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Can new banks keep up with old banks (Part Two)?

In part one I talked about bank systems, structures and people holding back innovation due to their legacy, and asked whether legacy structures could be migrated fast enough to keep up with the new guys? 

The answer to that question is yes, because banks also have legacy customers. 


That is why half the banks costs are wrapped up in legacy, as customers want branches to stay, to keep using cheque books, to have access to tellers and more.  This is why banks never close down old things, but just add new to the old.  It is because they cannot get rid of the old because the legacy customers want to keep them.  That is also where incumbent banks have the advantage, in that they have customers.  Many have millions of customers, and customers are unlikely to change easily.

For example, Metro Bank are gaining account openings at the rate of around 15,000 a month through 40 branches but how many are switching their main account to Metro Bank?  Getting numbers in this area is difficult, but the Payments Council published figures in January that show who is using the account switching service, and the winner by far is Santander.

The winners and the losers

Brand 

Gains

Losses

Net gains 

Santander 

78,734

18,812 

59,922 

Halifax 

40,794

25,669 

15,125 

Nationwide 

25,243

10,383 

14,860 

Low volume participants (C Hoare & Co, Virgin Money, Cumberland Building Society, Reliance Bank and Tesco Bank) 

689 

499 

190 

Bank of Scotland 

3,790 

4,093 

-303 

Danske Bank 

541 

910 

-369 

Bank of Ireland (UK) – includes Post Office 

333 

820 

-487 

AIB Group (UK) p.l.c – inlcudes First Trust Bank and Allied Irish Bank 

159 

956 

-797 

Ulster Bank 

180 

1,515 

-1,335 

Lloyds Bank 

53,019

59,335 

-6,316 

Clydesdale Bank – includes Yorkshire Bank 

1,117 

8,955 

-7,838 

RBS 

2,735 

11,258 

-8,523 

HSBC – includes First Direct and Marks & Spencer 

18,949

30,082 

-11,133 

NatWest 

12,674

27,542 

-14,868

Co-operative Bank – includes Smile 

4,508 

23,611 

-19,103

Barclays 

9,455 

31,574 

-22,119 

Source: paymentscouncil.org.uk. The figures only include the customers who used the switching guarantee service.

Why is Santander doing so well?  By buying customers.  Their 123 account is loss leader, but it is proving very effective in gaining short-term market share.

So how are the new banks going to compete?  Offering a loss leader product to get the rate switchers to switch?  Or hoping that being the new, cool, sexy kid on the block will make things happen.

I can tell you now that the latter will fail, and customer acquisition and change is the biggest challenge for any new start-up.  It’s why mBank often said that their challenge was getting 4.3 million customer to follow them in their path to digitise, getting them off the old bank platforms and onto the new.  They point out that the fresh kid start-ups are minnows by comparison.  As a digital only play in Germany, Fidor Bank has gained less than 100,000 customers; Che Banca in Italy, backed by a bigger bank (Mediobanca), has gained just half a million even with distribution through bank branches.

So the core question is: can the new banks sustain themselves when they are going to face years of losses as they build their new bank and have to attract customers?  

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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