Partners, not disruptors
European banking is witnessing a period of huge change. A wave of challenger banks are coming to market, threatening to upset the status quo by wooing customers with promises of better services at lower cost. They are free from the legacy technology problems facing many of the big incumbents. Instead, able to build systems from scratch, they claim to be more transparent, have a better understanding of customers through superior data analytics, and cheaper because their business models are simpler.
Since 2012, in the UK alone, more than 45 firms have applied to the regulators for a banking licence, 13 over the past year or so. There are mobile-only banks, small-business banks, private banks, hyper-local banks, and the first clearing bank to win a UK licence for 250 years. The trend is not confined to the UK. Interest and hype is rising across Europe. Venture capital investment rose from $100,000 for 39 deals in 2010 to 242 deals worth $1.4 billion last year , according to consultants KPMG.
Questions remain about how much business the challengers can win from the big, established institutions, for all the government and regulatory desire there is to promote more open and competitive markets. The big five British banks still hold more than 80 per cent market share of personal current accounts. According to Baringa Partners, the new entrants would have to win 70 per cent of the business from customers switching to achieve a 5 per cent market share by 2020. Although the market is getting more competitive, the challengers are a long way from taking over from the incumbents.
This is because the major banks across Europe still enjoy strong competitive advantages. Among the first is they already have the customers, a long history of serving them and powerful brands. Despite the financial crisis and its aftermath, they are still seen as safe and dependable. Second is their scale: they have more customers and can offer them a broad range of banking services. They have more customer data, a treasure trove, according to McKinsey, which means they will be able to offer deeper and richer personalised customer experiences, and have the infrastructure to do so. Third, customers are reluctant to switch. And finally, the industry is still highly regulated, and the big banks have already made the investments needed to comply with the regulations. For new entrants aspiring to scale, these costs are a significant barrier to entry.
So technology companies operating in the financial space and wanting to achieve scale should look to work with the banks rather than against them. Doing so will give them swift access to large numbers of potential customers, who in turn will be reassured by the association with a powerful brand, and the ability to increase size more rapidly than pushing on alone. Banks themselves are keen to partner with technology companies, especially as they are now beginning to embrace ideas around open innovation to improve their own products and services to meet the digital challenge.
This is our thinking at Centralway Numbrs. We pull together products and services from a number of different financial institutions and aggregate them into a store make managing money much simpler and easier. Customers can pick their own suite of products, or we can proactively help them bank better — for example, by suggesting the right consolidation loan to replace expensive credit card debt. And because their finances are in a single place, it is easier for them to analyse and budget. From our partner banks’ perspective, Centralway Numbrs provides a new way to reach customers and give them a superior service.
There are now more than 1.5 million bank accounts plugged into our technology in Germany, where our partners include Postbank, and the plan is to launch in the UK later in the summer of this year. We are already talking to a number of British banks — because we know the way forward is co-operation, not competition.