 2018, Nikolay Storonsky, co-founder and CEO of the aptly named Revolut, was bullishly predicting the end of the old order.
“In the next five to 10 years we won’t see as many banks,” he declared. “We’ll see a few global players, in the same way that Google and Facebook dominate advertising.”
And today? The challengers’ cris de guerre have faded and calm is returning. The high-street banks have fended off the initial attack and no ramparts have been breached.
Lloyds Bank, for instance, recorded a pre-tax profit of £6.9bn last year. By contrast, Monzo posted a loss of nearly £115m. Starling, a solid performer in the business sector, made a profit of £32m for the year ending March 2022 and recently raised funds at a £2.5bn valuation. These are respectable numbers for a well-regarded enterprise, but they’re still dwarfed by those of the high-street behemoths. Even the fusty old NatWest Group, bailed out by the taxpayer during the financial crisis of 2007-08, is still valued at about £24bn.
“All the big banks are still alive, well and posting healthy profits,” says Charles McManus, the CEO of ClearBank, which he founded in 2015. “They have certainly weathered the first fintech storm to a large degree.”
A symbiotic relationship
They have done so mainly by modernising, he adds. They’ve updated software, launched apps and collaborated, rather than competed, with emerging fintech providers.
McManus notes that several fintech firms have engaged in “symbiotic relationships with banks rather than eating their lunch. They filled technology gaps for banks, while banks became major buyers and distributors of fintech.”
HSBC, for instance, has signed an anti-money-laundering contract with Polish fintech company Silent Eight. The bank is a serial investor in fintech startups and runs an accelerator for them. Under the bonnet, HSBC applies the same software principles as a fintech firm. Last year it signed a multi-year deal to work with CloudBees, a specialist in continuous software delivery – a serious improvement on the big-bang IT upgrade model that’s been common in the banking industry for decades.
This June, the bank announced the creation of “fintech 101”, a course run by the University of Oxford’s Saïd Business School to give its staff a thorough grounding in the sector and its latest developments.
But McManus points out that most high-street incumbents, despite having integrated fintech into many of their services, do still face a significant technological threat.
“At their core, they’re still running on legacy systems,” he says. “So, while they have weathered the storm so far, there is a major question mark over whether they can continue doing that.”
Consider the impressive growth in the number of new customers that some challengers have been attracting, suggests McManus, who adds: “The likes of Monzo boast millions of customers already and they’re only continuing to grow. Thousands of people are flocking to open accounts with them each month.”
His assessment chimes with that of Michael Mueller, the founder and CEO of Form3, a specialist in payment processing. Established in 2016, his company has attracted clients ranging from Lloyds to German challenger bank N26.
“The interesting battle is whether the smart banks get big before the big banks get smart,” Mueller says. “At the moment, the tier-one banks are probably in a stronger position than they have been in the past six or seven years. Some of that has to do with the rise in interest rates – big banks like them high. A lot has to do with the fact that they’ve started their transition to better technology, although that process is far from complete.”
Investing in fintech
There’s also the fact that the incumbents have invested in challengers, he adds. “If you look at Chase by JP Morgan in the UK or Goldman Sachs’ Marcus, there are some really interesting projects in that area.”
The high-street banks not only have scale on their side. While some income streams will have dwindled during the pandemic, the sheer breadth of their offerings – from commercial loans to life insurance – has spread their risk and enabled them to keep turning in decent results.
Nonetheless, the competition isn’t going away. The challengers will reflect, learn, improve and return. New ones will emerge.
It’s a prospect that McManus relishes. He points to Bank North, which secured a banking licence in August 2021. Part of a new wave of regionally focused lenders, the business is “myopically focused on supporting consumers in the north. In times of economic uncertainty, we may find that customers look to banks that are built to solve their specific problems, rather than the more generalist bigger players.”
The longer-term outcome is far from obvious, according to McManus, who adds: “While traditional banks may make some gains in the current economic storm, the big question is whether they’ll be equipped for what comes after.”
The French revolution took 10-and-a-half years to play out. Inevitably, over such a long process, there were lulls in the action, but these would always be followed by periods of great upheaval. The high-street banks may well be sitting pretty today, but it’s distinctly possible that a second act is in store.