By Trevor Clawson

Major banks in Europe and North America are facing their “uber moment,” according to financial services giant Citigroup.

In a report on the banking industry – Digital Disruption – Citigroup predicts that financial technology (fintech) companies are poised to rain on the parade of the big banks by targeting their most profitable product areas. And as Citigroup sees it, the industry has reached a tipping point, with digital innovators set to triple their share of revenues generated by the banking industry over the next five years or so.

According to Citigroup consumer banking currently generates around $870bn in revenues across Europe and North America, with digital innovators accounting for just 5% of that total. But if the report’s predictions are correct, by 2023, disruption by fintech companies will account for 17% of a total earnings pot of $1.200bn

The real danger for major banks, however, is not simply that fintech companies are set to capture what amounts to something less than a fifth of the industry’s overall income by 2023, but that the fintech players are focused on those segments of the banking market that are most profitable.

Follow the Money

As the report points out, personal and small and medium-sized enterprise (SME) banking generate around half the income of European and American banks. Perhaps it’s no surprise then that those are the areas that are of most interest to fintech challengers who, usually, have no interest in offering a universal service and can instead cherry-pick the products they offer to businesses and consumers.

Coming in behind the startups are the big money investors. CitiGroup cites figures showing that global investment has risen from around $0.5bn in 2019 to just under $20bn today. And most of that investment – Citigroup puts it at 70% is focused on the key areas of personal and SME banking.

In that respect, the report reflects recent statistics from the UK. According to London & Partners figures, UK Fintech attracted a record £1.34bn in equity investment last year and the big deals reflected a focus on consumers and SMBs. For instance, payments company Transferwise raised £211m, app-based banking service Monzo secured £71m and Funding Circle, a peer-to-peer lending site with a focus on SMEs completed a £81.9m funding round. Atom Bank – often seen as the poster child for phone-based banking was also in fund-raising mode and secured more than £80m from Spanish banking group BBVA.

Banking at a Tipping Point as Fintech Drives Change

The Business to Consumer Market

As things stand, the greatest progress is being made in the business to consumer market. Citigroup says that as a direct consequence of changes in consumer habits. Smartphones have fuelled demand for banking services that can be accessed at all times and while major banks have responded by creating their own apps, challengers are winning consumers by taking a different approach to service. Adding value is the name of the game. 

What the Big Banks Won’t Do.

For instance, UK startup Loot was founded on the premise that in the digital age bank accounts should help people to manage their money through the month. As a Student, founder Ollie Purdue approached a bank and suggested that it provide budgeting tools as part of the online offer.

“They said it was technically not possible and that they didn’t see the need,” he says.

Purdue saw an opportunity and created an app that offers a current account – piggybacking on the account infrastructure of a large bank – a budgeting tool and a pre-paid credit card. He has signed up around 80,000 users.

Elsewhere challenger banks are ramping up their share of the market, albeit from a low base. In January of this year, Tandem Bank acquired Harrods Bank in a transaction that took its customer base to 21,000.  Monzo, which started out offering pre-paid credit cards and has now developed a full-blown current account has more than 500,000 users. Atom Bank has fewer users  – reportedly around 17,000 – but is one of the largest challengers in terms of taking deposits.

Reluctant Switchers

But does this justify the claim that the industry has reached a tipping point? The UK banking market is still hugely concentrated around the top five players who between them have around 85% of the current account market.

Perhaps more importantly, Britons are notoriously reluctant to switch bank account providers. Witness an IPSOS survey published in January of this year, which found that while the average UK adult is involved in 2.29 serious relationship breakups in a lifetime, the average for changing a bank account is just 0.81%.

Ollie Purdue believes the apparent reluctance to switch can be deceptive.

”I agree that the switch rate is low,” he says. “But people experiment. They may open a new account, without necessarily switching from the old one.”

But there is undoubtedly inertia in the marketplace and despite all the bad publicity generated by banks in the wake of great financial crisis and Payment Protection Insurance mis-selling scandal, evidence suggests that many consumers are not only happy with their banks but also trust them.

For instance, a survey of 1,000 bank customers carried out by marketing agency True Digital found that 65% thought the big banks, such  Lloyds, Barclays, HSBC offered higher quality of advice than their fintech counterparts.

But the Citigroup survey believes the die is cast.  While acknowledging that disruption to the existing banking market has, so far, been relatively small Head of Digital Strategy, Greg Baxter said:

“We are not even at the end of the beginning in terms of the disruption cycle in Europe and North America.”

And the challenge for incumbent banks, according to Citigroup is to show that they too are capable of innovation  “before their fintech competitors gain scale and distribution.”

Banks have probably not reached their Uber moment just yet, but with investors continuing to pour money into fintech,  serious loss of market share remains a clear and present danger.