When digital banks first arrived on the scene a decade ago, Britain’s high street rivals were rattled. Centuries-old institutions that had never seen much competition were suddenly threatened by a group of twenty-something coders in T-shirts.
It was an opportune time to disrupt the sector. The 2008 financial crash had wrought havoc on the high street stalwarts — some of whom needed emergency bail-outs from government. Their reputation was in the doldrums, along with their share price, and there was little room for investment.
No one with a computer science degree wanted to work at a bank, because they were uncool — and they weren’t building much, anyway. And with interest rates at record lows, Brits were hardly in love with their current account providers.
Enter the challengers: Monzo, Starling, Revolut and the rest. These banks did not have a single physical branch, but promised to deliver better customer service through shiny new mobile apps. Many were willing to give them a try.
Already battling to restore their battered reputations, the big banks were lightyears behind on their digital offerings, and have been scrambling to keep up ever since. HSBC’s scattergun approach to getting into international payments apps has been one of the clearest examples of this.
In 2022, the Canary Wharf-based business invested $35m to become a shareholder in money transfer app Monese. But the following year, the £150bn bank pivoted away from external investment to build its own money transfer app, called Zing, which it launched in early 2024. Barely a year later, struggling Monese was acquired in a rescue deal by Pockit, and HSBC decided to shut Zing altogether. Hardly a recipe for success.
“Zing was HSBC’s attempt at fighting back and for whatever reason that wasn’t successful,” said Paul Stoddard, president of fintech firm GoCardless.
“I’d speculate that HSBC might have been more successful if they’d done it in partnership with a fintech rather than by themselves. This is a classic example of the fintech community being able to service a need and the more traditional banks not able to do so.
“I don’t think it will stop any of them trying to do it because they have to. Having come from two of the biggest banks in the UK, I know that the narrative inside the bank is always that when it starts flagging as an issue of revenue loss or they start noticing that the business is growing slower or losing business then they have to be seen to respond.”
The dashboard lights really started flashing red for the big banks when Covid struck, shuttering the high street up and down the country. The technical edge of online services offered by the digital banks suddenly became more pronounced — and Brits started flocking to the challengers in their millions. The big banks knew there would be trouble ahead if they didn’t upgrade their digital services — and fast.
By the time the British economy reopened in the wake of the pandemic, the high street chains emerged armed with much better banking apps — as well as huge new teams of software engineers to keep up the innovation.
“There’s been a bit of a talent shift — pre-covid you would have struggled as a big bank to attract good engineering talent and good design talent…it wasn’t seen as a very fashionable or desirable thing to do for people working in innovation or design, but that’s shifted massively now,” said Nick Parminter, founder and CEO of Class35.
“The big banks spent tens, hundreds of millions on their own digital estate…look at the quality of Lloyds, which just relaunched their app. If you compare that to a Monzo or a Starling, it’s very similar if not better.”
“With the mobile app war, yes it took a few years and a lot of investment for legacy banks to catch up but they’re competing now.”
Another important thing changed for the digital banks post-pandemic. The re-opening of the economy, combined with war on the continent, could only mean one thing: high inflation. And with it, the end of the low interest rate era.
That left the high street banks back in their comfort zone: winning customers with better-paying current accounts, a skill they’d honed over centuries.
The figures bear out their return to success. While challengers like Monzo and Starling were winning tens of thousands of customers each month during the pandemic, in the years that followed, more customers have been switching away from them than to them, according to data from Pay.uk.
Neobanks accounted for 5% of primary banking relationships in the UK in 2024, down from 6% in 2023, according to a survey of 4,000 adults commissioned by financial services insights business RFI — the first time the survey has recorded a year-on-year fall.
The proportion of Brits who had used at least one digital-only banking provider stood at 50% in 2024, a rise of only one percentage point compared to the previous year, a marked slowdown compared to the 14% rise recorded between 2021 and 2022. Being offered an incentive to switch was the most common reason customers switched accounts, the survey found.
“I do wonder if some of those challengers have hit a ceiling,” Parminter said.
“A lot of more innovative and open-minded customers and early-adopters have got into them. But now they’re getting into the majority, and the hassle of switching for what is essentially a pretty undifferentiated service other than a slightly better app…I wonder if they’ve run out of growth.
“People have realised that just from a behavioural perspective, it is incredibly difficult to win customers…it is still who did you parents bank with, who is on your local high street, what account were you given at university.”
The slowdown in customer acquisition has prompted digital banks to look elsewhere for avenues to growth. It has prompted many to look at offering banking-as-a-service solutions to their bigger rivals — including Monese, which spun out its BaaS offer, XYB, into a separate business and Starling, which has given its BaaS subsidiary a differentiated brand identity, calling it Engine.
But there is a jewel in the crown of the fintechs which may mean they will yet win the current account war: Gen Z.
Digital banks like Monzo, Revolut and Starling were used by as many as 77% of Gen Z customers, compared to only 42% of Gen X. The skewed customer base means that right now, current account deposits are far lower than the average in the banking sector. But as twenty-somethings become thirty and forty-somethings, their savings will inevitably rise, opening them up to a range of other financial products like loans and mortgages.
“It will take a generation for them to properly move the market because that is how long it takes to cultivate an entrenched banking behaviour,” said Parminter.
“It’s Amara’s Law: people are always prone to overestimate the disruptive value of something in the short term and underestimate it in the long term.”
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