There's a huge amount of hype flooding the web about new startup fintech companies and how they're going to change banking forever.

Could it be true? Are the days numbered for Britain's big four banking groups? Could they crush these upstarts before they get off the ground? Or is there a third way? 

There’s no denying. The big High Street banks we know and love / hate are getting attacked from all corners.

Regulation is squeezing all the profit out of retail banking. Consumer trust has fallen to an all-time low and the government is encouraging a raft of “challenger” banks to come through and take chunks out the market share of the big four (Lloyds/Bank Of Scotland, RBS/NatWest, Barclays, HSBC).

And to add insult to injury, these High Street stalwarts are seeing their business being eroded by fintech startups, aggressive and well-funded geeks out to antagonise the big banks.

These fast-paced organisations are challenging norms in payments, credit, foreign exchange, transaction management, money management and beyond, bringing the consumer and the small business genuinely useful, engaging and often entertaining alternatives to the services offered by their incumbent bank.

Does the future of finance look like a dozen different apps from a dozen different providers, each offering their own slick “Uber-like” experience for whatever service is required?

Will we be abandoning our long-held current and business accounts and building our own bank-in-my-pocket from these varied (and often open) services?

Right now, that really does not seem likely. In fact, if current trends are anything to go by, you could argue the big banks don’t have too much to worry about:

  • People just aren’t switching current accounts. According to the CMA, just 3% of customers switched in 2014 that’s in spite of new Current Account Switching Service making life a little easier for switchers.
  • Although trust in banks is at an all-time low (financial services is the least trusted industry after media), trust in upstarts in the financial space is even lower. Ever since the Kaupthings, INGs and so on burnt out in the crash, our thirst to explore new, quirky and interesting financial brands has been seriously burnt.
  • Most people tend to rely on a small core of apps and, beyond games, it’s rare for consumers to add a plethora of disparate apps to their phone.

So, big banks are fine and can rest on their well-feathered laurels? These upstarts are but an itch?

Read on to find out, or for more on this topic read:

Not so fast!

You see, all this unbundling of banking into standalone products and services (as the startups are mostly touting) has already been done... by the big banks.

In the process of centralising all the products and services that branches used to handle more manually, they then spun-off or devolved these products into standalone teams (sometimes standalone businesses).

Think of RBS and its standalone credit card division, its Lombard car finance division and so on.

How many banking apps let you see and manage all the products you own from a single screen (or any screen)?

This happens because big banks very often have autonomous teams running autonomous systems that are not joined up – a lot like the fintech startups.

The only thing stopping consumers from getting these services from elsewhere is the little trust they have left in them and their ability to do things at scale.

The only thing preventing the big banks stopping the startups from invading their space is their ability to be agile, smart and contemporary. They are slow, cumbersome and weighed down in legacy systems, compliance and committees.

Fintech startups have no such problems, typically being fail-fast, caffeine-fuelled teams of tech risk takers not afraid of breaking the rules. Imagine using some of those terms in a UK bank boardroom?

What do we do?

Banks have the resources and the customers to make something meaningful but are often suffocated by their own scale.

Startups have the agility, the brains and the appetite to do cool things but have a real problem of trust and reach to overcome to make their efforts meaningful.

There’s three basic things they can do. Beat them, join them or buy them out.

Beating them is an expensive game which starts with tearing out those legacy systems – all green screens, mainframes and other pre-web technologies. That’s easy – banks can afford it.

Tearing out the curmudgeonly processes and the suffocating attitude to risk and failure is a much harder job. It really is not an overnight switch to make a bank act like a startup.

In fact, post-crash, banks’ attitude to risk is even more conservative than ever and any bank seeming to play fast and loose is often shamed in the popular press. Perhaps not...

Working with these businesses and integrating their services seems like a far easier task. Why not just modernise your merchant services by using Square? Or give your consumers better money management by plugging in MoneyDashboard?

This approach of finding the best-in-class then adding it to your portfolio definitely has an appeal. You get others to take the risks, push the boundaries, break the rules and then you plug their product in when the dust has settled. Great!

Fidor Bank in Germany does this well, integrating crowdfunding platforms as an alternative lending platform into their business banking portfolio.

However, unless you completely de-brand and subsume these services into your product portfolio you’re still educating your customers about the existence of these third-party services, instantly creating potential product disloyalty.

Secondly, you’re also adding another layer of user disconnect as it’s likely all these patched-in services offer different user experiences and disparate functionality. Needs some thought.

Finally, if you have a competitor nibbling at your heels or someone who does something that makes you green with envy, you just do what Google and Microsoft have done for years. Gobble them up and make them your own.

This is probably one of the strongest areas of opportunity for both the startup and the big bank. After all, the startup is typically VC funded and, if they can get a good price for their venture, they will sell.

All the bank has to do is integrate, cut off the competition and give their customers something their competitors will struggle to quickly emulate.

And, if they’re smart, they’ll retain the teams of these startups and use them to bring a more entrepreneurial character to their business and ensure that future acquisitions of this nature are more seamlessly joined up and work well together. This could definitely work.

At the end of the day, the consumer will decide. We’re adopting new tech and new methodologies faster than ever. The millennial is breaking every rule in marketing, product development and sales ever written. Perhaps none of these proposed futures will bear out. The one truth is that everything will continue to change.

What’s your money on?

Note: This article was amended on 25/11/15 based on feedback from BACS that the numbers sourced on switching rates from the CASS were inaccurate.

BACS state that “…data shows that, in the whole of 2011, 963,881 current accounts were switched. In the first 10 months of 2015, that number stood at 1,031,955 (with two months still to go).”  

This conflicted with numbers presented in a This Is Money article which suggested that the numbers had been in decline.

Martin Jordan

Published 17 November, 2015 by Martin Jordan

Martin Jordan is innovation director at ideas agency Equator and a contributor to Econsultancy. You can follow him on Twitter or connect via LinkedIn.

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Kerris Macauley, Head of PR at Bacs Payment Schemes Limited

You assert the following in your article:
"People just aren’t switching current accounts. In fact, since the “Current Account Switch Guarantee” came into being, fewer people are now switching banks than before. 25% less people switched banks in the last 12 months than they did in 2011."

I'm afraid our figures differ greatly from that claim - and I'm sure you'll agree, as we, at Bacs, own and run the Current Account Switch Service, we are in a position to have access to the most accurate data.

That data shows that, in the whole of 2011, 963,881 current accounts were switched. In the first 10 months of 2015, that number stood at 1,031,955 (with two months still to go).

That is certainly not down at all, let alone down by the 25% you claim in your article.

If you need to refer to figures around account switching in the future, our press office would be happy to provide accurate information to you.

almost 2 years ago

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Barry James, CEO at The Crowdfunding Centre

My money is on the fact that this is the most misleading piece of analysis I've ever read on eConsultancy or #Fintech.

The underlying assumptions are so staggeringly complacent that I hardly know where to start!

"All the bank has to do is integrate, cut off the competition and give their customers something their competitors will struggle to quickly emulate. " "This could definitely work."

The analysis is skin deep and disregards the basis of the Fintech disruption. To compare the internal structure of banks to what's happening in #Fintech - ignoring the absence of massive rents and disintermediation is as staggering as it is laughable!

This looks more like a love-letter to the major record companies written just before Napster started to find it's feet.

They assumed they could kill, buy or out-compete all the upstarts... Then there was iTunes. Oops!

They waited too long to transform themselves.

That window has closed for some - but perhaps not all banks. Key question: How radically can then think?

(Hint: It will have to be a LOT more radically than this!)

almost 2 years ago

Martin Jordan

Martin Jordan, Director of Innovation at Equator

Hi there Kerris @ BACS. Thanks for your note regarding statistics from the switch service. It goes without saying that your statistics to be accurate. Perhaps foolishly I trusted the numbers stated in the financial press (This Is Money - a Daily Mail publication).They cited figures from yourselves and the CMA (http://www.thisismoney.co.uk/money/saving/article-3282699/Number-people-switching-current-account-falls-sharply-12-months-appetite-moving-bank-wanes.html)

The article states that...

"Latest figures from the current account switch service shows in the period from 1 October 2014 to 30 September 2015, there were 1.03million switches compared to 1.2million in the same period a year previous. "

and then goes on to state

"The figures are also disappointing for the industry, given that in 2011, 1.35million people moved their current account - a far stronger rate than that seen today."

Certainly if they're publishing these numbers that are outright lies I am more than happy to adjust this article. I am confused however as to how they came to their conclusions.

Thank you for your feedback.

almost 2 years ago

Martin Jordan

Martin Jordan, Director of Innovation at Equator

Hi Barry

Thank you for your feedback. I am sorry if you found the article misleading. I do very much agree with you in terms of the disintermediation and the lean nature of the FinTech startups and I am not trying to pretend that the big banks are so organised as to just come along and subsume the startup world. I can see how that point may have come across. Perhaps in my bid to try and simplify what is in the realms of the possible, I may have missed out more what is in the realms of the probable and you are right to raise this.

I would love to think that the big banks could be as nimble as the FinTech community and perhaps, in a sense, this could be considered a love letter in the sense of my wishing that they could. But I am perhaps more optimist than realist in this matter.

I appreciate your feedback.

almost 2 years ago

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Kerris Macauley, Head of PR at Bacs Payment Schemes Limited

Martin,

The 2011 figure I provided above is an industry one, and I can assure you it is accurate - the number referenced in the article you quote is not attributed to Bacs as you suggested, and it is not a number we recognise. Now that you have the correct statistics, can I ask that you correct your blog accordingly.

For future reference, should you require up to date information on account switching, this can be found at www.bacs.co.uk/factsandfigures.

Your assistance is appreciated.

almost 2 years ago

Jeff Rajeck

Jeff Rajeck, Research Analyst at EconsultancySmall Business

From 15+ years of experience working in institutional foreign exchange - both at banks and software companies - I think you're quite right.

Big banks are very nimble with technology and, on the vendor side, we were constantly reminded that the banks were in the process of replacing our technology with their own.

As you might imagine this did not always go as quickly as planned, but most of the large banks were able to come up with matching, if not superior, technology in the space of a few years. Our long-term revenues then came from 2nd and 3rd tier institutions.

I can't comment on specific startups as hopefully they have taken this into consideration, but I think this means that the space as a whole is fraught with peril.

It's not like Uber (who were competing with nothing) or AirBnB where the incumbents optimized their technology on the 'wrong' thing (only their own properties).

Presumably banks and the startups will be competing for the same customer base, in the Western world at least, and they are definitely up for the challenge.

And, if all these fintechs are doing is building something to be bought by someone else then investors should take note that they will also be competing with a slew existing tech providers (e.g. Reuters, Markit, Bloomberg) who have extensive customer bases and deep pockets as well.

almost 2 years ago

Martin Jordan

Martin Jordan, Director of Innovation at Equator

Thanks Jeff. Appreciate the comment. I think last week's investment into Atom by BBVA sort of underlines that. The big banks have so much money at their behest, and as you say, they can be quite innovative when they want to be. Money always finds a way!

almost 2 years ago

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