In the last three years Tesco, Virgin Money and Metro Bank have entered the banking market as challengers to the big four UK banks - HSBC, Barclays, Lloyds and RBS. With customer trust in banks at all-time low following recent financial crises, does the
banking arena need more new entrants and what differentiators do they have to offer?
Tesco now has 7 million customers across all products (insurance, savings and credit cards), with a plan to launch current account in the second quarter of 2014. Virgin Money has a smaller market share, with over 3 million customers currently on their books.
Even though new entrants are gaining good traction, compared to Lloyds Banking Group’s 30 million customer base, their market share is still relatively small. However, the new disruptive players have significant advantages and big banks shouldn’t feel too
safe in their monopoly.
Technology is changing the ecosystem
New entrants have the advantage of starting with a blank canvas. They can choose the most up-to-date infrastructure and core banking system, embrace social media, have leaner processes and play in the areas that are most profitable. They are not burdened
by complex outdated systems, merger integration issues, old and broken processes and the general nervousness to fall behind the majority of banks through lack of innovation.
The real game-changer is the technology used by new-comers to build core banking platforms, supported by their relentless effort to maintain the simplicity of their systems and processes.
In the spring the UK Payments Council will launch a new cross-bank mobile person-to-person (P2P) payments system that will allow users to send money to each other using just their mobile number. Start-ups such as Zapp, for example, are already capitalising
on this through their mobile payment service that has been adopted by a number of banks.
Companies such as Backbase provide core banking, mobile and payments platforms which allow challenger banks to easily implement required technology, without legacy systems integration. This speed to market and reduced integration complexity give new banks
agility in processes and operations, product delivery and customer service.
In September last year, the UK banks spent £750 million on a new current account switching service which made it even easier for customers to change banks. In addition, the British Bankers Association (BBA) has been working with new entrants to lower the
barriers to entry, including the amount of funds they have to hold in reserve.
With non-traditional banks paving the way, is there an opportunity for non-financial companies to enter the game? How comfortable would you feel banking with Apple, Facebook or Google? These firms have a powerful combination of a track record in innovation,
a ready-made user base and the ability to respond to customer needs in an agile way.
And what do high street banks need to do to retain customers and accounts?