How the giants of British banking have kept their challengers at bay

The French rev­o­lu­tion took a while to get going in earnest. After the storm­ing of the Bastille kicked off pro­ceed­ings in 1789, it was three years before the guil­lo­tine entered ser­vice. Then things real­ly accel­er­at­ed: Louis XVI lost his palace, then his head, and Max­im­i­lien Robespierre’s reign of ter­ror ensued – until the rad­i­cal-in-chief got the chop him­self in 1794.

How safe are mem­bers of the UK’s bank­ing estab­lish­ment from the much-trum­pet­ed fin­tech rev­o­lu­tion? Just a few years ago, the out­look for these ven­er­a­ble incum­bents was look­ing decid­ed­ly unset­tled. Upstart star­tups such as Atom, Mon­zo, Star­ling and Tan­dem were aim­ing not only to com­pete with them, but to beat them. 

Even the nor­mal­ly under­stat­ed Deloitte was warn­ing that the big high-street play­ers would strug­gle to shrug off this threat to their dom­i­nance, as they’d done so many times before. In its 2014 research report, Bank­ing Dis­rupt­ed, the firm’s bank­ing leader in the UK, Zahir Bokhari, wrote: “Deloitte sees this time as being tru­ly dif­fer­ent. Banks’ core com­pet­i­tive advan­tages over new entrants are being erod­ed.” 

In 2018, Niko­lay Storon­sky, co-founder and CEO of the apt­ly named Rev­o­lut, was bull­ish­ly pre­dict­ing the end of the old order. 

“In the next five to 10 years we won’t see as many banks,” he declared. “We’ll see a few glob­al play­ers, in the same way that Google and Face­book dom­i­nate adver­tis­ing.”

And today? The chal­lengers’ cris de guerre have fad­ed and calm is return­ing. The high-street banks have fend­ed off the ini­tial attack and no ram­parts have been breached. 

Lloyds Bank, for instance, record­ed a pre-tax prof­it of £6.9bn last year. By con­trast, Mon­zo post­ed a loss of near­ly £115m. Star­ling, a sol­id per­former in the busi­ness sec­tor, made a prof­it of £32m for the year end­ing March 2022 and recent­ly raised funds at a £2.5bn val­u­a­tion. These are respectable num­bers for a well-regard­ed enter­prise, but they’re still dwarfed by those of the high-street behe­moths. Even the fusty old NatWest Group, bailed out by the tax­pay­er dur­ing the finan­cial cri­sis of 2007-08, is still val­ued at about £24bn.

“All the big banks are still alive, well and post­ing healthy prof­its,” says Charles McManus, the CEO of Clear­Bank, which he found­ed in 2015. “They have cer­tain­ly weath­ered the first fin­tech storm to a large degree.”

A symbiotic relationship

They have done so main­ly by mod­ernising, he adds. They’ve updat­ed soft­ware, launched apps and col­lab­o­rat­ed, rather than com­pet­ed, with emerg­ing fin­tech providers. 

McManus notes that sev­er­al fin­tech firms have engaged in “sym­bi­ot­ic rela­tion­ships with banks rather than eat­ing their lunch. They filled tech­nol­o­gy gaps for banks, while banks became major buy­ers and dis­trib­u­tors of fin­tech.”

HSBC, for instance, has signed an anti-mon­ey-laun­der­ing con­tract with Pol­ish fin­tech com­pa­ny Silent Eight. The bank is a ser­i­al investor in fin­tech star­tups and runs an accel­er­a­tor for them. Under the bon­net, HSBC applies the same soft­ware prin­ci­ples as a fin­tech firm. Last year it signed a mul­ti-year deal to work with Cloud­Bees, a spe­cial­ist in con­tin­u­ous soft­ware deliv­ery – a seri­ous improve­ment on the big-bang IT upgrade mod­el that’s been com­mon in the bank­ing indus­try for decades.

This June, the bank announced the cre­ation of “fin­tech 101”, a course run by the Uni­ver­si­ty of Oxford’s Saïd Busi­ness School to give its staff a thor­ough ground­ing in the sec­tor and its lat­est devel­op­ments. 

But McManus points out that most high-street incum­bents, despite hav­ing inte­grat­ed fin­tech into many of their ser­vices, do still face a sig­nif­i­cant tech­no­log­i­cal threat. 

“At their core, they’re still run­ning on lega­cy sys­tems,” he says. “So, while they have weath­ered the storm so far, there is a major ques­tion mark over whether they can con­tin­ue doing that.”

Con­sid­er the impres­sive growth in the num­ber of new cus­tomers that some chal­lengers have been attract­ing, sug­gests McManus, who adds: “The likes of Mon­zo boast mil­lions of cus­tomers already and they’re only con­tin­u­ing to grow. Thou­sands of peo­ple are flock­ing to open accounts with them each month.”

His assess­ment chimes with that of Michael Mueller, the founder and CEO of Form3, a spe­cial­ist in pay­ment pro­cess­ing. Estab­lished in 2016, his com­pa­ny has attract­ed clients rang­ing from Lloyds to Ger­man chal­lenger bank N26. 

“The inter­est­ing bat­tle is whether the smart banks get big before the big banks get smart,” Mueller says. “At the moment, the tier-one banks are prob­a­bly in a stronger posi­tion than they have been in the past six or sev­en years. Some of that has to do with the rise in inter­est rates – big banks like them high. A lot has to do with the fact that they’ve start­ed their tran­si­tion to bet­ter tech­nol­o­gy, although that process is far from com­plete.”

Investing in fintech

There’s also the fact that the incum­bents have invest­ed in chal­lengers, he adds. “If you look at Chase by JP Mor­gan in the UK or Gold­man Sachs’ Mar­cus, there are some real­ly inter­est­ing projects in that area.”

The high-street banks not only have scale on their side. While some income streams will have dwin­dled dur­ing the pan­dem­ic, the sheer breadth of their offer­ings – from com­mer­cial loans to life insur­ance – has spread their risk and enabled them to keep turn­ing in decent results. 

Nonethe­less, the com­pe­ti­tion isn’t going away. The chal­lengers will reflect, learn, improve and return. New ones will emerge. 

It’s a prospect that McManus rel­ish­es. He points to Bank North, which secured a bank­ing licence in August 2021. Part of a new wave of region­al­ly focused lenders, the busi­ness is “myopi­cal­ly focused on sup­port­ing con­sumers in the north. In times of eco­nom­ic uncer­tain­ty, we may find that cus­tomers look to banks that are built to solve their spe­cif­ic prob­lems, rather than the more gen­er­al­ist big­ger play­ers.”

The longer-term out­come is far from obvi­ous, accord­ing to McManus, who adds: “While tra­di­tion­al banks may make some gains in the cur­rent eco­nom­ic storm, the big ques­tion is whether they’ll be equipped for what comes after.”

The French rev­o­lu­tion took 10-and-a-half years to play out. Inevitably, over such a long process, there were lulls in the action, but these would always be fol­lowed by peri­ods of great upheaval. The high-street banks may well be sit­ting pret­ty today, but it’s dis­tinct­ly pos­si­ble that a sec­ond act is in store.