Banking Landscape

Banking services in the UK are fragmenting every day. The landscape is far from equilibrium.

Landscape Today

There are more than 50 banks competing for customers in UK retail and small business banking. The City is abuzz about “challenger banks” and “fintech.” It seems that all banks want to be challengers. Even Santander, which recently topped £200bn of lending wants the goodwill of being seen as a “challenger.”

Beyond the hype, what's going on? Looking at the players, six supertankers (£100bn+ ) still dominate the UK market with their liquidity and political importance. At the small end of the spectrum, there are more than two dozen startup and "micro" banks. Those ranks swell by the week, with de novo banks, as well as entrants from continental Europe, the Nordics, and (in due course) from the US.

Size matters

The fact that size matters in banking is often overlooked by media coverage and industry pundits. It matters for large and small players alike.

The large players are still “too big to fail.” The current political climate still prevents real failure. Large players are also monolithic. It is difficult to break them up. Look only at the repeated failures of RBS to divest Williams & Glyn.

For small players, many underestimate the human and financial resources needed to manage two things: liquidity and regulation.

Liquidity and regulation

The big banks are inefficient. They are inefficient in all of their operations. But in spite of themselves, they get things done. In particular, they manage their liquidity requirements (apart from financial crises). And they manage their regulatory requirements (apart from occasional infractions).

Small players struggle to cope with these functions. Although Mondo and Tandem can quickly source liquidity through other challengers like Crowdcube and Seedrs, those amounts are small. Even without the cost of physical branches, running a bank profitably requires vast pools of liquidity. Small players cannot access those pools. Even if they had access, they do not have the human and technology infrastructure to manage it.

Regulation of global financial services is ever more complex. Even the biggest banks struggle to keep up with a regulator's whim. Basel III, Mifid II and PSD2 are just a few case studies in the vagaries of financial regulation. Coping with those sorts of processes are simply anathema to any agile startup. They drain resources. Lots of them. Enough resources that only large organisations can cope without materially distorting their cost base.


At their core, traditional banks are investment managers. They earn their principal revenue from investments, through loans. Despite the frequent headlines about outrageous bank fees, the biggest banks in the UK still earn 75-90% of their total income through net interest income. And although some banks earn net interest margins (NIM) of 3% or more, many UK lenders clear only 1.5%. Those are tight margins in any sector, and require volume to be profitable.

The other 10-25% of top-line revenue is from fees for ancillary services, like payments, FX, and advice. Although these services are not as capital intensive as lending, they still require liquidity and are still subject to regulation. Because ancillary transactions are small, these services have very high overheads. They require expensive investments in people and technology.

Although there are some specialty lenders amongst the newest entrants to the UK banking market, many are app-only retail banks. These banks (often just prepaid debit cards), are missing most banking revenue. They are betting on business models without lending. They are making aggressive bets on their own agility. They must be agile enough to keep costs so low that they are profitable as small scale, discount, fee-only banking businesses.


Incumbent banks disappoint their customers on most fronts. Savings accounts cannot compete as an investment. Bank loans struggle against P2P, pay day loans, crowdfunding, direct lending, angel investment, venture capital, and private equity. Branch service is often terrible. Telephone banking often worse. For most customers, cashpoints are probably the best service they get from their bank. Ironically, cash is fading from daily use.

Challenger banks pounce on the poor customer experience offered by incumbents to promise something new and better. But can they serve the customers they acquire from young adulthood through raising a family and on to retirement? Although incumbent banks may do it badly, they are of sufficient scale and diversity to offer relevant services over a lifetime.

Beyond the horizon

If incumbent banks are bad at serving customers, and new banks struggle with liquidity and regulation, what dynamics drive the UK market?

Some of the moves are clear already. Foreign banks dip a toe in the UK with strategic acquisitions. Big incumbents act like VCs to invest in banking startups. Some incumbents successfully divest businesses, while others fail to do the same. Big banks struggle with legacy IT, and try to rationalise. Some startup banks form strategic partnerships, while others struggle to scale.

Even without the effects of PSD2, the agility, technology and brand appeal of the startups will meet the experience and scale of the incumbents. An acquisition of Mondo by RBS would hardly transform RBS. A partnership of Monese with Skipton Building Society could create value for both.

PSD2 accelerates those valuable partnerships. Particularly middle-weight incumbents can transform a headache into a growth opportunity. API-first startups have an edge to share with their larger competitors. Those startups might be near-banks like Holvi, or service providers like Figo.

Predicting the winning partnerships is difficult. Understanding each organisation is essential. Financial performance motivates management decisions. Current management dictates the customer offering. Corporate culture determines customer experience. And customer behaviour drives financial performance. How technology weaves into that feedback loop for each bank may determine the success of its partnerships, and the success of its business overall.

Next Steps

Based upon the context outlined here, and the list we have compiled, we will take a look at competitive positioning each of the nearly forty players in the market today. We will consider their financial performance, branding and marketing, customer experience, digital commitment, innovation, strategic opportunities, and short-term challenges.