KPMG seems convinced we are on the cusp of a banking revolution. It’s most recent report on UK challenger banks considers that, over the next decade, our banking sector “won’t have changed – it will be completely re-invented”.
A new breed of digital challenger – think Atom to Monzo to ClearBank to Starling – seems poised to offer a more personalised, transparent, intelligent way for us to manage our money. Our smartphones already offer biometric security, contactless payment, realtime financial information and the ability for banks and insurance companies to offer us tailored deals based on personal data, location and Facebook likes.
It’s not crazy to believe that the banking sector is about to witness a wave of disruptive innovation on an unprecedented scale: next generation banking fit for the next generation. So why am I not more excited? One reason is that, so far, these digital challengers haven’t strayed far (if at all) from flogging standard banking products. Atom has a logo that changes shape and a bit of nifty facial recognition software, but, once the novelty of these has worn off, it sells a fairly bog standard set of fixed term savings accounts and ‘digital’ mortgages (which are only currently available through a broker). Monzo claims to be “banking like never before,” but it’s really just a prepaid MasterCard with an admittedly nice smartphone interface. It doesn’t offer Apple Pay but it does list “extensive use of emoji” as a USP. Metro Bank has convenient opening hours and provides water bowls and biscuits for dogs, but its range of products is indistinguishable from any other high street bank: ISAs, personal loans, current accounts, buy-to-let mortgages and even safe deposit boxes.
All of these challenger banks in one way or another promise to disrupt the steady world of banking, but there’s little evidence so far of their delivering on this promise. There’s plenty of innovation going on, but it’s all in the wrong place. There’s one key difference between genuine innovation and gimmickry: insight into the user. And it’s difficult to see much evidence of insight in the way challenger banks are currently innovating. Our attitudes and behaviours towards money are intimately related to our sense of identity and remain stubbornly resistant to change. For example, in 2009 the Payments Council proposed a complete withdrawal of cheques by 2018. In technology terms, cheques are a bizarre anachronism, a 300 year-old form of payment that shouldn’t exist in a world where ridiculously cheap, ridiculously fast electronic payment technologies abound. But the proposal caused public revolt and was swiftly abandoned. More than seven years later, people in the UK still write around 500m cheques a year, worth over £1.5bn.
This isn’t to say that people can’t change; only that we change at a pace that suits us. We’re learning to love contactless and mobile forms of payment, but we’re taking our own sweet time. And we’re still a long way from digital banking nirvana. Based on existing technology, it’s possible to a faster, cheaper, fairer, more ‘perfect’ banking system. The problem is that people aren’t perfect and will always get in the way. We’re terrible calculators of risk. We don’t deal particularly well with uncertainty. Many of us struggle to plan for next week, let alone our eventual retirement. And banks – even flashy digital banks – still make some of us suspicious.
Of course this is all terribly generation X of me. Had I been born three years later I would be a millennial: the most optimistic, confident generation in existence, according to Deutsche Bank’s chief international economist. Perhaps if I were a part of ‘generation next’ I’d be more optimistic about the next generation of bank and buy in to the gimmickry a little more. Or perhaps not. A study last year by the Resolution Foundation revealed that, despite all its apparent optimism, the millennial generation will earn around £8,000 less in their 20s than the previous generation. To add insult to injury, the millennial generation will spend £40,000 more on rent by the age of 30 than their parents’ generation.
20 years ago, a 30 year-old might expect to be well on the way to owning a home and a car and starting a family. Today, the financial pressures faced by the millennial generation mean that plans for home ownership, car ownership, marriage and children have either to be delayed or abandoned. This is a sobering thought for any ‘next generation’ bank hoping to flog loads of mortgages, car loans, joint accounts and child savings products. The need for genuine innovation in banking has never been greater; we have a generational time bomb to defuse. Chatbots and biometrics aren’t the answer. Nor are prepaid MasterCards and dynamic logos. We’re going to need a far more radical re-think of what innovation in banking is really about. I’m tremendously optimistic about some of the work going on in the background; data as currency, open banking and the circular economy are just a few exciting areas of opportunity for big innovation. Gimmicks may attract a lot of interest in the short-term, but the long-term prosperity of the next generation of bank will depend entirely on its ability to help the next generation of customer.
Nicholas Liddell is director of consulting at The Clearing.
This article originally appeared in The Drum Network supplement magazine on 8 March 2017