Recent news that Barclays is buying the bulk of Tesco’s banking business, and that Sainsbury’s Bank is open to takeover offers, has thrown retail banking’s competition with legacy banks back under the spotlight. 

Over the last decade or so in the UK, we’ve seen the rise of retail banks and neobanks, like Monzo and Revolut, have a bigger impact than perhaps anywhere else in the world. These challenger banks looked set to transform the industry and take swathes of business away from the incumbents—but has this happened in practice? And in which direction will the industry head next? Let’s explore this compelling next era of British banking.  

The banking landscape today 

Much has been made of retail and neobanks’ headline-grabbing, tech-driven customer services, particularly among young people. Customers can ‘freeze’ and ‘defrost’ their cards in seconds, pay friends nearby through Bluetooth, automatically round up spending to save the change, and much more. Though legacy banks are playing catch up, many of these innovations were originally introduced by challengers. So, it’s no surprise to see Starling Bank, First Direct, Monzo, and Chase consistently ranked as the UK’s leading banks in terms of customer satisfaction.  

However, when it comes to tangible market share, these banks haven’t actually taken too much away from the entrenched traditional banks. Five incumbents remain the most popular banks in the UK, with 15% of the population using Barclays as their primary bank, 12% using Lloyds and HSBC each, 11% banking with Halifax, and 9% NatWest. In contrast, while 14% of the UK adult population has a Monzo account, far fewer use it as their main banking service.  

The legacy banking sector has never gone away, and consolidation is being driven by competition from start-ups, fintechs, and low profitability in certain sectors. As a result, smaller banks with fewer digital capabilities like Tesco are increasingly becoming acquisition targets. 

How will the Tesco deal impact the industry?  

Firstly, why did Tesco sell? Well, current economic conditions mean that Tesco’s banking arm is no longer a core consideration for the supermarket. The FMCG industry has been under pressure ever since the pandemic, so Tesco is looking to offload to streamline its operations and focus on its core competencies while receiving a cash injection. 

As for Barclay’s, it’s a great deal for a number of reasons. In terms of economies of scale of customer acquisition, it will help Barclay’s integrate new customers quickly and easily. Plus, Tesco is a well-recognised brand so Barclays can leverage brand recognition and attract extra customers. We know that Barclay’s is already the UK adult population’s most popular bank – this deal will only help to strengthen that position. If the deal is a success, will we see more legacy banks swallow up smaller competitors?  

The whole deal signifies that the landscape of banking is changing, likely to be driven by consolidation. The banks that will get immediately acquired by incumbents are the ones with poorer digital presence, as they may be seen as easy wins towards gaining a greater market share. But should all neobanks be worried about getting bought out? And if not, can they continue to withstand resource-heavy, revenue-hungry incumbents?  

The risk of copycat customer services  

On the surface, neobanks’ points of differentiation, such as their advanced P2P money-sharing tools, help them to keep their own corner of the market. Neobanks have also shown it’s possible to build great customer journeys within regulatory compliance.

Perhaps the main risk for neobanks is not a takeover by an incumbent, but that the incumbents decide to leverage their massive resource advantages to copy the USPs and features of a neobank and build their own versions. For instance, many more banks now offer customers the option to ‘freeze’ their debit card, a feature first introduced by Monzo. In fact, incumbents often have teams studying the movements and developments of neobanks, ready to capitalise on copying their newest features because they know that they’re already fair game from a compliance point of view.  

However, we still need to encourage neobanks’ growth because they are the companies that are coming up with the innovations that tangibly improve customer experiences and the UK’s financial services economy. So, is there a way for fintech start-ups to fight back and continue disrupting in the UK? 

Government support is key 

To encourage fintech talent and drive start-ups, governments worldwide are slashing regulatory requirements. A good example of this is China and its WeChat app. It began as a messaging platform but now supports mobile payments, broadcasts, video conferencing, and video games amongst many other features. In fact, it’s been described as China’s ‘app for everything’. 

What’s driven WeChat’s development has been strong government support, less regulation, investment into development, tax breaks, and more. China, and other countries like Singapore, employ a regulatory sandbox in which companies can build products outside of regulatory rules so they can explore the implications of these new experiences.  

Ultimately, if the UK wants to retain innovation and its place at the forefront of financial services, solutions that ease regulatory requirements to help drive talent, start-ups, and scale-ups will help to spark a new era of fintech breakthroughs.