How Can We Save the Banks?

In the UK more than in many other countries, there is a dichotomy between traditional, incumbent banks offering relatively dated products and delivery, and generally falling well short of customer expectations, and new, digital challengers seeking to reimagine banking with Apple-like elegance, intuitiveness and user experience.

Despite its position among the global leaders in economic output and social and technological advancement, the UK lags behind in banking innovation.

There is a high level of customer dissatisfaction with and distrust of banks in the UK. The distrust is justifiable, with one scandal after another following the 2008 financial meltdown, itself caused in large part by the big banks, but why the high levels of customer dissatisfaction?

According to Which?, a customer review site, 4 of the 5 largest banks in the UK by market share have customer satisfaction levels below 60% (the other, Santander, boasts customer satisfaction of just 62%).

In competitive markets, companies must innovate to survive. As revealed by a series of market studies over the past two decades (Sir Donald Cruickshank’s review of retail banking (2000), the CC’s investigation of SME banking (2002), the Vickers Review (2011), the Parliamentary Commission on Banking Standards report (2013), the CMA & FCA’s Banking Services to SMEs report (2014)), the UK banking market is not very competitive. With no competitive pressures to innovate, it has been cheaper and easier for banks to maintain the status quo. Thankfully, this appears to be changing.

Unfortunately for banks, as the saying goes: if you’re not moving forward, you’re moving backwards. The failure of banks to take innovation seriously in recent decades has led to tangled masses of unwieldy systems, outdated processes and manual workarounds that now prevent incumbents from keeping pace with customer needs in an increasingly digital age.

In other countries, such as Poland, competitive forces and market demand have led to meaningful innovation, with banks like mBank, Idea Bank, Millenium Bank and even Poland’s largest bank, PKO Bank Polski, actively pursuing new, often digital, strategies.

Of course, some will argue, Poland has a younger population than the UK (29.5%[1] of the population is between the ages of 15–35 compared to 26.4% in the UK[2]), which perhaps means higher customer demand for digital solutions. However, despite its smaller proportion of young people, the UK, a bigger country, still counts 5.4 million more of them than Poland.

The real factor driving innovation in Poland is likely competition. Unlike in the UK, where the combined market share of the 5 largest banks hovers around 85%[3] (as a percentage of retail current accounts), the top 5 banks in Poland have a combined market share of only about 45%[4] (as a percentage of total assets; market share by current accounts not available). More competition for customers means greater incentives for innovation. Also contributing to the higher level of competition in Poland is the absence of long-standing incumbents.

The UK Competition and Markets Authority (CMA) is in the process of preparing a detailed study of the retail current account and SME banking markets, due out in August 2016. Expectations among fintechs and new entrant banks are that this analysis will confirm the perceived lack of competition in UK banking. In the event the CMA concludes market conditions should be improved, more important than the findings themselves will be the subsequent steps taken by government and regulators to increase competition.

Regardless of the outcome of the CMA report and any resulting measures taken to enhance banking competition, incumbent banks are almost sure to face intense pressure in the coming years as new entrant banks bring innovative solutions to market. Currently, customer awareness of challenger banks is low and account switching is rare despite the recently introduced 7-day account switching service (CASS). With the arrival of the next wave of retail-focused challenger banks, including the likes of Mondo, Tandem and Atom, this will change.

Incumbent banks must begin taking innovation seriously now to avoid losing ground to digital challengers, the first of which will be live and aggressively marketing to customers by the end of the year.

[1] https://en.wikipedia.org/wiki/Demographics_of_Poland

[2] https://en.wikipedia.org/wiki/Demography_of_the_United_Kingdom#Age_structure

[3] http://www.statista.com/statistics/387098/uk-banks-current-account-market-share/

[4] http://www.rbinternational.com/eBusiness/services/resources/media/829189266947841370-NA-988671613168380133-1-2-EN.pdf

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