Why 2015 won't be the year of the challenger bank

It’s a financial world: Why 2015 won’t be the year of the challenger bank

Why 2015 won’t be the year of the challenger bank

When
politicians and consumer finance champions talk about challenger banks they are
looking for new players to eat into the 77% of the current account market and
the 85% of the small business banking market that the Big 5 (Barclays, Lloyds,
HSBC, RBS and Santander) currently have.

The
figures from the Financial Conduct Authority for potential new banks could give
the impression that 2015 could be the year that finally the Big 5 sees their
market share being significantly reduced:

6
banking licences issued
4
banks proceeding through the application process
26
new banks being discussed

In
addition there are already the likes of Nationwide, Co-op, TSB, Yorkshire Bank,
Clydesdale Bank, Metro Bank, One Savings Bank, Handelsbanken, Aldermore,
M&S Bank, Tesco Bank, Virgin Money and Shawbrook operating in the UK.

However
on closer scrutiny the picture isn’t quite as rosy and is unlikely to cause any
executive from the Big 5 banks to lose any sleep.

The
existing “challengers” broadly fall into one of four camps.

Camp 1: Existing established
Players:

Post
Office (Bank of Ireland)

The
established players have been operating current accounts in the UK market for
many years, Nationwide being the newest of these to this specific market.
Despite having been in the market for some time these established players’ impact
on the market share of the Big 5 has been minimal. Nationwide is the most
proactive in trying to acquire new customers within this group as is reflected
by their being one of the biggest beneficiaries since the introduction of 7 Day
Switching. Their market share is small but growing and its offering is
something that clearly appeals to customers who do not like the Big 5 banks.

Camp 2: Banks created
from former banks:

One
Savings Bank (Kent Reliance Building Society)

TSB
(Lloyds Banking Group)

Virgin
Money (Northern Rock)

Williams
& Glyn (RBS) – still to be launched

These
are all banks that have (or will) relaunch themselves and have existing
customers, branches and IT infrastructure. What this means is that in terms of
offering a true alternative to the Big 5 banks they are limited by the legacy
technology and cost bases they have inherited when they were set up. In the case
of TSB and Williams & Glyn both of these were compulsory disposals by their
parent banks following the 2008 financial crisis, however both of them have
significant shareholdings by Lloyds Bank Group (TSB) and RBS (Williams &
Glyn) so whether they can really be seen as challengers when they are still
owned by one of the Big 5 is questionable.

One
Savings Bank does not offer a current account and is focused on the specialty
lending sector. Virgin Money does not currently market a current account.

Camp 3: Banks owned
by larger organisations
These
three are each quite different.

Handelsbanken
which has more than 175 branches in the UK has its parent company in Sweden. It
is primarily focused on SME banking but does offer a personal current account.
It is building a presence and has very high customer satisfaction but is still
sufficiently subscale to not be a threat to the market share of the Big 5.
However it is picking off customers that the Big 5 banks would rather not lose.

Tesco
Bank has only relatively recently launched its current account so it is
difficult to judge how successful it will be. With the size of the Tesco
customer base and the insight it has into its customers from the Clubcard it
has the potential to be a serious challenger however achieving sufficient scale
will be beyond 2015. There is also a possibility with the woes of Tesco that
the bank could be a candidate for disposal which could change significantly
Tesco Bank’s market position.

M&S
Bank while it does offer current accounts cannot be seen as a challenger as it
is owned by HSBC, one of the Big 5 Banks.

 

Camp 4: Greenfield
challenger banks

These
(and there are more) are the genuine upstarts the ones that are doing or
planning to do something different in the market. The last three are still to
launch. They are all primarily Private Equity funded.

Of
those listed on Metro Bank offers a personal current account and Atom has a
stated intention to offer one.

What
each of these Greenfield challengers does not offer is scale and will certainly
not bother the Big 5 banks in 2015.

Big 5 bank executives
can sleep easy in 2015

When an examination is made across the four
Camps as described above the inevitable conclusion is that while there may be
some headlines and excitement about the number of potential challengers in and
coming into the UK banking market there can be no doubt that in 2015 there will
be very little dent in the current account market share of the Big 5 banks.

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