Could a combination of technological innovation, frustration with established banking models and the changing desires of younger HNW individuals and affluent clients transform the shape of banking in the coming years?

Banking in the UK and further afield is in flux. One of the oldest and once most prestigious brands, Coutts, has seen its reputation badly dented by the recent Nigel Farage story. Credit Suisse, which was founded in the middle of the 19th century, is being absorbed into UBS in a shotgun wedding. Meanwhile, a new “Consumer Duty" regime in the UK is lighting another fire under financial firms in a bid to improve service quality. And then there’s the promise, or threat, of AI. Finally, we’ve seen the rise of a whole crop of “challenger banks” and “neobanks.”

With established brands going through a tough time (not all of them – look at the results of HSBC, for example), and looking at how to rebuild reputations, it is easy to see that the “challengers” have a window of opportunity to eat some of their lunch. Less weighed by legacy costs, such as hundreds of branches and large payrolls, these upstarts are making inroads. Within this field, “neobanks,” which have no physical premises at all, are even more blessed by a lack of costs. It may not just be younger adults who might prefer to go down a new route. People who have been rattled by some of the news headlines of recent weeks might want to switch some of their money. 

So who are the new players? One is Metro Bank (which operates a private banking arm). That bank was formed over a decade ago, the first high street bank to take flight in more than a century. At the more “neobank” end of the spectrum are Revolut, Tide, Monese, Monzo, Starling Bank, N26, OakNorth, and Skrill. Many of them offer plain vanilla accounts and have no physical presence at all, although Metro – founded more than a decade ago – has branches. As this publication noted in its profile of Monument, a UK bank pitching more for the mass-affluent space rather than the retail one, some of these firms are starting to go after more specialist, and hopefully lucrative, sources of clients.

Of course, a few points need to be remembered. The largest, “systemically important banks” are more likely to be bailed out by taxpayers if there were to be another financial crisis, although regulators and politicians must hope that the "ring-fencing" reforms after the financial crisis will make this less likely. (One should never assume “never again", as the Silicon Valley Bank reminded us.) Smaller firms might not be so lucky, and clients will want to pay close attention to these firms' balance sheets. Regulators are still trying to get to grips with how the upstarts handle procedures such as anti-money laundering controls and KYC checks, among other matters. Some people might still find the lack of any physical presence a bit of a turnoff. 

Even so, while these new firms are miles away from capturing a big slug of the total domestic UK banking market, now is arguably one of the most auspicious times for new entrants to make progress.

To take one metric – mortgages – the top 10 largest lenders accounted for 81 per cent of the total, according to Statista (8 September 2022). The largest single player was Lloyds Banking Group, at 18.1 per cent, while NatWest came second at 11.7 per cent. Even if a small chunk of that gets taken by the newer firms over the next few years, that’s a lot of money. As the challengers receive more deposits, so their lending prowess should, assuming that there are no problems, begin to come through. 

A question, however, is how much difference does this make to the private banking sector? After all, for decades, the value proposition of private banking is that famed “white-glove” service, in-person contact, a steady point of relationship with an actual person, and access to top-notch analysis, investment management, advisory, even concierge and other services, including philanthropic and fine arts collecting advice. At this stage, there aren’t many sightings of any “challengers” able to offer any of this as a package. What could, however, happen is that some HNW and even ultra-HNW individuals – such as those who have multiple accounts anyway – might use some of the larger challengers as places to hold money (subject to the constraints of deposit protection limits). And this increased variety and competition is surely a positive force. Look at Switzerland, a country now with one universal bank following the UBS/Credit Suisse combination. While there are other banks, there's arguably a competition issue in that country.

This isn’t just a UK story, of course. In Switzerland, for example, there is Alpian, which was rolled out in 2020 by REYL Group; it is a digital wealth management platform that goes explicitly after the mass-affluent space. There are neobanks such as neon and Yapeal in Switzerland. Wise, which operates also in the US and UK, also operates in Switzerland. A bank that straddles the crypto assets and traditional banking world, SEBA Bank, is relatively young and is focused on wealthy individuals and institutions. Over in the US, a neobank is MoneyLion; another is Lotta. Bank Mobile – the name is a clue – is also a US example. Others are Chime, Varo, Aspiration, MoneyLion, and Qapital, according to Mordor Intelligence, in a report saying challenger banks in North America generated a revenue of $10 billion in the current year and are anticipated to register a CAGR of 9 per cent for 2019-2028. 

Turning to Singapore, there’s Aspire, for example, and in Hong Kong, Neat. In most cases, these are either for business or very straightforward retail clients.

All these new entrants surely give the lie to the idea that there's an inevitable, unstoppable drive towards "consolidation" with a shrinking number of banks, maybe leading to some sort of oligopoly of two or three banks. If the "de-banking" scandal of recent days has taught us anything, it is that the need for genuine competition and variety is more necessary than ever. This is something that even regulation-minded politicians would do well to remember.

Whatever the sceptics might say at this point about the challengers and neobanks, there’s little doubt that the banking sector needs competition, if only to stop complacency creeping in as memories of the financial crisis fade. And service quality can easily fade if there isn't enough competition. A recent Accenture report, focusing mostly on Asia, contained a warning that wealth managers’ clients are often annoyed at bugs and clunky platforms. There’s work to be done.

But this is also an exciting story. In times of great turmoil, when traditional ways of doing things are thrown up into the air and people want a re-think, and a return to first principles, it can be healthy. And with interest rates rising and widening banks’ margins, and also forcing firms to focus on profit and less on non-core activity, it adds a dose of necessary realism. 

Not everyone remembers the scandals, mistakes and problems of earlier eras when business models were turned upside down and replaced, but I have a sense that in 10 or 20 years’ time, we might look back on this period as a time when the very way that people thought of banking began to change. A few years ago, I was told in an investment seminar that it was sometimes hard to know whether a bank should be treated as a tech stock or a financial one. There are many sides to that argument, of course. But what stuck in my mind is that the seminar was held at Coutts.