NO! Challenger Banks will NOT be Uberizing Retail Banking

As a self-confessed Millenial and (I like to think) early adopter I for one am slightly fed up of hearing this talk about new entrants into the Banking sector and specifically ‘Challenger Banks’ will potentially displace / disrupt banking and the whole financial system. There is some truth to it, but there is far too much hyperbole. Banks SHOULD be worried about a long term refusal to innovate but it is highly unlikely to happen. This is why…

Current Account Activity

Just taking the benchmark of Current Accounts as an indicator of market share. We can look at the quantitative element, how are Current Accounts segmented amongst banks and the qualitative element which looks at the actual monetary value of those Current Accounts. The Big 4 Banks have lost overall 4.5% market share in revenues and slightly more than this in actual Current Accounts since 2005 (‘Retail banking market investigation’ by the Competition Commission, Oct 2015).

This is despite the credit crunch in 2008 which damaged consumer trust in these banks, Retail giants making a foray into Financial Services e.g. Sainsburys, Tescos, Harrods etc and the emergence of foreign banking corporations establishing a presence in the UK e.g. Santander and National Australia Bank etc [Although some class these as Challenger Banks, I don’t. A Challenger Bank is a New Startup Retail Bank trying to capitalise on changing customer trends]. Despite the turbulent market conditions over the past 10 years, a loss of 4.5% is not an abnormal amount. Incidentally, most of that 4.5% has been occupied by established banking corporations, namely Santander, Halifax, Nationwide, Tesco Bank and (recently separated) TSB

In 2015 only 3% of consumers with a Current Account switched to another bank (Retail banking market investigation, Oct 2015). The vast majority of these switches were to Santander, Halifax and Nationwide (Telegraph, 2015). I couldn’t find data on new / closed accounts being opened, which would be interesting to get a hold of as (I suspect) there would be a strong concentration of Gen Z activity.

You can probably go beyond and look at mortgage volumes and value and get a similar picture. The Challenger Banks are always a ‘drop in the ocean’ compared to the other players

Enter Digital Challenger Banks

There are the two examples of 1. UBank and 2, First Direct, who are both relatively newer digital centric banks AND have had excellent market traction. However what’s common to both of these is that they are both still entity’s belonging to two major banks; National Australia Bank and HSBC respectively and therefore benefit from shared branding, resource, infrastructure, budgets etc. Therefore, they are not really new entrants to the market.

As an example of a new entrant (and what I would term a Challenger Bank), take Metro Bank, which started up in 2010 and could be categorised as a ‘challenger bank’. The UKs (apparently) first high street retail bank in 150 years (not sure that’s accurate as, off the top of my head, Tesco Bank and IBB both started up earlier). They have had modest successes over the past 5 years and have in no major way shaped or made a profound impact on Banking in the UK (based on current and previous market share). 

My Thoughts

I believe it’s unrealistic that a new entrant to the banking sector will have any chance of competing against any of the large corporations (let alone the big 4) just based on the market data. Despite regulators lowering the regulatory barriers to entry. The only realistic future and what the trends from the past 10 years show; the big 4 banks maintain a dominant position. And the established banking corporations that have recently entered the market are commanding a stronger presence in the UK. This will result in the ‘big 4’ becoming ‘the medium sized 8’ (sure there’s a better term for it).

As long as there is no apocalyptic future where the banks completely stop any sort of technological change over the next 10 years. The Challenger Banks will continue in relative obscurity on the fringes of high street banking with possibly one or two being able to grow (relative to other challenger banks) but never being able to become one of the top 10 banks in the UK.