The rise of challenger banks - unprecedented or expected?
Have the well-established banks had it way too easy for way too long? If history is anything to go by, you might say “yes, absolutely”. The Global Financial Crisis of 2007-8 is considered by many economists to have been the worst crisis since the Great Depression of the 1930s.
It was concluded to be the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street and the UK banks”.
One blessing in disguise is that the market is now heavily regulated, with the FCA and PRA replacing the FSA. Subsequently there are much tighter controls and rigour around bank and building society lending requirements, resulting in stricter lending criteria across the board for financial institutions.
In addition to this regulatory squeeze we have seen the call for ring fencing of the retail banks from cross fertilising into their investment arms – a further attempt from the Bank of England to keep an eye on the banks’ fund management to avoid anything like 2007-8. The BoE stated in the press recently that bigger banks will be subjected to two stress tests per year, looking at cyclical and wider risks to assess if they are still able to lend money in difficult economic conditions.
The Bank of England cannot afford another crippling crisis whereby they had to bail out a long established multi-billion pound bank due to poor regulation and overzealous lending. So quite rightly they are tightening the screws on the entire Financial Services industry.
Challenger banks make up less than 1% of the market at present so there is a very long way to go to wrestle a competitive market share from their long established rivals. There is definitely an appetite for something better and different, and many Challengers are now focusing on consumer and digital.
What a lot of people don’t know is that Challenger banks offer consumers a substantially better return on investment than the Big Four banks. You can also reside yourself in the comforting fact that any savings you have with the Challenger bank will be covered by the Financial Services Compensation Scheme up to a maximum of £85,000.
The Big Four banks are trying to compete by offering cash back incentives with heavy prime time advertising and a celebrity or two. They are pushing for challenger banks to pay an additional 8% of UK profits in corporation tax (to be confirmed). As you can imagine, there is a lot of resistance from the boards of these Challenger banks and rightly so.
In a recent BBC article the CMA said customers should be prompted to change providers. According to the statistics, 57% of consumers stayed with their provider for more than 10 years and 37% - for more than 20 years, whilst only 3% had switched in 2014. Unfortunately I am in the former category and really do have the appetite to look at a challenger bank.
It’s no wonder Challenger banks have featured heavily in recent press. I think it’s about time people had a little more choice and were treated with a lot more care - wouldn’t you agree?
For me, it’s a no brainer – consumers today want choice and quality that suits their individual needs, so why shouldn’t that be the same when it comes to banking?
Rob Jefferies is the Principal for The Financial Services at Interim Partners.