Large traditional UK banks are still strong but have seen their traditional advantages begin to weaken, according to the UK banking regulator.
In an update to a review that began in 2018, the Financial Conduct Authority (FCA) said traditional banks saw a reduction in their share of personal and micro business accounts between 2020 and 2021.
The weakening of the advantages enjoyed by traditional banks over the years is “driven by digital innovation and changing consumer behaviour”, said the FCA.
The regulator said banks increasingly invested in digital products and services during the pandemic, which improved service quality and satisfaction, particularly for mobile and app-based users.
Kate Collyer, chief economist at the FCA, said: “Competitive pressures and innovation are starting to deliver for retail banking customers, with greater choice, lower prices and more convenient ways to bank.”
Digital challenger banks have been around for more than a decade and are now beginning to appeal to a wider customer base.
Their digital services became attractive at the height of the pandemic, when physical bank branches and shops closed, forcing them to move online.
It is no secret that challenger banks have been winning customers, but many people have used them as a second account, retaining a traditional bank for most of their banking. They were often referred to as “spend accounts”.
But this is changing. For example, app-based Starling Bank became the first UK digital challenger bank to make a profit when it recorded a monthly profit of £800,000 in October 2020.
In March last year, following a £272m funding round, it reached a valuation of $1bn and the unicorn status that goes with it.
Zopa, which set up its banking operation 18 months ago, has already received £1bn in deposits.
The bank, which models its customer-centric approach on tech forms such as Amazon and Netflix, has set its sights on reaching £2bn in the next 12 months. Since its launch in 2020, it has issued more than 200,000 credit cards become a top five credit card issuer in the UK.
Such banks are built on the latest technologies and serve customers remotely, with no branch networks.
But the FCA’s Collyer stressed the importance of traditional banks retaining a physical banking presence.
Analysis by the consumer rights organisation has revealed that since the beginning of 2015, banks and building societies have closed or scheduled the closure of 4,734 branches in the UK.
It showed that an average of about 60 UK bank branches were closed in every month of 2021, with 298 closed between June and August alone.
The increased take-up of digital banking services during the pandemic began and the desire by banks to cut operational costs has accelerated closures and the future of branch networks is uncertain.
Collyer added: “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.”
