Nicola Medicoff
Nicola Medicoff from St Paul’s Girls School, Hammersmith is the runner up in the Bank of England/Financial Times schools blogging competition. In her post, she looks at how fintech might reshape the banking industry…
Six years after setting up shop in London, ride-hailing app Uber has a fleet of 40,000 drivers doing battle with Black cabs, upsetting an industry that has seen little change since Hackney carriages started in the 1650s. Banks are bracing themselves for a similar assault, in their case from small fintech start-ups and large technology groups. Are the banks’ fears justified?
Traditional banks still dominate the financial sector with the top five lenders accounting for 85 per cent of all current accounts. The business model of banks is remarkably resilient: customers deposit funds into “free” current accounts and then banks lend these funds to home buyers and businesses and provide a range of ancillary services such as foreign exchange and credit cards which generate relatively high margins. Convincing customers to move banks for a better deal remains a dream for regulators; since 2013, only 4.7m million people have switched their accounts out of 70 million active account holders. Historically, customers have been reluctant to switch because current accounts are free so they have little incentive to find an alternative — customers trust traditional banks with their savings.
Small fintech firms are targeting what they see as the lucrative end of banking activity. Their modus operandi is to hone in on a single ancillary service and use cutting-edge technology to cherry-pick the most profitable customers with innovative products. Without the burden of legacy computer systems, expensive branch networks and fancy headquarters, fintechs start with a cost advantage. For example, three-year-old Revolut allows users to set up an account in minutes and transfer money into 25 currencies via a mobile app at rates that undercut the foreign exchange fees charged by banks. More than 500,000 customers in the UK have signed up so far.
The banking sector can also expect to face competition from other players — notably large tech firms. The sector is no stranger to non-financial companies launching banking services: supermarkets Tesco and Sainsbury’s did so in the 1990s with limited success. However, large tech firms have two distinct advantages. Firstly, they have expertise using data — a crucial raw material used by banks — and secondly, they have enormous financial resources.
Amazon, whose market capitalisation is greater than all listed banks in the UK combined, has just indicated its interest in launching a bank, and Orange Mobile has launched a bank aimed at customers in underbanked Africa. Will we also see Facebook bank or Google Bank? Or perhaps the first large tech firm in the UK will be Chinese.
Demographics are working against big banks. The expectations of younger consumers and the traditional mentality of big banks are fundamentally opposed. A selling point for banks used to be proximity to a branch, but this has little relevance in a digital age. It seems unlikely that young people would select their financial service providers based on the presence of empty high street branches rather than opting for the cheapest, most convenient services delivered to their smartphone. The basis upon which consumers chose banks is already being upended.
Nicola Medicoff is a student at St Paul’s Girls School
