Digital challengers ‘starting to weaken’ stranglehold of large banks – FCA

challenger banks fca

The dominance of traditional retail banks is “starting to weaken” because of the rise in digital challenger banks, the UK’s financial watchdog has said.

The Financial Conduct Authority (FCA) said that shares of personal and micro-business current accounts held by challenger banks rose between 2020 and 2021.

The shift has been driven by “digital innovation and changing consumer behaviour”, the FCA said.

At the same time, the market share of the largest retail banks fell, undermining their “historic advantages”.

The FCA, which made the comments in an update to its 2018 strategic review of retail banking, said the development has led to better choices and lower prices for consumers.

Online banks including Starling, Monzo and Revolut have attracted vast sums of venture capital as investors bet on them loosening the iron grip historically enjoyed by larger banks in the current account market.

Starling Bank, which has more than 2.7 million open accounts, last year raised a total of £322m, giving it a valuation of more than $1bn.

Meanwhile, digital bank Monzo saw its valuation soar to $4.5bn following a $500m funding round. It followed a torrid time for the neobank as it wrestled with heavy losses and struggled to monetise its five million customers.

The FCA said that consumer and business adoption of digital banks was “accelerated” by the pandemic.

Another digital fintech challenger to benefit from this trend is UK-based business financial platform Tide. The SME banking services provider said last week that it added 100,000 customers in 2021 – a 30% year-on-year rise.

“Competitive pressures and innovation are starting to deliver for retail banking customers, with greater choice, lower prices and more convenient ways to bank,” said Kate Collyer, chief economist at the FCA. “But changes that may benefit many of us can also be a risk to those in vulnerable circumstances, which is why we have put in place guidance on the closure of branches and ATMs. We are also consulting on a new consumer duty to set higher expectations for the standard of care that firms provide.”