For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
The rise of challenger banks
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb. With the scars of having to fork out in excess of £500 billion in the post-recession bailout still fresh, the ordinary taxpayer rightly feels, er, wronged given that such a black hole in the public finances resulted (in large part) from the irresponsible practices these high-street behemoths adopted, with such a brazen disregard for the potential consequences.
This vacuum of consumer confidence has left a gaping hole in the market, and in recent years, it is precisely where challenger banks have stepped in. What’s a challenger bank, you ask? Essentially these are small retail banks whose ambition is to disrupt the establishment by offering a more consumer-friendly form of banking.
The first of these was Metro Bank, who in 2010 became the first to be granted a high-street licence in over 150 years. Since then, the likes of Aldermore, Shawbrook, Virgin Money, Charter Savings, Tesco Bank and numerous others have emerged, and with many more awaiting approval of their licence by regulators, the marketplace looks set to become ever-more competitive.
The appeal of these newcomers
The key selling points of challenger banks lie in two main areas: superior service and better deals. Often it is a combination of the two that underpins their approach. However, while the former is a result of strategy, the latter is somewhat necessitated. New banks rely heavily on customers to build their balance sheet in order for them to lend money, which is why they tend to top the various comparison sites for best rates on savings and current accounts.
But what really differentiates challenger banks is their online presence, and focus on digital and mobile banking. Vast branch networks are not part of the modus operandi at all, which naturally reduces overheads and enables them to offer better rates of interest. A prime example of this is Atom, which launched in the UK earlier this year. The company offers its savings accounts exclusively via iPhone or its iPad app, and as it looks to expand into other forms of banking, it will do so entirely via mobile.
In March, newcomer Mondo, which, like Atom, will be mobile only, raised £1 million via equity crowdfunding in just 96 seconds, and is set to launch here within the next few months. They plan to make it possible for consumers to open an account with them in less than a minute and without a human conversation.
Fellow incumbent Tandem, which has also received its FCA and PRA accreditation recently, has raised over £100 million in capital and will offer a complete range of services, including current accounts, credit cards, savings and loans when it gets off the ground later this year. Less is known about Tandem’s software, but it seems safe to assume that they will bring a dynamic digital presence to the table, and they are already quoted as planning to ‘flip the banking model on its head’ by ‘using data to empower customers’ rather than using it against them.
Such challenger banks will also bring a greater level of dynamism and choice to the market for consumer credit. For example, many now offer retail finance, allowing customers to finance their purchases instantly at the point of sale, with a minimum of fuss and often-negligible rates of interest to boot. This is just one of a number of ways in which they are setting themselves apart from established high-street banks.
The challenge facing the challengers
The biggest obstacle for challenger banks in their attempt to make significant gains in market share is, quite simply, public inertia. Despite the widely held-contempt for the banking establishment (a 2013 YouGov survey saw 84 per cent of respondents agree with the phrase ‘bankers are greedy and get paid too much’), some associate the lack of stature of challenger banks with risk. It’s a fallacy of course, as they are obliged to comply with the same regulations as traditional bank, and funds are still covered by the Financial Services Compensation Scheme.
Nevertheless, there remains a tangible resistance to change with these fledgling alternatives. In addition to this, a significant unanswered question is whether challenger banks will be able to compete in terms of offering good value, high-quality current accounts. These are not a great money spinner for big bankers, but, given their financial muscle, it is a service they can accommodate, and have honed in recent years.
However, with their roots in fintech, and the agility to integrate the very cream of the technological crop into their approach, you wouldn’t bet against challenger banks finding a way. Indeed, there can be no downside to the rise of these largely virtual platforms. Perhaps it is not until the practice of fractional reserve banking is entirely abolished that the public will ever be entirely enchanted with the wider industry. But such a wave of dynamism, innovation and disruption is a significant step in the right direction, and if it continues to enhance both service delivery and value for the customer, then it’s a cause we will champion.
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