As high street banks struggle to embrace new technology, start-ups are experiencing a boom – but are they destined to replace traditional banks or merely plug the gaps the established institutions find hard to fill?

There is an old joke about the guy who has got lost driving in the countryside and stops to ask a pedestrian how to get to the city. The pedestrian replies: “Oh, if you want to get there, I wouldn’t start from here,” and this is exactly how banks feel today. They want to get to the nirvana of new technologies, but are stuck in a spaghetti of old systems.

Some call them legacy, others call them handcuffs, but whatever they are, it is a problem. The problem is that old systems and legacy technologies stop the bank moving forward into the nimble and agile future on offer today, and this is exactly the weakness fintech start-ups believe they can exploit.

On the rise

What we are seeing is many new companies launching capabilities built upon the latest internet-enabled technologies. These include easy-to-use apps for customers, simple-to-add code for merchants and open systems to allow anyone to work with them. It's almost like banking in an app store – hundreds of companies offering thousands of services that are simple and easy for sending and receiving money.

These companies include firms such as Stripe, a company that offers the preferred code for building online checkout services. Really easy to work with, the company is the chosen system for many other innovative companies including Kickstarter and Apple Pay, and was valued at almost $10bn at the end of 2016. Not bad for a six-year-old start-up. The reason why Stripe has gained such a valuation is that it has taken something the banks make difficult – setting up online payment services – and made it incredibly easy.

There are also companies that do similar things in lending, savings, investments and other specific areas of financial services based upon internet technologies. These companies have names such as Zopa, Smartypig, Nutmeg and eToro and have fun branding and cool offices. They are very different to banks and are collectively known as fintechs – financial technology start-up companies.

They all share many of the same attributes in terms of being young, aspirational, visionary and capable. This is why, collectively, they have seen investments from venture capital and other funds averaging $25bn for the past four years, according to figures published by Ernst & Young.

Out with the old?

However, there is a possible impasse here, as the most successful fintech firms are not replacing banks, but serving markets that were under-served. Those offering easy investing, better access to funding, support for small businesses and that turn mobile telephones into points-of-sale are the fintech firms that have the highest valuations and greatest success. However, none of them has replaced a bank. They are succeeding by addressing areas that banks find difficult to serve due to cost or risk, such as lending to small businesses.

This is why it is interesting today to see almost 50 new banks launching in the UK, many of which are fintech banks. Atom, Starling, Monzo and more have bank licences from the UK regulator, as well as considerable funding. However, they are up against the biggest UK banks, who have millions of customers, billions in funding and centuries of history.

For new players, fighting the large banks is going to be a challenge and they will need a lot of funding to succeed. This does not mean they won't succeed, but they will need real differentiation and exceptional digital services.

Even then, will customers switch? It will be interesting to find out, but the new players have fresh technologies, no legacy and unconstrained thinking. Equally, they don't have cost overheads and so can compete more effectively on interest rates. 

After all, big banks have an awful lot of branches that aren’t used much anymore. In fact, it may not be attractive to their customers or the media to shut down these branches but, if they don't, the big banks clearly can't compete with these new digital start-ups, even with their millions of customers.

The fight for the future of banking is going to be an interesting one between a host of new digital players and a few large banks who find it hard to change. Interesting times indeed.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter