Is this the end of banks as we know them?
Back in 1997, I got a glimpse of the future of banking when I delivered the Co-operative Bank’s internet banking service.
Although it was only the third bank in the UK to go live on the internet, it was the world’s first online banking platform to be launched on Java, allowing it to be opened and used on a number of different devices.
We showed off this ability at launch, running the service on a touch screen Java Kiosk, the very first Windows CE (handheld personal digital assistant – essentially a smartphone without the phone), and of course on standard computers.
We did this with two developers, and in just over six months, we were live!
We went on to do a similar job for a number of banks across Europe. At that time, we arguably put more banks online for the first time than anyone else. This was the future.
Then came the speedboat banks launched by large financial services organisations – Intelligent Finance by Halifax, Egg by Prudential, and Smile by Co-operative Bank. The larger banks like Lloyds spent over £1 billion creating Evolve, its own speedboat bank. In those days, it was harder to get a banking licence, so I don’t remember any new standalone digital-only banks. Certainly none created back then exist today. And the speedboats are largely defunct, although some are still around.
I spoke at conferences back then and said that within a few years all banks would be digital and this was the beginning of the end for branches, but not necessarily call centres. How wrong I was.
Again in 2013, as I became chief digital officer at Temenos, my first presentation slide on digital showed a shark and piranhas. I said that big tech companies would take large bites out of banking, and there would be hundreds of piranhas (the fintechs and neobanks) taking smaller bites out of banks product by product.
Ten years later and here we are. No incumbent bank has gone bust because they’re not fully digital, while some neobanks have gone bust and there are some that continue to grow.
It’s surprisingly hard to get comparative numbers for things like customers, revenue, profitability, cost-to-income ratio (CIR), and valuation. Some simply don’t report CIR, while valuation is based on funding for Monzo/Starling whereas banks such as Lloyds are measured by market capitalisation, and TSB doesn’t report independently of Sabadell.
However, broadly, in terms of customer numbers, Lloyds has around 26 million, TSB 5 million, Monzo 7.5 million, and Starling 3.6 million. When it comes to profit, Lloyds made around £6.8 billion in 2021, TSB made £183 million in 2022, Starling made £195 million in 2022, and Monzo is set to report a full year of profit probably next year.
You can argue about the comparisons or differences in the numbers given, but the simple fact is that larger banks are here to stay. I included TSB merely to show that even a smaller incumbent bank in the UK is arguably well entrenched and doing just as well if not better than the neobanks. Yes, I know that some of the larger incumbent banks were bailed out in 2008, but that has nothing to do with whether they were digital or not, and that is my point. I still see claims that fintechs and neobanks are “eating the lunches” of bigger banks, and suggestions that “the writing’s on the wall, do digital or die”. While this may happen at some point, it’s not happening anytime in the near future.
Right now, Starling has the broadest range of products on offer for a neobank, but it is still some way off from having the breadth of offerings that Lloyds has. Neobanks have been funded well by investors, but their balance sheets are weak when compared to incumbent banks who can afford to buy their way out of many challenges, including the threat of neobanks.
Neobanks still have a lot of growing up to do – not only in terms of their product range, but also their processes and their ability to keep up with technology. Yes, both Starling and Monzo have created their own “modern core”, but are the rest of their stacks modern? As they expand their range of products, have they already started to recreate the silos that incumbents have? My guess is yes. Now, as we face a new era of AI, will they be able to invest as heavily and broadly in new technology to compete with the balance sheets of the larger banks? As NatWest Boxed gets off the ground, will Starling be able to compete with Engine for the BaaS market?
Don’t get me wrong, I’m not anti-neobanks, I’m just realistic that “digital” banking alone is not going to kill off “legacy” or incumbent banks anytime soon. Digital banks are absolutely necessary to show what can be done with a newer approach and with modern technology. I’d love to say that they also provide “innovation”, but I fail to see anything they have done that is innovative compared to incumbent banks when it comes to banking products and services.
This week, I’m just saying let’s be realistic about the near-time future and optimistic that the future on the whole will be much better for customers regardless of who provides it. If banking starts to really help with real customer challenges and makes life better for many more customers, then that would be the best outcome.
About the author
Dharmesh Mistry has been in banking for more than 30 years both in senior positions at Tier 1 banks and as a serial entrepreneur. He has been at the forefront of banking technology and innovation, from the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He founded proptech start-up AskHomey (sold to a private investor in spring 2023) and is an investor and mentor in proptech and fintech. He also co-hosts the Demystify Podcast.
Read all his “I’m just saying” musings here.