HSBC’s U.K. headquarters are seen at the Canary Wharf financial district of London on July 31, 2018.
Tolga Akmen | AFP | Getty Images
Britain is the home of some of the world’s oldest financial institutions. To stay relevant, they’re racing to bring a better banking experience to their customers.
In the last few years, a wave of fintech, or financial technology, start-ups have flooded the U.K. market, offering checking accounts and bank cards through an app — not a single physical branch in sight.
That’s not gone unnoticed by the established consumer banking giants, which are having to evolve to keep up with the kind of offering coming out of challengers like Revolut and Monzo.
HSBC for instance last year launched a new money management app called Connected Money, which shows users bank accounts from HSBC as well as rivals including Barclays and Lloyds.
The bank recently topped the 300,000-user milestone. While that’s nowhere near Revolut’s more than 5 million users or Monzo’s 2 million signups, HSBC’s new app did hit that target in the space of a year.
RBS, meanwhile, has formed its own standalone digital bank called Bo. The lender’s app breaks down spending into categories and sends alerts when a user pays for something, similar to how the fintech challengers’ platforms work.
Bo, which is part of RBS’ NatWest division, is currently being beta-tested, with no date set for an eventual release to the general public.
The battle for trust
While banks are under increased pressure to innovate, they’re not facing an existential crisis, according to Raman Bhatia, HSBC’s head of digital for the U.K. and Europe. The lenders that will win in the long run, he says, are those that people trust.
“I think one thing which remains a truism is customers do have a very high degree of trust when it comes to money, their deposits and their identity with respect to established banks,” Bhatia told CNBC. “And banks need to work harder than ever to preserve that trust.”
That view was echoed by Amelia Nicholls, chief of staff at RBS’ Bo, who said: “Customers trust legacy banks to keep their money safe, but they’re slightly unsure of fintechs keeping their money safe.”
And there’s some truth to that claim. While Monzo has attracted over 2 million customers, the bank has seen some difficulty getting them to take the plunge and switch from their main bank to the start-up’s app-based current account.
Monzo CEO Tom Blomfield told Reuters last month that only 30% of its users are using the app as their main bank account.
“We’re kind of the best of both worlds,” Nicholls added. “We’re looking and acting and being built like a fintech start-up. But actually we have that backing of NatWest and hopefully that’s an advantage.”
Banking beyond Main Street
Large lenders may have the advantage of history and a customer base far outstripping that of any fintech challenger. But they’re having to wind back on their brick and mortar operations as customers increasingly flock to digital banking.
British banks have shuttered their branches at an alarming rate. Consumer rights organization Which? said last year that 60 bank branches are closing every month. In total, 1,080 branches across the U.K. have closed, or are set to be closed, in 2018 and 2019.
That might simply be the direction things are leaning toward. Bo’s Nicholls said the banks of the future will be forced to go beyond Main Street, as younger people increasingly want to do most of their daily tasks via smartphone.
“Everything is expected to be on their phones and on their apps,” she said, referring to younger bank customers, “and actually that is the way we need to go.”
She notes that challenger banks have gained significant popularity, among young people in particular, and suggested big lenders are hoping to tap into that trend. According to the U.K. consultancy Caci, mobile banking is set to become more popular than visiting bank branches by 2021.
Profitability is another potential advantage for the big banks. While neobanks like Monzo and Revolut have scored millions of users between them, they’ve struggled to translate their wild growth into profits. Monzo reported a £33.1 million ($42.1 million) pre-tax loss last year, while Revolut racked up a £15.1 million loss in 2017.
Nicholls said that Bo had the advantage of being associated with a major banking brand like RBS, a profitable lender. But it’s also an independent bank, and Nicholls says it will be able to operate at “zero marginal cost.”
“We are able to operate our current account on a break-even basis, which is super important in that space,” Nicholls said. “It would be easy for us to be financially sustainable because we can leverage the wider group and use our deposit base as well.”
Going on a hiring spree also helps, HSBC’s Bhatia said, adding the company’s retail banking division boasts talent from fintechs as well as big tech companies.
“We built a global digital team over the last four years which has people from all sorts of backgrounds,” he said. “We have big tech talent, we have start-ups and of course we have our homegrown talent expertise.”
Are banks too slow?
While banks are touting their moves into digital as a sign of progress, some in the fintech industry think they aren’t moving fast enough.
Revolut CEO Nik Storonsky said it can take large lenders between several months to over a year just to hire senior executives and teams devoted to devising a digital strategy. He also doubts banks still have the full faith of their customers.
“I think with time, the divergence between start-ups in fintech and banks, it will just increase,” Storonsky said. Incumbents are good at “taking money out of their users,” but lack speed when it comes to innovating, he said.
Meanwhile, Benedetta Lucini, CEO of fintech firm Oval Money, said big financial institutions lack the agility enjoyed by tech firms when it comes to developing app-based finance products.
“The app is the tool; the disruption comes in many forms,” she said. “We work in an agile environment where every two weeks we have a new version of the app in the store. We get continuous feedback from our user base. We move on data all the time.”
“It’s that constant attention to the customer that’s central to what you’re doing,” she said. “Not creating products from the top down, but the bottom up.”
Nevertheless, pitting banking giants against their fintech rivals may be misguided, HSBC’s Bhatia said. Characterizing the situation as “David versus Goliath” or “fintech versus banks” might not be appropriate as banks are also partnering with fintechs, he added.