Challenged: Why old school banks might fend off the new tech lenders


n theory, a new breed of “challenger” bank is going to shake-up the staid old industry. Is going to wow us all with technology, eating the lunch of Barclays, NatWest et al along the way.

Banks with whizzy names – Monzo, Tide – will show the tired old lenders how to do it in the digital age.

Some of the us think we have seen this movie before.

Twenty years ago the first lot of new banks – Egg, Intelligent Finance – were going to do the same. If you’ve never heard of either that is exactly the point.

They were the Friends Reunited of the banking world.

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Getting a bank to what MBA types call “critical mass” just isn’t that easy.

And the early noise doesn’t often follow into later success.

The modern crop of new lenders including Starling and Atom have had a major shot in the arm from state led Covid loans. Assuming the pandemic has an end, that boost gets withdrawn at some point.

Even allowing for government help, the barrier to entry to the world of banking is high. You need to build up a strong balance sheet before you can do any lending.

Egg, launched by the Pru in the 1990s, amassed huge amounts of deposits and started writing mortgages. But it never made any money.

It pondered a float that never happened, was later sold to Citigroup and now Yorkshire Building Society owns the brand – or part of it.

Intelligent Finance was part of HBOS, launched in 2000 by Jim Spowart, who had headed Standard Life Bank – another (failed) attempt to challenge the big four.

IF was a strong internet brand, and championed offset mortgages, but in the end it got caught between other Halifax and Lloyds products. It is still out there, somewhere.

Lloyds had its own stand-alone internet bank Evolve which quickly died a death (at least in any meaningful form).

Once upon a time everyone got very excited about Marcus, Goldman Sachs’s entry into the UK retail banking market. No one talks about it anymore as a serious threat to the big players.

The former building societies Abbey National and Alliance & Leicester were supposedly the biggest risk to the HSBC, NatWest, Barclays and Lloyds stranglehold.

Their business models failed, and their operations got swept up into Spanish giant Santander (the bank of Ant and Dec, if you insist).

Supermarkets, the businesses supposed to be most in tune with their customers, also launched banks. They might be reasonable businesses, but it is plainly not where the grocers are looking to for growth.

The start-up bank’s initial proposition is that we are fed up with lousy service from the traditional players, but maybe that isn’t actually true.

A note on “Neobanks” by Credit Suisse a few weeks ago said that of the 70 million current accounts in the UK, less than 10% had switched since 2013.

Even if that is just laziness, it doesn’t bode that well for the start-ups.

One fundamental problem for the new-fry is that ordinary current accounts that mostly stay in the black just don’t make any money. Those customers are uneconomic for the lenders.

The new banks think that what is different this time is the explosion in demand for data. The idea is that they know so much about these customers that they can cross sell them other stuff.

But cross-selling in financial services is also an idea that pre-dates the internet, it is not some striking innovation, and historically, it has always fallen short of expectations.

Revolut wants to create a super-app where customers use it for lots of different things.

This might work, but an issue for them and others is that while they have built customer numbers reasonably well, the challenge they pose has meant that big banks have themselves innovated or copied fintech ideas.

So the biggest winners from the challenger bank innovations might well just be the original entrepreneurs who devised the platforms, as their inventions are bought out by Barclays and the others.

Best of luck to the challenger banks. And hopefully a few of them will crack it. But the old guard might be with us for a while longer. Banking is difficult.