Daily Telegraph recently reported that many of the new graduates hired at the Bank of England have accounts with the challenger banks and observed that some incumbent, traditional banks are now building their own digital banks.
One reason why the younger generation are attracted to challengers – setting aside whether they are ‘digital natives’ rejecting the banking norms that their parents and grandparents tolerated – is that they are providing a basic need in managing money that
has thus been sadly lacking from our society; the ability to be financially sustainable throughout the month.
Prior to the challengers, the banks simply sent a monthly statement showing an inventory of transactions with little or no explanation of the transactions. If the transaction exceeded the cash in the account, charges were levied.
The challenger banks and fintech community were quick to combine advances in mobile communication technology with real time payments and the computing power of smartphones to gives the account holder a view of their balance before they make a purchase.
The challenger banks are taking this further and are becoming the primary banking relationship for their account holders, allowing greater insight into cash management. For example, if there is money left over every month, it can be deducted at the time
of the income arriving into the account and moved into an interest-bearing savings account, removing the danger of it being used in a casual moment. Given consumers’ lack of cash management experience, any money in the account is often seen as spare money.
Large corporates have treasurers and accountants that look after their cash management and liquidity of the company. Corporate Banks have served these organisations with services that have filtered down to other sectors of banking. Here the sweeping of funds
from many accounts to a single, interest bearing one in retail banking is an example. Similarly, for netting payments and pooling different currencies. Another would be providing FX rates and spreads without market risk to the corporate.
It is this kind of cash management that the challengers are bringing to the retail banking sector, and soon to small businesses, meeting the need for customers to have a clear and understandable picture of their financial position.
This type of dedication to the individual shown by the challenger banks is becoming ‘table stakes’ for anyone now offering a current account – hence the belated scramble by incumbents to build their own digital banks; they could have spotted the opportunities
themselves, but never got around to it.
With the increasing number of accounts going the way of the challenger banks the traditional banks will need to move. The traditional banks will need to show they can provide intelligent cash management for consumer and small business current accounts and
have the skills and the technology to do so.
We will have to wait and see if this sort of known innovation fits into the budgets of the traditional banks. Currently banking revenue growth is near zero and costs are stubbornly high. The bank’s cost to income relationship is often more than 50%, often
higher than the challengers.