Why are the High Street banks self-disrupting?

The banking sector is changing. New technologies and consumer expectations are forcing banks to innovate, and a favourable regulatory environment encourages challenger fintech brands in the UK. The fintech sector attracted double the venture capital investment in 2017 than in the year before. So, how are the banks responding? NatWest made the move to self-disrupt.

2,868 bank branches closed between 2015 and 2018, showing that a widespread physical presence on the high street is of lessening importance for banks. Yet consumers still feel reassured by banks that have branches: GlobalData’s ‘Global Digital Consumer Analytics 2018’ survey of 5,000 consumers found that 41% were against wholly digital banks, while 30% were neutral. 67% stated a preference for a bank with branches, while only 9% of respondents said branches would not factor into their decision of where to bank.

The old guard of the high street banks still dominate the market – a recent study by the Competition and Markets Authority (CMA) found that Barclays, Lloyds Banking Group, HSBC and RBS still provide 70% of current accounts – but a wave of digital challenger banks have caught the public eye. Even if customers are slow to switch accounts, digital banks have raised the bar for consumer expectations. High street banks have been left with a choice: innovate or face a gradual slide into irrelevance.

The rise of digital challenger banks

The UK is a global leader in fintech with a supportive regulatory environment. Only this week, Chancellor Hammond announced the government-backed FinTech Alliance, a community-led digital platform for accessing investment, sharing resources, and recruiting talent. Alongside the low barriers to entry are fast-moving technological developments.

Head of Innovation at NatWest, Andy Ellis, comments on the shifting banking landscape and what it means for customer expectations.

“One of the big challenges for any bank is the move from physical to digital,” Andy says. “That is underpinned by enhancements in technology which mean that we – and everyone else – can build things much more quickly and test products and the barriers to entry are much lower.

“The regulatory environment is also much more supportive of being open and moving to the cloud. And then there’s customer demand saying: we want to open an account quickly, we want everything in one place, and we’re tired of having fragmented ways of running our business.”

Numerous digital banks and financial services apps have sprung up over the last few years – and they keep setting the bar for incumbents higher and higher. In particular, digital banks have challenged established brands’ products by offering friendly, convenient customer service and an intuitive, streamlined digital experience.

“There is a lot of competition in this market,” Andy says. “There are a lot of investment dollars being spent, which is great for customers. And it’s not only digital banks – it’s accountancy platforms too.”

“Disruption is inevitable and good,” Andy adds. “Banking is probably one of the later sectors to be disrupted, due to the large trust and regulatory elements. But undoubtedly, we are being disrupted, and there some prime examples already in things like current accounts, payments and lending products.”

NatWest’s move to self-disrupt

November 2018 saw NatWest launch Mettle: the incumbent’s answer to digital brands. Mettle is a digital banking platform, an attempt to offer the kind of user experience which is drawing customers away from the High Street banks – even if it means taking some of NatWest’s own customers.

Andy Ellis says: “We’re seeing from our small business customers that they want to bank and run their businesses in a different way. SMEs want to see things in one place, whether it’s a cash flow analysis, advice to manage their business better, invoices, tax receipts, etc. Mettle is an attempt to put that all in one place in a digital way to serve this big and vibrant segment that wants something different.”

The logic is simple to follow. Mettle may inadvertently poach NatWest’s customers, but they will stay within the RBS Group rather than abscond to challenger brands. And the model is clearly working, as Andy mentioned a further eight or nine digital ‘challengers’ in development or operation
at NatWest.

“Self-disruption is self-evident,” Andy says. “You can have a passive, steady decline, or you can go bold. It requires the ability and attitude to listen to customers and evolve with them. And it requires that you hold your nerve, develop new capabilities and think in a different way. The need to self-disrupt is obvious to anyone; the internal alignment needed to get on with it is difficult.”

Challengers vs. incumbents

What about those challenger brands? Does the launch of ‘in-house’ digital brands like Mettle make the market smaller for independent fintech companies?

Matt Ford is Chief Product Officer at Tandem.

Matt says: “I wouldn’t see the new launches from NatWest or other high street banks as any more of a challenge than the other fintechs that are growing from start-ups.

“They certainly have more resources, but they also have their own limitations, be that in terms of culture or processes. The sector is diversifying and thriving and the big banks are at risk of bringing their same slow-moving structures along with them.”

Matt adds: “The wave of established banks’ challenger brands widens the fintech market, rather than shrinks it. The challenger brands will have to work hard to prove their value and attract customers just as any other new market entrant does.”

The future of fintech

How do both these industry experts predict that fintech will develop?

Andy and Matt agree on one thing: there will be value in service ‘bundling’, offering a full suite of services via one platform.

Matt says: “We are seeing customers seeking to ‘rebundle’ their banking services. We previously saw people were increasingly using financial products from a range of providers, which was great for new providers seeking a market share, but now they are returning to one provider that offers multiple services.

“Tandem fits into that because we are developing a suite of products that each aims to help with a certain part of our customers’ lives, but they are also integrated for a streamlined financial ecosystem.”

Andy predicts much of the focus will be on the SME space: “There are huge amounts of money going into the SME space. I have no doubt there will be huge changes in the next five years in how SMEs are served, and that has got to be a good thing. It’s a vibrant, attractive sector, and it’s probably going to become more important economically, so there’s plenty for everyone.

“In terms of the value pool it increases in a sense, because you start to move into accountancy, lending, insurance – you think, what does a small business need to operate? Then you start to look across sectors and the cake gets bigger, and it gets more competitive for us, but it’s better for customers.”

Ultimately, the future of fintech looks promising for customers – and for companies which are quick enough to adapt.

“Innovation in business models will drive competitive advantage in the Fintech industry,” Matt says. “Simply charging less or offering free products isn’t enough. Customers will look to business models that are aligned with their interests and services that create real value in their lives.”