Challenger Bank Battle In Full Swing In UK

In banking, in the jockeying and jousting for consumers’ attention (and deposits, of course), will it be a case of anarchy in the U.K.?

We’re being (slightly) tongue in cheek, with apologies to Johnny Rotten – but if the early days of 2020 are any indication, the battle is being swiftly joined.

The conventional wisdom holds that startup banks, challenger banks, digital banks – or whatever term as you see fit – will upend the way traditional retail banking is done.

And ground zero has been, and likely still will be, the place where open banking has taken root – that would be Europe, of course. Though Brexit raises the specter of “what’s next?” – with some uncertainty over passporting and just how firms will be able to interact with the EU) – the U.K. still has proven to be a durable FinTech hub.

As noted in this space at the end of last month, right when Brexit became reality, data compiled by Innovate Finance showed that 2019 was a banner year for FinTechs in the U.K. Private investors put $4.9 billion into U.K.-based FinTech firms last year, up 38 percent year on year. London got the lion’s share of that money, at nearly 90 percent.

Barely two months into the new year, the fund flows now seem to be taking aim at the U.K. (directly and indirectly) in terms of investments from private equity – and some huge retail banks have direct skin in the game, too.

Open banking, of course, as fostered by the Competition and Markets Authority (CMA) in the U.K., mandates that banks open their data to third parties in a standardized way.

And for digital banks, open banking may be a tailwind for more mainstream adoption. In one example, Revolut said earlier this month that it unveiled a new open banking feature that allows customers to access all of their bank accounts across a single app. The aggregation feature is designed to help customers get a holistic view of their finances. We note, too, that it provides consumers with an onramp to Revolut, using their retail accounts with traditional firms as a bridge of sorts.

Revolut and a Host of Others

Revolut, of course, has just raised $500 million in a funding round that values the company at about $5.5 billion. That round was led by Silicon Valley VC group TCV. Unicorn status, indeed – and, as the Financial Times has reported, the latest valuation is three times the implied valuation that was seen the last time the company raised money in 2018. Revolut has been busy focusing its expansion efforts in Europe.

Two weeks ago, Starling, a British challenger bank, raised 60 million pounds to fund its own expansion in the U.K. and beyond. Elsewhere, Monzo has been looking to raise funding rumored to be more than $100 million, having set a goal of 5.5 million users (where it now has 3.8 customers in the U.K.).

And on the retail banking side, JPMorgan has set its sights on opening a digital bank in the U.K. by the end of the year. Goldman’s already there, of course, with Marcus, where relatively higher interest rates on accounts have helped bring 13 billion pounds to that digital bank.

These (and, we assume, other) firms see opportunity in the fact that the German FinTech N26 has shuttered operations in the U.K. following Brexit, and where passporting remains an issue (the firm had used what is known as “inward” passporting).

Beyond the scrambling for that firm’s customers, the market is relatively greenfield in the U.K. Accenture has estimated that neobanks added six million customers in the second half of the year. The digital growth rate is in the triple digits, where for traditional banks the growth rate is about 1 percent.

Yet the same report from Accenture shows that the average income per customer for neobanks, at about nine pounds – while up from four pounds in 2018 – pales in comparison to the roughly 270 pounds for traditional banks. That implies that digital-only banks have a long way to go before displacing financial institutions (FIs) as the primary account destination. For now, interchange fees, subscription fees and VC funding are enough to help sustain growth – and the runway is long, even if the space gets ever more crowded.