The digital upstarts taking on Britain’s dominant few banks

CHRIS MATTHEWS joined Monzo last May. “A friend mentioned it over a curry. Everyone signed up at once. Nine or ten of us.” Mr Matthews, a structural engineer living in London, transfers money monthly from the big bank where his salary lands to the online upstart, for everyday expenses. Monzo’s smartphone app lets him track his spending precisely. He has found big banks’ security procedures frustrating, but he can block and reactivate his Monzo debit card with a tap on the app.

For some British millennials, Monzo is as close to a cult as a bank can be. Its coral-pink cards are hard to miss. “People in bars will get very excited if they see you are a fellow Monzo user,” says Mr Matthews, who is 29. Founded in 2015, it has had a full banking licence since April. It launched current accounts in the autumn; more than 370,000 have been opened, mainly by customers converting pre-paid cards, with which Monzo began. Tom Blomfield, the chief executive, says its marketing budget has been “practically nothing”.

Monzo is one of many hopefuls trying to upset British retail banking’s established order. In 2016 the Competition and Markets Authority, an antitrust watchdog, reported that Barclays, HSBC, Lloyds Banking Group and state-controlled Royal Bank of Scotland (RBS) hold more than 70% of Britons’ main current (checking) accounts. Counting the British arm of Santander, Spain’s largest bank takes the share to over 80%. In 2015 Britons had 70m-odd active current accounts. They paid £500 ($750) or more into 70% of them every month.

Supervisors have licensed more than 30 entrants since 2013. But by no means are all the challengers young. One of them, CYBG, owns Clydesdale, a Scottish bank that turns 180 this year, and Yorkshire Bank, aged 159. It has about 1.8m personal current-account customers and assets of £43bn. Nor are all the infants purely digital. Metro Bank has since 2010 established 55 “stores” (ie, branches) and is spreading beyond south-east England. Stores open for long hours and even on Sundays; taxi-drivers, says Craig Donaldson, the chief executive, park outside and deposit the day’s fares. Debit cards are printed while you wait. Fees for safe-deposit boxes cover 80% of the stores’ rents, once they have been open for a year. But aren’t branches dying? Metro, which has built a balance-sheet of £15bn, says not. It looks certain to report its first annual profit on February 21st.

Among digital purists, Monzo’s chief rival is Starling Bank—where Mr Blomfield used to work. It started current accounts last spring; around 100,000 have been opened. Tandem, which recently acquired Harrods Bank, the banking arm of a posh department store, is also open for business. Atom Bank, part-owned by Spain’s BBVA, focuses on mortgages funded by fixed-rate savings. N26, a German smartphone bank, is due to arrive this year. Another near-cult, Revolut, is seeking a European licence (valid, for now, in Britain). It has 1.5m customers across the continent, half of them in Britain, wooed at first with keenly priced foreign exchange; now it also tracks your spending and offers you the chance, if you dare, to buy crypto-currencies. Zopa, a peer-to-peer lending pioneer, also aims to become a bank, offering savings accounts.

The authorities have been encouraging entry, in part because big banks’ long-lamented dominance intensified during the financial crisis. One big fish, HBOS, expired. Lloyds took it over. The smaller Northern Rock and Bradford & Bingley also crumpled. In 2013-14 Lloyds was forced to divest 631 branches into TSB, which it bought in 1995. Now owned by Sabadell, a Spanish bank, TSB has seen its assets grow from £25bn to £43bn.

Knock-out competition

To ginger up small-business banking, RBS, the market leader, must cede ground and money to competitors as part of the price, agreed on with the European Commission, of its rescue by the government in 2008. RBS will put up £425m, divided into sums from £5m to £120m, to build up rivals’ capabilities, plus £350m for incentives to customers to switch banks. Banks with assets of up to £350bn may bid. That excludes the big four but just lets in Santander (£315bn), to some challengers’ chagrin.

The creation in 2015 of a regulator to oversee access to payments systems, especially Faster Payments, which makes almost instant electronic transfers, has helped entrants too. Anne Boden, Starling’s chief executive, sees her bank’s membership of Faster Payments as essential. Starling can both avoid dependence on big banks and provide services to others. Regulators have also issued restricted licences, limiting services but requiring less capital. Loot and Monese offer simple accounts, opened swiftly on smartphones, but redeposit customers’ money at fully licensed, insured banks. This can be a route to the full bankhood of Monzo or Starling, or allow upstarts to harry banks in specific fields—as Azimo, Revolut and TransferWise have done in foreign exchange.

“Open banking”, Britain’s version of the European Union’s revised payment-services directive, which came into force in January, may open the market further. It allows “account aggregators” to collect customers’ data from several banks—and to push financial services (and more) in online marketplaces. On February 13th Starling announced deals with four fintech partners. But established banks reckon they are better placed than the upstarts. Giant tech companies may anyway prey on both whales and minnows.

A speedier switching service, set up in September 2013, has made it easier to swap banks. Starling even offers switching within its app. Britons are not yet moving in droves. In 2017 fewer people did than in 2015. But Metro’s Mr Donaldson detects a rise in “multi-banking”: opening new accounts, without yet ditching old ones.

Can any of the challengers really take on the giants? Even the biggest of the upstarts chasing conventional banks are small. Analysts think some may merge. Rising interest rates would test their mettle. The closure this month of the Bank of England’s Term Funding Scheme, which offers cheap four-year money to support lending, will soon raise the cost of funds.

The digital purists ooze confidence, although they are still tiny. Ms Boden expects Starling to make a profit by the end of 2019 and to be serving ten countries by 2020, starting with Ireland this year. Monzo is eyeing America; N26 will open there this year; Revolut is on its way to several non-European countries. But they need not just to woo new customers, but also to persuade them to ditch their accounts elsewhere. “For us, the salary is the holy grail,” Mr Blomfield says.

That’s not because, like a traditional bank, he wants a pile of deposits to fund loans, and make money on the margin between saving and lending rates. Rather, it is to learn more about how people spend their money. If they can be offered, for example, better utility deals, Monzo might take a share of the cash they save. If they take out insurance with a big-ticket purchase, it could earn a commission. The upstarts have novelty, sharp technology and gusto. The old guard have a force that may be just as powerful: inertia.