The new financial frontier: How digital banks and fintech pose a threat to traditional financial institutions in the United Kingdom

According to a report published by Boston Consulting Group (BCG) and QED Investors, the fintech market is estimated to grow from $245 billion, reaching a market revenue of $1.5 trillion by 2030. The report also states that the fintech market, which currently holds a 2% share of the $12.5 trillion global financial services revenue, is expected to grow to 7%. Out of this growth, the banking sector is estimated to capture 25% of the revenue by 2030.

This ultimately results in the form of increased market volume estimated to reach $1,219 billion by 2028. These stats clearly indicate a shift in consumer behavior from traditional banking to the digital banking model, redefining the way people manage their money, financial services and engage with the financial industry.

Digital banks

Digital banks, also known as neobanks, are now emerging as a disrupting force within the finance and leasing industry. These banks are mobile-first, app-based banks that do not exist physically. Unlike traditional banks that follow the brick-and-mortar model, these banks exist online only.

Due to their online presence, costs associated with the traditional banking model are reduced or even eradicated, making these banks more cost-effective. Further, they are more user-friendly, generally with better interest rates, cashbacks and rewards that traditional banks do not offer their customers.

The emergence of digital banks in the United Kingdom

Recently, the digital banking landscape within the United Kingdom has seen remarkable growth and transformation. According to a report published by Finder in February 2023, 24% of people in the UK are aware of the concept of digital-only banks, which increased from 9% recorded in 2019.

Stats show that approximately 49% of people who intend to open digital-only bank accounts cited convenience as a driving factor, whereas 16% intend to open digital-only bank accounts due to the lack of physical branches in their area. Figures further show that by the year 2028, approximately 22.6 million Britishers intend to open their accounts on digital-only banks.

Key fintech players in the United Kingdom

Monzo, a UK-based digital bank established in 2015, is a growing disruptor that operates solely online and is one of the leading digital banks in the UK used car market. Another major player within the digital banking industry, Revolut, experienced exponential growth from 2018 to 2022, increasing from 1.5 million to 25 million customers, making it the biggest European digital bank with the highest recorded customer base. Checkout.com is another global payment solution provider that excels in the UK's finance and leasing industry. It was founded in 2012 and holds funds of $1.8 billion.

Starling Bank is another example of an emerging digital bank in the UK market, with a customer base of approximately 3 million and a valuation of £2.53 billion. Some more key players in the fintech industry include LendInvest, Prodigy Finance, SumUp, OakNorth Bank, among others. All these key players within the digital banking sector of the UK market indicate the trend shift from traditional to digital banking.

JP Morgan Chase CEO, Jamie Dimon, at the JP Morgan Global Markets Conference in Paris, shared that "Banks are now facing a threat both in the form of fintech's and big tech companies." Furthermore, he said "Fintech companies are playing an effective role in building digital and physical products at the same time. From loans to payments to investments, these fintech's have done a great job in accomplishing an easy-to-use, fast and efficient product."

Ed Lane, VP Sales EMEA at nCino, also stated that "The UK has become a global champion in incorporating innovation in the financial services sector, especially London, which is topping the charts in producing the next generation of fintech giants."

Why digital banks are a threat

Customer-centric approach

Digital banks are playing an impressive role in revolutionizing the banking sector, as they tend to focus more towards customer behavior and their consumer journey, making the user experience more efficient, which gives them a competitive edge over traditional banks. Unlike traditional banks, which provide a one-size-fits-all model, digital banks focus on providing tailored solutions, making the experience for each of their customers hassle-free and user-friendly. They provide user-friendly apps with better and interactive user experiences, seamless online services available at their customers' touchpoints and quick problem resolution. This customer-centric approach results in the form of engaging and satisfying banking experiences for customers.

Swift and efficient services

Fintech companies play a critical role in the swift and efficient delivery of financial services. The digital transformation incorporated into their operations enables them to smoothly provide services like expedited payday loans and peer-to-peer lending, reducing the time and cost to access essential funds. In contrast, traditional banks engage their customers in a lot of paperwork and prolonged waiting processes, making it an inconvenient user experience for the customer. The fast, smooth and paperless process with no prolonged loan-granting experience deployed by fintech companies resonates with customers seeking convenient financial solutions, which demonstrates a shift of customers from conventional banking to digital banking alternatives offered by these fintech innovators.

Data-driven decision making

Fintechs' use of data analytics and credit scoring is playing a critical role in transforming the way lending decisions are made. These companies use data-driven decision-making models by assessing borrowers' financial information and fetching all the transactional data from various sources. This empowers these fintechs to reduce their reliance on traditional credit scoring models. This approach makes the loan origination process a lot easier and creates opportunities for people with diverse financial backgrounds who face challenges while attaining loans from banks using a traditional banking approach.

Alternative lending

Digital banks are focusing on filling a gap that traditional banks have created. These fintechs are focusing on providing smooth lending options to small and medium-sized businesses (SMEs). While traditional banks follow protocols and prolonged processes before providing loans to these small startups, fintech companies have stepped up and made it easier for these small businesses to acquire loans, making it a convenient and hassle-free process. These fintech companies provide a simplified and easy access application process and quick fund allocation, making digital banking a more convenient option for startups.

Competitive interest rates

The introduction of fintech companies and digital banks in the finance and leasing sector has played a critical role in replacing traditional banks, as they offer competitive interest rates to their customers. In contrast to traditional banks, digital banks provide lower interest rates to their customers, which attract customers seeking higher returns on their savings. This creates a shift from traditional banking towards the digital banking model. This competitive interest rate advantage is reshaping how consumers view their banking options, empowering them to move towards options that provide them with greater financial benefits.

Blockchain and cryptocurrency

The introduction of technologies like blockchain and cryptocurrency has empowered fintech companies to offer decentralized and secure financial solutions to their customers. This innovation challenges the traditional financial system's reliance on centralized intermediaries, including banks. These technologies provide customers with greater control over their financial transactions and investments. The rise in blockchain technology and Bitcoin strengthens consumer trust in fintech companies as they ensure better security in their financial transactions compared to traditional banks.

Personal finance management

Fintech companies are also focusing on providing personal finance management tools that enable customers to manage their finances at their fingertips. These Software-as-a-Service (SaaS) solutions enable customers to streamline their personal finances and provide them with easy access to a range of tools that can assist them in money management, budgeting and investment tracking. This convenience, paired with the ability to have a readily available comprehensive overview of their finances, attracts customers who value greater control and accessibility in managing their money. This shows that digital banks are effectively addressing the changing financial landscape and preferences of modern consumers.

Challenges of traditional banks

Traditional financial institutions are facing a number of challenges in the digitally disruptive financial landscape. One of the biggest challenges is digital disruption. In this modern landscape, fintech companies and digital-only banks have become a greater threat to the traditional banking model. The user-friendly, time-saving and convenient approach provided by these fintechs and digital-only banks makes them a go-to option for consumers.

Additionally, changing customer preferences and subsequent expectations also play a critical role in making digital banks a threat to traditional banks. Customers now demand a more personalized experience rather than a one-size-fits-all approach that traditional banks have failed to provide to their customers. In contrast, digital banks have gained an edge in providing tailored experiences to customers, making them a more preferable option.

How digital banks are affecting the banking industry

The banking industry is undergoing significant change due to the introduction of fintech companies and digital-only banks. Cloud technology allows users to access financial services from any location and at any time. On the other hand, API integrations facilitate seamless interactions between clients and third parties, ensuring customer insights, enhancing trust and promoting engagement. Omni-channel banking, on the other hand, plays a role in efficiently resolving issues and providing personalized services through various digital channels, whereas AI-powered payment systems predict customer behaviors and provide customers with voice-activated transactions. Open banking is also promoting financial transparency with third-party access to customer data that benefits both consumers and businesses. All these trends are playing a significant role in reshaping the banking industry, making it more customer-centric, efficient and adaptable to the digitally transforming financial landscape in the United Kingdom.

Future outlook

The UK fintech industry has expanded rapidly over the past half-decade. Peer-to-peer lending, digital banks and money transfers have played well in the fintech industry. According to stats published by IBISWorld, the industry revenue increased at a CAGR of 6.7%, reaching £12.8 billion in 2023. The digitization of financial services through mobile apps, chatbots and automation has made banking more personalized and convenient for users.

However, accompanying this digitization come challenges such as cybersecurity and fraud, arising from this shift towards a digital ecosystem. These threats require banks to ensure robust security measures and stay onboard with the top trends for financial institutions to avoid any loss. The changing landscape of the automotive digital finance solutions industry requires fintech companies and digital banks to invest in cutting-edge technologies, develop proactive security strategies and stay ahead of information security services to safeguard customer data.

Should fintechs and traditional banks collaborate?

The evolving financial landscape within the financial services and banking sector demands a collaborative approach between fintech's and traditional banks. With the increasing use of technology worldwide, relying on traditional sources will only keep traditional banks out of the league. The increasing use of smartphones and tablets drives the need for banks to prioritize mobile accessibility, enabling clients to access real-time banking information and conduct rapid transactions. Due to the introduction of cloud-based technology, financial services are now available around the globe 24/7.

Additionally, fintech's are focusing on providing security options that ensure the safety of private financial data, a focus that traditional banks may have lagged behind in. Due to this evolving landscape, it has now become both essential and imperative for traditional banks to partner with fintech companies and adapt themselves to keep up with the changing financial landscape. In the United Kingdom and worldwide, traditional banks are experiencing a greater threat due to the introduction of fintech companies and digital-only banks. These fintech companies have posed a threat to traditional banks by providing user-friendly, personalized and convenient banking options with swift and efficient processes available at their touchpoints, as well as competitive interest rates empowering customers to shift from the traditional banking model to the digital-only model. It has now become necessary for traditional banks to collaborate with fintech's to provide innovative, secure and customer-centric financial services. The future of banking relies heavily on how traditional banks collaborate with these fintech's so that customers continue to enjoy convenient, tailored and efficient financial solutions.