Handheld banking: a quiet revolution
Tom Traill - 19 July 2017
The adage that you are more likely to get divorced than to switch your bank account may soon be outdated. While the annual churn rate for UK personal current accounts (PCAs) is still less than 2 per cent, there are three drivers of more rapid change. First, the Competition and Markets Authority is on a mission to prise open the PCA market oligopoly. Second, the prospect of a rising Bank Rate will supply a long-missing deterrent to inertia and indifference. Third, and possibly most important, the appearance of a new generation of tech entrepreneurs is bombarding the market (figures 1 and 2) with exciting new, app-based bank accounts that redefine the PCA, enticing more and more people to make the switch.
The new wave of start-up banks seems to be aimed squarely at millennials – the use of emojis and the focus on mobile-app based accounts. Companies like Monzo (formerly Mondo), Atom Bank, B, Starling, Revolut, Tandem, N26, Monese, Soldo and Iambank offer variations on the mobile banking theme, but at varying stages of development. Some, like Monzo are attracting a lot of users despite being still in Beta phase, they are haemorrhaging money, and until very recently, only offer prepaid cards. Others like Atom Bank (formed by a Metro bank co-founder) are more advanced and offer very competitive fixed term savings and mortgages.
These mobile apps provide more timely information on spending, enabling better financial control. With Monzo, for example, a transaction on the card triggers an instant notification from the app, showing how much has been spent, in what store, how much money remains on the card and allocating the spending into one of several headings – Groceries, Bills, Shopping, Entertainment etc. Other selling points are the facility to use the card abroad without incurring charges, and the ability to freeze the card when mislaid or stolen.
These firms will look to make money in the same manner as traditional banks, lending money out at rates that are higher than are paid on deposits. But if they are looking to attract consumers who are keen to keep track of their spending, then how many of them would become loan customers? The technology also needs to be trustworthy. Would you check your balance on an app? Sure. But take out a mortgage?
The lack of overheads due to the absence of a physical infrastructure means that some of these banks can offer very competitive rates, Atom Bank is currently offering 1.75% for a one-year fixed savings account and was previously in the news offering 5-year fixed rate mortgages at 1.29%. Favourable press, such as they received for their mortgages, will go a long way to compensate for their lack of marketing budget relative to the established players.
As the current teenagers choose their first bank accounts, are they going to be attracted to the app-only way of doing things? Or will they ask their parents for advice and be steered towards the high street behemoths? Newcomers face a formidable challenge in seeking to overturn the established order. Could one of them build an Amazon-like bandwagon? However, for those that make inroads in the PCA market, there is always the mouth-watering consolation of a buy-out bid from one of the giants. Perhaps the best approach for the high street banks is to buy the best upstarts and run them as a separate brand under the same parent company, keeping youth-friendly branding and the market share.
Figure 1: Number of PCA providers in the UK market (brands)
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