UK incumbent banks are digitalizing rapidly in response to their customers’ evolving
preferences, and because of competitive pressure from a new wave of digital-only lenders
and technology-driven finance firms, according to Moody’s.
While the challengers have made inroads into the payment services market, their impact on core banking services remains modest so far. However, fintechs are likely to make further progress as the 2018 Open Banking initiative, designed to make it easier for third parties to sell products and services to banks’
customers, gains traction. The UK regulatory environment has also been broadly supportive
of the fintech sector. The gradual unbundling and enhanced transparency of banking and
related financial services will over time lead to lower margins and ancillary service revenues.
High rates of internet and smartphone usage, and a growing consumer preference for online transactions, have driven rapid growth in internet banking and card payments across the UK. This has been accompanied by a continued contraction in UK banks’ branch networks.
Broad consumer take-up of digital banking and regulatory efforts to promote competition have encouraged a wave of new technology-driven entrants to the UK banking industry. UK regulators have authorised 41 new banks since 2013, and there are also an estimated 1,600 fintechs operating in the country. Some
of these challengers have taken market share from incumbent banks in the area of payment
services. They also look set to benefit further from the 2018 Open Banking initiative, which
gives third parties conditional access to established banks’ customer data.