The Rise of the Digital Banks
One of the major developments in the Fintech market in 2019 is the rise of the so-called “challenger banks”. There have been significant investments made and the rise of these new digital banks look set to continue into 2020. So why has this change arisen and what will it mean for the future?
What is a “Challenger Bank”?
A challenger bank is a relatively new type of bank that competes with the familiar traditional banks but operates differently. They do not have the high street presence, long account set up processes and do not, at present, offer the huge product offering of many of their traditional counterparts.
Instead, a challenger bank uses the technology available to operate under a new model where they function only online and via their mobile app and so do not incur the high operational costs of their traditional banks. Also, the new UK Open Banking legislation and the reduction in capital required to set up a bank, has led to the rise of these new digital institutions and they are proving to be an attractive proposition for the venture capital investors.
What investments have been made?
Over the past year, challenger banks have been making headlines by attracting big venture capital investments. For example, Monzo, a UK bank, raised £113 million in June 2019 valuing the business at £2 billion. Early in 2019, the UK challenger bank Starling, raised £75 million and, more recently, a further £30 million to develop its product offering and propel its launch into Europe. This takes the total money Starling has raised to £263 million.
Revolut’s CEO Nikolay Storonsky has recently hired JP Morgan with the target of raising a further £500 million to fuel the company's growth. Storonsky has also gone on record to say that Revolut is aiming for a $10 billion valuation through this new round of funding. That would put the 4 year old company amongst the largest 100 banks in the world (by market cap).
To add to this Germany’s N26 has raised a total of £527 million, Tide £73 million and Oak North, a less well known digital bank in the UK, has raised over £775 million.
Why are we moving to Challenger Banks?
Digital banks that operate in the UK now claim 13 million customers, with five million new accounts opened in the first six months of 2019. According to Accenture, this number is set to triple in the next 12 months, however, given nearly all banks already have apps for easy access to finance, this raises the question as to why people are moving to these new challenger banks?
One of the main reasons is that many consumers have lost trust with their current bank. Over the last 20 years there have been many banking scandals and the big banks have lost our trust due to a range of issues including mis-selling finance products, data breaches, currency manipulation, and insider trading. As a result, the loyalty has gone and many consumers no longer feel reassured that they are “safe” with the bank that they currently use and hence will consider moving to an alternative provider.
Convenience is also a key driver for their success. Setting up an account with a digital bank takes minutes. All you need is a form of ID and the ability to record a video on your phone and your account is set up. Compare that to the traditional banks where it can take weeks to set up a bank account and involves you going into the bank to have your identification verified – this all takes time and hassle which the new banks have overcome.
Finally, the digital banks use the technology available and they use it well. The user interface, in-product navigation, support and security features are creating better user experiences. The technology is constantly evolving and improving so making the experience even better and so creating strong customer loyalty.
Will the traditional banks all disappear?
Not all high street banks are behind and some are now bringing new products to market. Natwest, for example, were Platinum partners at Xerocon London and they have developed a range of fintech products including
- Mettle - their challenger bank equivalent for sole traders and Ltd Companies up to 2 owners,
- Bó – Natwest’s own challenger bank,
- Rapid Cash - their alternative finance solution and
- APtimise - their accounts payable app for businesses.
Natwest seem to be right up there from a technology standpoint and appear to be adapting more quickly than many of their industry peers. They also own the cloud accounting software FreeAgent and is another example where Natwest are keeping up with the changes on the technology front.
Is all this good news for accountants?
Many accountants now offer cloud based bookkeeping solutions with bank feeds and an invoice processing application such as Receipt Bank. But should product recommendations stop here? If a client asks for a recommendation for a bank or a loan why not suggest a digital bank or an alternative finance company to borrow money? Both of these products can potentially be set up on the same day so this will ensure that your clients get the finance they need quickly.
It is likely that the range of products available through these new banks will develop and increase in number in the future. As a result, the accountant will be in the position to offer a wider range of services and move into more of the role of the trusted advisor and build a stronger relationship with their client.