The End of the Food Chain

I still remember the time before 2020. During lunch breaks, many “finance people”, lawyers and bankers met in Canary Wharf, sometimes a little more centrally in the City of London, in small restaurants, cafes and snack bars. Nobody paid cash. But everyone had a card in their hand that either looked like Sophia Loreen’s lipstick (pink red) or bright green. Everyone, really everyone, was either a Monzo or WISE customer. I myself didn’t have an employee at Deutsche Bank London, who doesn’t have one of these two cards.

A lot of time has passed since then. Every trader knows that time passes faster in the bubble than in the real world outside.

The United Kingdom’s banking sector is undergoing a seismic shift, propelled by the rapid ascent of Fintech companies. These innovative startups are reshaping financial services, prompting traditional banks to confront unprecedented challenges or risk obsolescence. For some legacy banks, this was ultimately the end. My pity is limited, as these companies have missed out on innovations for decades, closed their eyes to a completely new world and resided in their glass towers like the Queen of England, Scotland and Wales, only without tea and dogs, but with Scotch and Soda.

Fintech’s Rise:

Over the last decade, the UK has become a global fintech powerhouse, with London as its epicenter, specifically the City of London and Canary Wharf. As of 2022, the UK Fintech sector boasted over 1,600 companies, employing over 76,500 people and attracting a record £4.5 billion in investment in 2021 alone. Money always goes where it is loved and pampered. And traders and investors are good at this discipline. We even love it.

Digital banking pioneers like Revolut, Starling Bank and Monzo have amassed millions of customers, challenging incumbents with their user-friendly interfaces and innovative features. Monzo, for instance, surpassed 5 million users in 2021, while Revolut’s valuation soared to £24 billion in its latest funding round.

Fintech’s impact extends beyond banking, with companies like WISE revolutionizing international payments. Wise facilitated £54 billion in cross-border transactions in 2021, offering transparent fees and real-time exchange rates. That was 3 years ago and the market trend has continued to be strongly bullish. Robo-advisors have democratized investing, with platforms like Nutmeg managing over £4 billion in assets. Nutmeg reported a 57% increase in customers during the pandemic, reflecting growing demand for digital investment solutions. Blockchain and cryptocurrency startups, including Blockchain.com and Coinbase, have gained traction, attracting users seeking alternatives to traditional banking and investment avenues.

Traditional Banks’ Struggles:

Legacy infrastructure hampers traditional banks’ agility and innovation. Outdated systems inhibit seamless digital experiences, contrasting sharply with Fintech’s nimble, tech-driven solutions. High operating costs burden incumbents, with brick-and-mortar branches and legacy operations contributing to inefficiencies (and that doesn’t mean the cost of scotch and soda). A study by McKinsey found that legacy costs account for up to 80% of traditional banks’ IT budgets.

Consumer preferences have shifted towards digital-first experiences, exacerbating traditional banks’ challenges. Data from UK Finance reveals a 30% decline in branch visits between 2017 and 2021, as customers embrace online and mobile banking. In 2023 this number will have increased again to over 50%.

The difference between bank customers in London up to Zone 5 (e.g. Woolwich, Arsenal) and all customers who live further away from the city is extreme. Customers in more central residential areas almost exclusively use digital banks. People outside either don’t have accounts, are NatWest customers, or pay in cash. “The Matrix” becomes reality and London is the capital of it. And we, the traders, brokers and bankers, are the architects of this “city”. We didn’t create the construction plans, but we are helping to build the digital infrastructure. We are a big part of this digital transformation.

Regulatory compliance poses another hurdle for traditional banks, with stringent requirements increasing operational complexities and costs. Deloitte estimates that UK banks spend £6.4 billion annually on compliance-related activities, diverting resources from innovation and growth initiatives. Customer satisfaction with traditional banks has declined, as evidenced by a 2021 survey by the Competition and Markets Authority (CMA), which found that only 57% of customers were satisfied with their current account provider.

Collaboration? Innovation? Death sentence for old banks?

Recognizing Fintech’s disruptive potential, traditional banks are embracing collaboration as a survival strategy. But the efforts are similar to an untrained guitarist applying to Mike Oldfield. Some things are doomed to fail right from the start. Barclays, for instance, launched its Rise accelerator program to nurture Fintech partnerships and drive innovation. But I wouldn’t bet that Barclays will still be around as a traditional bank in 5 years. There is a higher chance that Leicester City will win the Champions League.

Acquisitions and partnerships enable incumbents to leverage Fintech’s technology and expertise while enhancing their digital offerings. Lloyds Banking Group acquired digital wealth manager Embark in 2021, signaling its commitment to expanding digital wealth management services. For the full year 2023, Lloyds reported net interest income of £13,298m, up from £12,922m (2022).

Regulatory sandboxes and innovation hubs foster collaboration between regulators, Fintech startups, and traditional banks, facilitating experimentation with new technologies and business models. However, many old banks are only now realizing that they are the little fish in the sea. They are now the end of the food chain after 300–400 years. Perhaps Lloyds still has the best chance of surviving the next few years. It would be a shame to lose a traditional house like Lloyds.

In conclusion, the rise of Fintech companies in the UK is reshaping the banking landscape, forcing traditional banks to adapt or face irrelevance. With Fintech’s continued innovation and collaboration, the future of finance promises to be more inclusive, efficient and easier.

The rest of the banks will simply die. And we’ll bring the shovels.