Digital banking 2019 in review

Challenger banks are set to increase competition, disseminate service and democratise access to finance.

The world is excited about fintech. You don’t have to go far in today’s news to come across a fintech story, usually this is because some smart person has realised they can use an app to solve a currently laborious financial chore - the result is a billion pound idea that gets a lot of potential investors excited. But it’s a long road from proof of concept to proof of market and a lot of the fintech hype remains just that: hype.

However, that’s no reason to dismiss the potential of the sector; which I believe is immeasurable. I’ve been fortunate enough to work for many years as a journalist covering the financial sector, interviewing hundreds of bankers and entrepreneurs and it is clear that fintech and digital banking are going to change everything - and the main beneficiary will be the consumer. Below I’ve fleshed out three core reasons why.

1) Established banks are complacent.

Last year I wrote a chapter for the Book on Open Banking on how digital banking was going to change the culture of banking as we know it. I used a terrifyingly true story that actually happened to me when I went to my old high street bank to make the biggest transfer of my life.

‘I’m sorry sir, we’ve got a pigeon in the bank this morning,’ said the teller. I looked around and there was indeed a pigeon flying around. The man who was supposed to be helping me at long last get my foot on the property ladder was spending more time watching a pigeon and fumbling with the half-loaf of bread his manager had assigned him for pigeon-tempting duties. I felt ignored and embarrassed for all of us, including the pigeon.

If this was personal service, I didn’t want it. A month later I moved to a fully digital bank.

Digital banking is seen as disruptive because the high street banks’ ownership of the market has bred complacency. While many have launched very good digital offerings those services are still seen as a silo within their operations. Of course they have huge, diverse customer bases and massive legacy systems which do not grant agility but if the price of that is a disrupted and competitive marketplace that puts a premium on ease of use, accessibility and technological rigour as a constant, then that will massively benefit the consumer, whoever they bank with.

2) Digital banking will fill the advice gap.

A lot of the people in finance I’ve spent time speaking to are wealth managers. They cover a lot of bases in their role but in a nutshell they’re responsible for keeping an individual or a family’s money safe (and hopefully growing it a bit). This can mean dealing with an account worth billions with assets all over the globe, or it can mean dealing with many more smaller accounts that represent retirement plans, often worth under £1 million.

In recent years it has become harder and harder for wealth managers to monetise their service for those at the lower end of the spectrum. A bigger account means bigger margins and more profits and fees and vice versa. That means that many people who previously expected a personal, hands on, service are getting short-changed in the wealth management space. This has created something called ‘the advice gap’: if you’re at the top of the pile you will be well advised on how to manage your money. If you’re at the bottom you won’t… and you might well ask what you’re paying your wealth manager for.

Here fintech has stepped in with apps and online services that let users manage their money straight up, without a hard to get hold of wealth manager in the way. They’ve slashed notoriously complex percentage based service costs. Again, they’ve been disruptive and are being rewarded. However, the established wealth managers are now playing catch up with their own digital services. The net result is that those who were previously falling foul of the advice gap are paying less fees and getting a degree of advice. It probably isn’t hours with one individual but it will be valid research and market data that they can apply and understand within a digital application.

3) This is affecting everyone.

Someone I spoke to last year was Rupert Scofield. He’s known as the founder of Finca, a company that provides micro-financing for thousands of small business owners in the developing world. He mentioned the ‘leap-frogging’ phenomenon he was seeing: Digital banking was allowing those who lived hundreds of miles away from the nearest bank to get access to finance via their phone. In spaces passed-over by development people were leap-frogging straight to the next generation of banking. That is entirely down to the fast, secure and proven technology that digital banking represents and that is something that will, hopefully, change the fortunes of many, many millions.

It turns out the bank I mentioned in the first point closed that branch a few weeks later and, I’m told, the building became an anarchist squat - poetic justice or just another market moving to utilise a resource (or both)? At times the hype and scrabble around the fintech phenomenon may seem anarchic - certainly in some newsources - but I hope the above points show that we really should be excited about the potential of digital banking, not least because it is set to increase competition, disseminate service and democratise access to finance - all inherently good things.

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