Key Takeaway: Large banks in the U.K. recognize the impact of digital banks and are clamoring to compete with their offerings, a move that could spur greater investment in the sector. Although traditional banks have advantages such as a large retail footprint, fintechs continue to draw customers with less expensive and more streamlined financial products.
HSBC and RBS, two of the U.K.’s largest banks, are launching new digital banking platforms this month to compete with the nation’s rising fintech-heavy challenger banks.
HSBC’s Kinetic, which debuted in beta this week, focuses on small businesses, while RBS is going after small consumer accounts with digital product Bó, which will roll out publicly later this month, according to Reuters.
The offerings come as digital-based challenger banks amass millions of customers and expand services to new populations. The advantage both banks have over fintech companies is a large branch network that can complement their digital offerings and established trust in the market.
“I quit the big banks because I knew technology was key to building products customers really wanted and needed.”
Increased competition from established banks might actually help the upstarts, which have seen investment taper this year amid economic volatility in the U.K.
“I see this as a positive to shake up the competition,” Rav Hayer, fintech lead at PwC United Kingdom, told Karma. “Ultimately the launch of Bó and Kinetic will see more investment in the fintech sector.”
Their challenge will be to compete with existing fintech players that already have a critical mass of customers, capital, and a broader set of tech-driven offerings. “Challengers have better leveraged data and their customer segments, seeing data as the fuel to capturing customers with valuable insights and digital connectivity,” Hayer noted.
HSBC’s Kinetic will go up against the likes of Starling Bank, which has raised $338 million in capital and amassed over 80,000 business accounts since launching five years ago.
Like Kinetic, the Starling platform makes it simple for businesses to open an account. But Starling also offers easy access to accounting software, lending services and business insurance directly through its app. Starling CEO Anne Boden told Karma she is confident big banks cannot compete with such tech-driven offerings.
“I quit the big banks because I knew technology was key to building products customers really wanted and needed,” Boden said. “It is difficult for big banks to compete with us.”
With momentum on their side, some British fintechs have expanded abroad. Revolut, which offers a prepaid debit card, peer-to-peer payments, fee-free currency exchange and commission-free stock trading and has over 8 million accounts, recently launched in the U.S. and Singapore. It has raised $336.9 million so far, and The New York Times reports it plans to raise an additional $500 million next year.
Yet, overall, fintech investments are not flowing as freely as they once were. Global private investments in fintech industry dropped about a third this year from 2018, totalling $60.7 billion this year, according to PitchBook. In the U.K., where uncertainty over Brexit has led to economic volatility, fintechs have amassed $11.2 billion in private investments so far this year, less than a third of that of last year.
HSBC has made two fintech-related investments in the last three years, according to PitchBook. One was a venture with Global Payments for an undisclosed amount and the other a $75 million venture capital investment in Synapse Information, a U.K.-based spreadsheet solution company.
In contrast, RBS has been more active. Since 2018, a handful of fintech startups have received about $100 million in funding from it, including Vizolution, Fluidly, Swoop Finance and Pollinate Networks.
Some fintech companies, which entice customers with lower fees than traditional banks but ultimately rely on fees and interest for income, are struggling to turn a profit. In May, Loot, an app to help students with their finances that had raised $9 million — including $2.6 million from RBS — became insolvent after a potential sale to RBS fell through and it ran out of cash.
Loot’s founder, Ollie Purdue, and 17 other employees have since joined the Bó team.