On the face of it, the fin-tech and challenger bank sector is truly thriving and going from strength to strength. But the reality is that the big banks are still dominant and are monopolising the market as much as ever. Today we’re going to try and work out exactly why that is.
It’s been nearly a decade since I left banking. During my time working for the biggest bank in the UK, the organisation had nearly gone bust in the banking crisis of 2008 (nothing to do with me) but had weathered the storm coming out the other side of it stronger than ever (all down to me), commanding a huge market share across the personal account, business banking and lending sectors.
By the time I left, the bank was taking the threat posed by challenger banks and the fin-tech sector very seriously. There were very high-level discussions about how tech-banking startups and peer-2-peer lending could revolutionise global banking and finally disrupt the big bank monopoly. Fast forward 8 years though, and it still has not happened. There’s a lot of neobanks these days and you can find a number of good brands from this Bankopedia digital banking guide. At all. Whilst UK based Monzo, Germany’s N26, Canada’s EQ bank, Indian startup Amica and the Nordic Luna are all doing amazing things, the truth is that the neo-bank combined market share and net value does not even amount to that of one of the traditional bank – JP Morgan or Lloyds Banking Group could buy them all out and still have spare change left to buy a space rocket.
The Most Successful Online Banks in The World Today
Fin-tech startups and challenger banks have been wooing customers away from the big banks by offering low cost accounts and transactions, cutting-edge app interfaces that save hours in hold times, and by throwing a few little extras such as free foreign transactions. Tech banks have made the impossible look all too easy and have left their establishment rivals looking old and dusty.
There have been some clear winners (so far) and we’re going to take a quick look at them.
Founded in 2015, London based challenger bank Revolut now serves 15 million personal customers and 500k business banking customers worldwide. Revolut was born when founder Nik Storonsky was backpacking and realised how much he was paying in banking fees for accessing his money abroad. Indeed, I first came across Revolut as they offered zero-fee overseas ATM withdrawals and foreign card transactions and they are still much loved by travellers for these reasons.
However, they offer so much more including zero-commision stock and crypto trading. Revolut is on track to get a full British banking license by 2022. Whilst so far Revolut has been nipping at the ankles of the British banking elite, if and when that is granted, it may mean Revolut can finally start to take on the banking establishment properly.
Founded on the back of the “fastest crowdfunding campaign ever”, London based Monzo initially launched in 2016 as a prepaid debit card and smart-phone app which allowed customers to carefully budget and manage their expenditure. They then expanded into the travel card space before becoming one of the first challenger banks to get a license allowing them to offer a full current account.
However, Monzo still continues to post losses in excess of £100million so have a fair bit of work to do before they can really take on the big bad boys.
PS – In case you are wondering why so many challenger banks are based in the UK, it is because the country has relatively flexible financial services regulations as well as a long and established culture of international banking.
Berlin based neo-bank (the name is inspired by the rubik’s cube!) is currently available in 22 EU countries and is now considered to be the most valuable mobile bank in Europe (ahead of even Revolut) with an estimated worth of £2.6 billion.
However, it has not been all plain sailing for N26. The German regulator is keeping a close eye on them after it emerged that the bank was (inadvertently) allowing customers to open accounts using fake documents which was enabling large scale criminal money laundering. Whilst most big banks have also been caught out like this historically, blows like this can be very hard for startups to parry and N26 has had to pull out of the US and UK markets in an attempt to get itself back in order.
The biggest of Latin America’s neo-banks, Nubank was founded in Brazil in 2013 and already has a whopping 35 million customers which is very substantial in a nation where swathes of the population still don’t actually have bank accounts.
Nu have now opened operations in the mega-sized Mexican market and this proves a success they may be on track to rival Santander as latin america’s favourite bank.
Silicon Valley startup Chime initially launched in 2013 on the Dr Phil show and offers mobile banking services to 8 million Americans.
However, whilst operating a branch free network and offering some truly innovative products, Chime is actually owned by The Bancorp Bank or Central National Bank, the 5th largest bank in America. Therefore whether they can truly be classed as a challenger bank is debatable and critics suggest that they are merely a store-front allowing the dominant banking hegemony to offer the illusion of a competition. They were also ordered to stop calling themselves a ‘bank’ by the regulator in California.
Equitable Bank (EQ)
Based in Toronto, Canada’s challenger bank EQ are seeking to ignite a thus far lacklustre Canadian online banking sector. Whilst the rest of the (Western leaning) world began embracing the online banking and fin-tech sector a decade ago, Canada was a bit reluctant at first largely on account of more stringent regulatory requirements.
Offering Personal accounts (including a debit card), and a user friendly app based interface for account management, EQ is set to become the country’s biggest native neo-bank.
Criticism of Neo-Banks – Why Are They Not Doing Better?
Many customers agree that the traditional, established banks offer slow and painful customer service, antiquated practices (they hung on to fax until well into the 00’s), and they charge frankly shameful fees for foreign transactions and late payments. With easy to use fast apps, tempting offers and a fresh perspective, fin-tech and challenger banks are irresistible which begs the question of why they are not doing even better?!! They should be making bank but as things stand, the big boys could buy out them without even breaking the bank.
The sad truth is that all the fin-tech companies in the UK combined are still a lot smaller than Barclays, Lloyds or HSBC UK and this pattern holds true throughout the world. Whereas online marketplaces like Amazon have beaten high street shops around the world into submission, the high street banks continue to face down their young digital pretenders.
So, what are not challenger banks not doing better?
Loyalty or Laziness?
One reason is simply that a lot of customers are deeply conserative when it comes to banking. Whilst younger customers are quite willing to give a challenger-bank a shot at the title, older customers (usually ones with less debt and more assets) may just feel that their money is safer in the big old vaults of the big old banks rather than sitting in some fancy new app. And to be fair, they do have a point. In 2008 world governments bailed out the high street banks who were dubbed ‘too big to fail but you can bet that they probably wouldn’t offer the same courtesy to the online banking sector. Whilst all fin-tech companies are required to protect monies up to regulatory thresholds, if the worst does happen customers may well still lose out.
This genuinely conservative tendency is also often peppered with a good dash of simple inertia – yep, many customers simply cannot be bothered to move banks as the hassle of moving their direct debits and re-keying their account details into Deliveroo is just too much pain to bear. However, it is sadly this very customer inertia and tolerance of substandard service that has allowed the banks to get away with so much (or so little considering they don’t ‘do’ much) for too long.
The Red Tape Regulator
Another reason is regulatory red tape. As we explored earlier, Revolut still does not have a banking licence even in the light touch regulatory environment of the UK – this does tie their hands and limit their capabilities somewhat. Regulators are also often uneasy of challenger banks taking funding from private equity which basically forces them to seek funding instead from, you guessed it, the big banks who then end up controlling the sector by the back door. Whilst banking regulators may not intend to referee a rigged game, they kind of do.
Sticking with the point of regulators, it remains to be seen what the global monopolies commissions will do if the big banks try to buy their way into the sector by acquiring their little digital rivals. Whilst such a move should arguably be rejected as counter-competitive and bad for the market, the US regulator in particular never misses an opportunity to show the markets just how toothless it really is and already green lighted Chimes acquisition by Bancorp.
COVID-19 and Fin-Tech
Then, the global COVID-19 pandemic dealt the sector something of a mixed hand. On the one, many customers found themselves sitting at home bored enough to actually get their banking in order and many responded by opening online bank accounts for the first time – the popularity of online banks spread even faster than the corona virus itself. However, the pandemic did ultimately turn into a battle of who has the deepest pockets; challenger banks had their limited cash reserves severely tested and did not qualify for any governmental support.
The Future of Finance
May it simply be a matter of time? Whilst a decade can feel like an eternity to some (and in tech, it kind of is), in banking 10 years really isn’t that long of a time. Remember that HSBC traces its origins back to the British Empire founding Hong Kong and Wells Fargo traces its origins to the old wild west. Therefore getting established in banking takes time and the ones that rise too fast and fly too high too soon all too often end up in trouble and getting rescued by their dusty old rivals.
As trust in the sector grows, and a new generation grows up online, the challenger banks can only grow and go from strength to strength. Furthermore, with each new version of their apps, neo-banks leave their big, traditional rivals looking more and more dated, old fashioned and out of touch. For an anecdotal example,I personally recently spent 60 minutes going round and round the international call centre purgatory of a major bank trying (and failing) to close down an old account – I would not tolerate that from an online banking platform and would not have to as I could have done it all by leaving a message inside their app.
In summary, if the fin-tech sector can somehow stave off big bank buy-outs and survive a minor financial crisis or two, then the future of finance may well just belong to them.