By Mark Richards.
The new ‘challenger banks’ should have helped consumers be better off and better informed about their finances. But now some of the new banks are running into trouble – and so far, the benefits for the consumer are questionable.
Over the last two years, I have written several articles about British banking: how the traditional banks were in decline, how the ‘challenger banks’ were coming up fast and how the inevitable beneficiaries of all this would be the consumers.
If only it were that simple. Yes, the traditional banks are in decline – at least as far as their high street branch network is concerned. But some of the challenger banks are running into trouble – as our headline suggests, some of the challenger banks are being well and truly challenged.
What are ‘Challenger Banks?’
Simply put it is a small, recently created bank that competes directly with the ‘big four’ – Barclays, HSBC, Lloyds and the Royal Bank of Scotland Group. They will often do this by competing in specific areas that are not adequately catered for by the big banks and, very often, they will operate only online, making use of the latest financial technology (‘fintech’ as it is known). Doing this – and not having the huge costs associated with a branch network – means that the challenger banks should be able to make profits in areas where the traditional banks cannot make a profit.
That had to be good news for customers. The challenger banks would offer better, cheaper, more accurately targeted products. Customers would have more choice and better value. The banks would be open when it suited the customers – or 24/7 online – and not when it suited the banks. Throw in a new attitude that would see customers seen as clients – as opposed to profit centres – and the days of the traditional high street branch were surely numbered. And a good thing too…
One of the first of the challengers (if you exclude Tesco Bank and Virgin Money) was Metro Bank which – in 2010 – became the first new high street bank for 150 years. It launched with the stated aim of opening 200 to 250 branches in Greater London within 10 years.
Sadly, it has not quite worked out like that. Shares in Metro Bank have fallen spectacularly of late, with the trouble starting back in January when the Bank revealed it needed to raise £350m to ‘plug a hole’ caused by miscalculating how much capital it needed to support its book of business loans.
With investors still waiting for news of this new capital, shares in Metro Bank – which now has 66 branches – are down by 85% over the last 12 months.
It’s not just Metro Bank
Revolut was founded in 2015. It is a ‘fintech’ company that offers banking services including a pre-paid debit card, currency exchange, cryptocurrency exchange and peer-to-peer payments. It employs around 600 people and for a while was the name on everyone’s lips as it threatened to shake up the banking world with its rapid growth.
But in February and March, the wheels started to fall off. There were stories of staff being asked to work for free, impossible targets, compliance problems and a string of high profile departures.
One man and his travel card
Right now I am looking at a pre-paid travel card – and it exactly sums up the problems consumers currently have with banking and banking services.
I am going to Ireland in the summer and the B&Bs I am staying in all want paying in cash. I find that odd – they all advertise what a good internet connection they have, but when it comes to paying the connection mysteriously disappears. “Ah, the signal is a bit hit and miss, don’t you know. We find that cash is the simplest way to pay.” I am sure the Irish taxman agrees…
The result of this is that I will need to draw a lot of cash out of ATMs when I am in Ireland. I would have simply used my normal debit card (from a traditional bank) to draw the cash, but luckily for me, it expired at the end of May. The bank sent a new one and for once I bothered to look at the leaflet. And what do you know? If I want to draw cash abroad there’s a 2% charge plus a flat £2.75 transaction fee. So if take £100 out of a hole in the wall it will cost me £4.75.
That is not outrageous, it is whatever comes after outrageous. So online I go and spend half an hour comparing pre-paid Euro cards. Would it not be simpler if my bank wasn’t trying to rob me? As my wife said to me, “The banks never change do they? They get caught out over PPI; they just move on to something else.”
Just what the banks want
That is just one example. I am sure there are plenty of others. But what it very clearly illustrates is that when it should be getting simpler for the consumer, it is actually getting harder. And that is great news for the banks. The harder it is to compare, the more we stay with the same provider – and pay the price.
There used to be a much-quoted stat that more people changed their husband or wife than changed their bank account. Is that still true today? Even with all the tools and apps that supposedly make it easier to switch, I suspect it is.
Right now there is a bewildering array of choice open to the consumer. Current account in one place, loans from somewhere else, credit cards and foreign exchange from virtually everyone except the local butcher and your investments managed on your phone by AI.
Meanwhile, free ATMs are disappearing ‘at an alarming rate’ and the poor old industry regulator is struggling to keep up with it all.
New challenger banks will continue to open: the traditional banks will remorselessly close their branch networks. New apps and online tools will continue to appear. But right now, whether that will leave the average consumer any better off – or any better informed – is very much open to doubt.