Virtual banks have reinvigorated competition in financial services, for both consumers and businesses. They have provided new and improved services to customers who have for so long had to make do with the less-than-perfect services provided by traditional banks.
The success of these virtual banks in winning business from traditional players – as well as the fact that established brands have begun to launch digital offerings that copy many of the innovations introduced by virtual banks – are both testament to this.
The question now is whether virtual banks can sustain this level of competitiveness, as traditional banks use their financial muscle to develop digital platforms and services to enable them to catch up.
For example, RBS has launched a digital bank called Mettle that offers a business-focused current account, along with additional services such as invoicing and cash-flow forecasting for small-business customers via a mobile app. Mettle is built on a new digital platform, which should enable the rapid introduction of new services and functionality. HSBC and Santander UK reportedly have similar plans for digital brands in the pipeline.
But there are a few reasons why virtual banks should be able to stay ahead of the chasing pack of banking giants both in the short and longer term.
The convenient and user-friendly services that virtual banks offer are built on digital platforms that take advantage of rapidly developing internet infrastructure. In contrast, traditional banks have considerable legacy infrastructure and culture that make them less agile. Years of work will be needed to transform their operations before they can truly compete with their digital rivals.
In addition, schemes like Banking Competition Remedies help UK startups and online-only banks win business from established rivals to boost competition in lending to small businesses.
In February this year, Metro Bank, Starling Bank and ClearBank (together with business banking service provider Tide) received a total of £280 million from the fund to be spent on developing and improving the financial products and services they offer SMEs. More recently, Nationwide Building Society, Investec Bank and The Co-operative Bank were granted a combined £80 million.
These factors will provide a short-term advantage, but how will virtual banks fare once the established players have transformed themselves to offer the digitally enabled and responsive services customers are demanding?
The simple answer is that they could well race even farther ahead through continued and sustained innovation.
In a recent interview with Wired, Monzo co-founder Tom Blomfield said the fact that more banks are offering services pioneered by his virtual bank business (which is currently acquiring 100,000 new customers per month) is forcing Monzo to continue to innovate.
Monzo innovations that have already been adopted by major high-street banks include the option to temporarily ‘freeze’ a debit card if the user suspects it has been lost or stolen, and the ability for online customers to track their spending using Google Maps.
But Blomfield is confident his company can stay ahead. The major reason for his optimism is that legacy banks are focusing on where virtual banks are now, rather than where they will be in the near future. They will be chasing a constantly moving target.
Like other virtual banks, Monzo stands out for its transparency and the customer and software developer communities it has built up.
Monzo’s customer forum, for example, allows customers to vote for new features. Another differentiator is support for financial inclusion, with many virtual banks offering people shut out from traditional banking products a way to make payments online without the risk of going into debt, giving them the ability to restore their financial standing.
The final factor in favour of virtual banks cited by Blomfield is the health of the fintech ecosystem in Europe: “I can't remember a time ever in the history of European technology where three companies [Monzo, N26 and Revolut] have raised hundreds of millions in a single sector, let alone one company.”
While it could be argued that virtual banks should make hay while the sun shines, it’s likely that the brands that innovate effectively will continue to have success long into the future.