The world of retail banking can seem staid and traditional.
Many of the largest banks in the world have been around for hundreds of years and the core of their business model is unchanged - banks take deposits and lend them out.
Customers stick with the same bank year after year, hence the witticism that people change spouses more often than their bank.
That picture – if it ever was true – has certainly been shattered.
Nearly ten years ago, neobanks like Monzo and Starling first launched in the UK. Their entry into the market didn’t create mobile banking but it supercharged the trend and stimulated industry investment. The shift to digital banking had predictable but significant consequences, including a sharp reduction in the number of branches. Today the majority of us do our banking through a mobile app. The branch network is less than half the size it was a decade ago.
New competitors and changing customer behaviours throw up big questions for the future of banks. It is no longer so clear that banks can rely on greater loyalty from us than we show to our loved ones. Instead, banks have seen their relationships fragment, with customers holding deposits in one bank, making payments from another and getting products like a credit card from somewhere else again.
While incumbent banks have lost ground on payments, they have so far managed to hold onto the most valuable aspects of the customer relationship: deposits and lending. But it is an open question whether that will continue to be the case and what banks can do about it in a world where customers can switch accounts at the press of a button. A critical part of neobanks’ pitch to investors is, in effect, that they will ‘win’ these valuable parts of the relationship in the future.
At the same time, the last decade has seen banks struggle to convince investors of their profitability prospects. Most listed banks have traded at a discount to their book value, meaning that the market judges them to be worth less than their net assets.
In response, banks of all types are intensifying efforts to generate revenues. The neobanks have experimented with the most radical ideas, including advertising on their platforms and selling their technologies into other markets. We are also seeing incumbent banks compete more fiercely than ever for the most valuable customers. Look across the market and you see banks launching new services, such as dedicated financial guidance, to support customers with higher incomes.
Less loyalty, easier switching, new competitors, innovative business models: the last ten years have been a disruptive time in banking. The next ten years could be even more transformational as neobanks mature and trends in digital banking and patterns of customer behaviour continue to evolve at pace. Bank bosses will see tested their bets on how to navigate these choppy waters, maintain strong relationships with their customers and earn enough to satisfy their investors. They’ll have to do that while also coping with new trends in AI, digital currencies and open finance.
Who said traditional high-street banking was staid?
