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When does a start-up have a balance sheet of $ 3 billion? When it’s JPMorgan Chase.
The arrival of this agile digital neobank-colossus from global banking to the UK market raises the stakes for retail banks already struggling with low interest rates, higher savings rates and less borrowing.
Traditional high street banks seem stuck between rapid growth, popular fintech achieved on the one hand and through well-funded global competition on the other. But the pinch of this digital vice may not be felt where it is most evident.
Inertia is retail banking’s best friend. Despite efforts to shake up the current account market – the loss-making gateway drug for retail banking – the change remains at incredibly low levels. “The majority of neobank clients are still secondary accounts, with the main one still held by the incumbent, and traditional banks have implemented many account features that differentiate between challengers,†said Michael Harding at Oliver Wyman .
Copying new gadgets or features cheaply and easily kept accounts that could have been hijacked. Fintech rivals could move into more lucrative fields such as small business banking: Revolut added 24 new retail or business products in 2020, according to Citi. But the path from a hyperactive launch schedule to profitability remains unclear for many.
Chase is a different, more patient beast. The fact that the US bank has not (publicly) put a target customer base on its UK business, and its intention to use it as a model for other international markets, suggests that it is focusing as much on translating openings. From account into profitable users of multiple products it comes to gaining low traction side accounts. This should certainly be his marker of success.
Regardless, the problem for incumbents is also part of the appeal of a launch from scratch by Chase: the target customers of a digital-only startup and an established full-service bank. more and more alike.
The UK has made five years of progress in digital engagement in 2020, according to Lloyds Bank. ATM withdrawals fell 39%, according to UK Finance, while the use of cash in transactions, at 17%, fell much more and faster than expected even two years ago. The use of online banking services grew fastest among those over 45 during the pandemic – and, according to McKinsey, there is now no marked difference in willingness to use digital banking services between age groups.
For banks designed for a face-to-face world, that means a familiar headache: costs. Operating costs per customer for Britain’s biggest banks have remained stubbornly high over the past decade at around £ 200, according to Oliver Wyman; large-scale neobanks work at a tenth of that (although with decrease in revenue per customer).
Part of the problem will be real estate, and accelerating branch closures are increasingly attracting political and regulatory attention with a looming battle on the “last in town†provision. This could reignite a debate on state support for cash distribution, as suggested by Future of finance report produced for the Bank of England in 2019.
But it will also mean examine legacy computer systems and the people needed to operate them. Historic digital start-ups, like the B from NatWestó, were not always closed because they could not function, argued a banking expert, but because that money would be better spent improving the systems of millions of customers rather than pursuing a distinct demographic whose online behavior converges with the market standard.
A large number of customers and huge amounts of data is not very useful if it is distributed among existing divisions and operated manually using old technology. And survey data suggests that investors, who are typically skeptical about investments in this area, see a lot more opportunities to cut costs with digital spend than increase revenue with the latest Whizzy offering.
The digital challenge is both internal and external.
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