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I realised the other day that financial markets are confused. On the one hand, we spend all of our time criticising banks for being slow to change, inflexible, lacking customer focus and being greedy and, in some cases, fraudulent; on the other, many reckon that challenger banks are not that at all – they’re just mosquitoes buzzing around the big banks arse. What’s the truth?
Well my truth is that we live in a Catch 22. In every developed economy, there is a core group of banks who control everything. The USA: JPMorgan Chase, Bank of America, Citi, Wells; Australia: Westpac, NAB, ANZ, CBA; the UK: Lloyds, RBS, Barclays, HSBC; France: BNP Paribas, Société Générale, Credit Agricole; Germany: Deutsche Bank, Deutsche Postbank, Commerzbank; and so on.
The reasons for this I blogged about two years ago: The biggest barrier to entry to banking is the regulator;1 although this is changing, as regulators in all developed economies have tried to encourage more competition since then.
The result is that in some countries we are seeing a whole new raft of digital and physical banks launching. The UK leads the pack with over 40 new banks in the running: Atom, Starling, Monzo, Tide, Lintel, Clearbank and more; the Netherlands has some interesting new banks, including Bunq and Knab; and Germany has some vision from the likes of N26, Fidor, Solaris, Wirecard and more.
People call these challenger banks. They’re not. I call them neobanks, and here’s the Catch 22. A neobanks will grow in a niche. If it ever breaks out of that niche into the mainstream and challenges the large incumbents, what will happen? The big banks will just let them do it? I don’t think so. When banks see a true threat they either buy it, copy it or kill it.
Equally, what is the demand for a neobank? Because they’re digital and cool. That will appeal to a small part of the market, but looking at Atom’s launch it appears that offering a bribe works.
Atom is offering 1.4 per cent fixed for a year and 1.65 per cent for two years, which still propels it to the top of the independent This is Money savings tables. Previously, it was offering two per cent over a year and 2.2 per cent over two years on an ‘invitation-only’ basis.
Just to put that in context, the top 10 one year fixed rate bonds in the UK right now read as follows:
These are all fringe banks, niche banks, neobanks. Where are the mainstream banks? Offering 0.55%. Nearly 1% less. So unknown banks attract people through interest rates. That’s an unsustainable strategy. Maybe you attract through interest rates, and then retain through a great customer experience … except it tends to be that people who move for interest rates will leave for better interest rates just as quickly. That’s why it’s unsustainable.
Then, when the bank gets big enough to be noticed, it will be acquired anyway, or the big banks will offer a rate churn to get those customers or they will copy their offer. It’s a Catch 22.1
This was brought home to me hard by the stats I now use often: despite the launch of half a dozen new banks in the last few years, the largest lenders still have 77 percent of the market. They had 69 percent market share in 1999.
So the Catch 22 is this: there are no challenger banks. There are just niche banks that offer differentiated services that gradually force the incumbent banks to pull their socks up, change, adapt and keep up. But there is no big rush to do so, as customers don’t switch and their monopoly remains.
As a result, we beat up the big banks for not being customer focused, and always have and always will; and we applaud challengers and neobanks, knowing full well that they’ll never win. Just a thought.
Just in case, what is a Catch-22?
A Catch-22 is a paradoxical situation from which an individual cannot escape because of contradictory rules. The term was coined by Joseph Heller, who used it in his 1961 novel Catch-22. An example would be: “How am I supposed to gain experience for a job, if I’m constantly turned down for not having any experience?”
Catch-22s often result from rules, regulations, or procedures that an individual is subject to but has no control over because to fight the rule is to accept it. Another example is a situation in which someone is in need of something that can only be had by not being in need of it. (A bank will never issue someone a loan if they need the money.) One connotation of the term is that the creators of the Catch-22 situation have created arbitrary rules in order to justify and conceal their own abuse of power.