Digital Banking

08 December, 2014 by Julian Barker-Danby | Strategy

I have read a lot of articles recently asking where is the “Uber of banking?” – a new entrant that is going to disrupt and transform the banking industry.

Uber has transformed the taxi industry. How has it done this? Well as a taxi user there are three main issues:

·         Difficulty in finding a taxi that is free for hire

·         Waiting for ages in a taxi rank queue

·         Dodgy or dirty vehicles

Uber solves these almost instantly. You download the app, a few taps and addition of card details and all your problems are solved, probably in around 30 seconds. 

So how can we apply this level of disruption in banking? Well it is not so easy.

The main problem is that the current banking model requires a host bank in which to deposit your money into an account that then offers you account services. Therefore, if you want to change banks, you need to “switch” and move your current account from one bank to another. 

The big banks (for example Barclays, Lloyds, RBS, HSBC, Co-op) have about 75% of the market share of around 55 million account holders in the UK.  The Payments Council, trying to encourage competition, introduced an “account switching service” which would allow you to move banks and all your regular payments would be moved across. More recently they took steps to reduce the time this takes to 7 working days.

In October 2014 various media outlets highlighted a big jump in the number of people switching by about 22%. But in reality the absolute number actually switching is still tiny at around just 1% of account holders and the number has fallen recently back to early 2014 levels. So why do I, a millennial (according to the Time Magazine definition anyway) and a digital banking “expert”, still use the same bank after 25 years?

Well the problem is that switching is not so simple. Here is a list of what you would need to do:

·         Contact your new bank to initiate the switch service

·         Setup continuous card repayments (kind of like a Direct Debit but for cards) because the scheme does not cover these

·         Update your card details at all the retailers and/or digital wallet providers you use online (I have at least 50 of these!)

·         Tell your friends your new bank account details within 36 months of switching so they can send money to you (one alternative to this is transferring by mobile phone number).

·         Check that nothing goes wrong with key payments such as mortgages, rent, salary etc.

 

It is also worth noting that the switching service would not move your loans, mortgage or savings accounts you might have with that bank.

Because of this and despite the Payments Council’s attempts, switching is still a pain and the result is a huge hurdle of inertia and apathy for any new entrant into the market to overcome. Recently the Financial Conduct Authority did a study into account switching and found that, in addition to apathy and concerns over things going wrong, only 41% of consumers were actually aware of the service.

A number of people have been campaigning for account number portability, a bit like when you move mobile phone providers and you keep your phone number, but for bank account numbers. I’m not convinced it would make things significantly easier, except maybe for small businesses who could avoid asking their customers to change their details.  It would also require some pretty significant IT infrastructure changes to support by the current banks. It is possible that consumers might feel it is more convenient if they can retain their existing details, and therefore be more inclined to switch, but I am yet to be convinced.

One way to look at this is to forget about existing customers and focus on the younger generation who are yet to open their first bank account. This way you get to skip over the account switching problem. There must be several hundred thousand of these types of account opened every year.  One additional hurdle to overcome is the low level of financial literacy in the UK, a study by the Money Advice Service finding that just 16% of adults can identify a balance on a bank statement. From this low financial literacy rate you could then surmise that young people are likely to follow their parents for bank choices in the absence of better knowledge.

So what is next? Despite the challenges, it is an exciting time for the banking industry. There are a lot of new banking license applications in progress with the likes of Atom, Starling and Flip promising launches in the next 12 to 18 months.  I, like others, are fascinated with what they will come up with and what proposition they are going to offer potential customers in order to attract them.

Any new entrant needs to find a way to overcome this switching inertia hurdle, and it won’t be easy. We will have to wait and see if their focus on providing an exceptional digital experience and customer service will be enough of a carrot for most consumers (me included) to finally make the switch.