The dominance of traditional retail banks is “starting to weaken” due to the rise of digital challenger banks, the UK financial watchdog said.
The Financial Conduct Authority (FCA) said the shares of personal current accounts and micro businesses held by challenger banks increased between 2020 and 2021.
The change was driven by “digital innovation and changing consumer behavior”, the FCA said.
At the same time, the market share of the largest retail banks has fallen, undermining their “historical advantages”.
The FCA, which made the comments in an update to its Retail Banking 2018 Strategic Reviewsaid the development has led to better choices and lower prices for consumers.
Online banks, including Starling, Monzo and Revolut, have attracted huge sums of venture capital as investors bet on them to loosen the iron grip that big banks have historically enjoyed in the current account market.
Starling Bank, which has more than 2.7m open accounts, raised a total of £322m last year, giving it a valuation over $1 billion.
Meanwhile, digital bank Monzo saw its valuation soar to $4.5 billion after a $500 million funding round. What followed was a torrid period for the neobank as it battled heavy losses and struggled to monetize its five million customers.
The FCA said the adoption of digital banks by consumers and businesses has been “accelerated” by the pandemic.
Another digital fintech challenger to benefit from this trend is UK-based trading finance platform Tide. The SME banking provider said last week that it had added 100,000 customers in 2021, a 30% year-on-year increase.
“Competitive pressures and innovation are beginning to benefit retail banking customers, with greater choice, lower prices and more convenient ways to bank,” said Kate Collyer, chief economist at FCA. “But changes that can benefit many of us can also pose a risk to those in vulnerable situations, which is why we have put in place guidelines on closing branches and ATMs. We are also consulting on a new requirement for consumers to set higher expectations for standards of care provided by businesses. »
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