The UK's challenger banking movement is approaching its tenth year and competition has never been fiercer.
Neo banking is not new anymore. In fact, it’s a decade or so old and competition is starting to get very interesting.
Now, ten years after the UK's Financial Services Act 2012 which kicked off the trend we have a host of established digital challengers such as Revolut, Monzo and Starling Bank. The latter’s CEO and founder Anne Boden even made it on to Question Time last week.
For fintech fans, unfortunately, the panel didn’t tackle the biggest question though. What will happen now that two very large incumbent banks JP Morgan and Goldman Sachs are happily investing vast amounts of cash from their weighty balance sheets to take on the fintechs?
Last month JP Morgan shared the numbers on its bold $450m bet on the UK's digital banking market which is less than a year old.
Chase UK, the digital-only banking brand of the largest US bank, wants to eat the hard-won lunches of the likes of Monzo, Starling and Revolut. You have got to hand it to Sanoke Viswanathan, who leads Chase in the UK.
In two-thirds of a year - and a tricky one at that - the bank has attracted more than £8bn of deposits and has already reached half a million UK customers.
The figures came from the US banking giant’s 2022 investor day and highlight just how much it is willing to splash the cash in order to play in the fintech space. It also of course acquired robo adviser Nutmeg in the UK, as well for c.$700m last year. Key to its success is customer growth and revenue.
Goldman Sachs’ Marcus brand is not technically a neo bank given it only offers savings accounts here in the UK. However, like JP Morgan it is showing a profound willingness to invest - or lose - money - in building up its consumer banking push.
This week it revealed it will lose more than $1.2bn on its consumer business this year alone. Most of that is in the US where it also offers loans and the bulk of its $100bn of customer deposits sit.
Chase pays 1 per cent cashback on spending, and 5 per cent interest on roundups and has instant-access savings account with 1.5 per cent interest. All a very enticing way to get deposits but comes at a substantial cost. Roughly (caveats aside), this could imply c.£120m per year paid out in interest alone.
Higher rates and more deposits make this much higher. Even one of the world's largest banks won't pay that forever unless it starts to see money flowing in the other direction.
Marcus is also staying hyper competitive in the savings market with a 1.3 per cent rate in the UK and 1 per cent in the US.
Monument, Pennyworth and Kroo, which just won its full UK banking licence, are all examples of neo banks at earlier stages demonstrating investors still want to back the sector. Cashplus and Zopa meanwhile have made the move to become neo banks after many years as alternative lenders.
In Australia, meanwhile, the country’s first ever digital bank Volt Bank is set to close and hand back deposits to customers alongside its banking licence proving the model is far from guaranteed to succeed.
While it may on the face of things look like a simple 'David and Goliath' moment for neo banking, fulfilling the long-told prophecy of a huge bank coming to eat the fintech startups' lunch, the next few years will prove if the very, very expensive gamble pays off for Chase and Goldman.
Or, and this is where my money - pun intended - is on; the fintech competition starts to heat up. The next year or two will be critical.