It’s an interesting question: with all the excitement around the digital, largely app-based challenger banks and others, are a bunch of hot new start-ups about to play David vs. Goliath with the esteemed heritage of the UK banking industry? Do we have a nouveau riche in town?
These firms are making huge strides. Revolut’s three-year sprint to its $1.7bn valuation and Unicorn status shows the belief venture capitalists (VC) have in the potential of the new entrants. Overall, this graph from VC commentators PitchBook shows that Fintech investment is increasing in both frequency and value (per deal as well as overall). Indicators of FinTech success can be seen more widely than the “challenger bank” marketplace, with CB Insights listing 32 FinTech Unicorns globally (~12% of their listed Unicorns) with a whopping six of those coming from the UK (of just 15 UK Unicorns in total). It certainly looks like times are pretty good for the new kids on the block, while their incumbent competitors face some big challenges, including regulatory fines and IT problems.
But for all the buzz, how much market share are the new players truly stealing from the old guns? Sales at the high street banks have gently risen since 2013, despite some disconcerting stock price movements (source: Factiva). Do the CEOs of these behemoths truly lie awake at night worrying that the new entrants (most with less than one million customers) are about to send them into administration? That’s hard to give a definitive answer on, but we do know they’re already making big efforts to digitise – from new products to technology upgrades to neobanks. So…is it time for some new kids on the block?
Well…it may be too early to tell. In the words of Alex Rampell, “The battle between every start-up and incumbent comes down to whether the start-up gets distribution before the incumbent gets innovation.” So yes, be excited about the wave of FinTech innovation coming into banking, but also be excited for the range of FinTech and innovation possibilities banks are employing. As banks in the last few years have started to get on top of Basel and similar regulation waves, so they have started to turn their attention to their own innovation and digitisation, with a number of them introducing incubators and labs. They do face the challenge to be as agile as the challengers, but with their scale, the question becomes not “can they out-innovate the start-ups?” but “can they innovate faster than the start-ups can grow?”…and that is a question that remains to be answered.
Researched by Ashley Hunter, MBA.
Several of these startups, founded three or four years ago, are reaching a level of maturity and a customer base that has led to them raise massive rounds this year to fund further expansion. And this could keep on going if reports of UK-based Monzo's impending unicorn coronation hold true.