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Are UK High Street Banks Struggling To Keep Up?

high-street-banks UK struggling
February 18, 2023

Are UK High Street Banks Struggling To Keep Up?

New research suggests that UK high street banks are failing to provide the appropriate services to their personal and business customers, and it’s costing them both their customers and their market position. 

High street banks have been at the centre of the digital transformation storm since the advent of their digital competitor, yet damning new evidence strongly indicates banks are losing touch with want their personal and business customers really want.

A fresh analysis of the market appears to show that high street banks are starting to lose the race to the digital banking alternative, primarily in failing to suitably accommodate the needs of their customers.

Banks retrench on lending

As a time of economic strain, it comes as little surprise that the latest iwoca SME expert index pinpoints banks’ cuts to lending as a primary catalyst of their downfall.

It is evident that banks’ decreasing willingness to lend is colliding with the growing demand from the UK’s 5.5 million SMEs for more capital.

Funding experts believe that current macroeconomic pressures will have a worse impact on SMEs than the pandemic did.

Eighty-four per cent of brokers report their SME clients are concerned about their businesses surviving increased energy prices, and over half think a potential recession will be worse for small businesses than the pandemic was.

Of the SME finance brokers involved in the development of the latest index, 82 per cent agree that major banks have reduced their appetite to fund SMEs. Similarly, brokers reported that in December, compared to the previous month, finance providers rejected more of their clients’ applications, with almost half experiencing this.

Speaking on the widening gap in SME financing, Colin Goldstein, commercial growth director at iwoca, explains that with predictions that the impact of current macroeconomic pressures will be worse than the pandemic for small businesses, “it’s clear that SMEs across the UK are in need of financial support. And as our data shows, traditional banks just aren’t offering this.”

“Alternative lenders are once again proving just how crucial they are to protecting small businesses from this financial shock,” adds Goldstein.

The beginning of a great departure from high street banks

As the latest data from the personal finance comparison site, finder.com, puts forward, the number of digital-only account holders in the UK is growing, stealing away more of the market from share of the incumbents with each passing year.

The digital banking adoption research found that a quarter of the UK currently has a digital-only bank account, and a further 5.3 million people, or about 10 per cent of the population, intend to open their first digital-only bank account within the next year.

An additional 4.8 million intend to follow suit within the next five years, meaning that by 2028, 22.7 million people, or around 43 per cent of the total UK population, will have a digital-only bank account.

By comparison, the research recorded that in 2019, just nine per cent of the population had a digital-only account, with figures trebling since that time.

Making the switch

Traditional high street banks have historically held a strong user base among the older generations. As opposed to Gen Z and millennials, who keep a special place in their heart for digital-only banks, older generations have typically retained their faith in the high street incumbents; until now.

As the figures indicate, consumers are steadily migrating to digital banking alternatives to the detriment of their high street competitors.

A reason for this appears to be the lack of local bank branches. This was cited by 16 per cent of UK adults, causing 8.5 million account holders to make the switch.

A survey of the so-called ‘silent generation’, of those aged above 74, revealed that 53 per cent noted the impact the closure of physical bank branches had had on their decision to go digital.

In fact, the number of those in the silent generation with an online-only account has risen from the seven per cent recorded in last year’s research to today’s 13 per cent.

A generation down, and 15 per cent of so-called ‘baby boomers’, being aged between 55 and 73, have made the switch for the same reason, followed by 22 and nine per cent of gen x and gen z respectively.

Convenience is key 

The finder.com research asks why participants opened or intend to open a digital-only bank account, and the majority 64 per cent of answers were linked to convenience.

For 22 per cent, doing so was the ‘easiest option’ when looking to open a new bank account, while a further 21 per cent did so to be able to ‘transfer money more easily’. Another 21 per cent confirmed using a digital-only bank to be ‘generally more convenient’.

Additionally, a fifth made the switch to access to better rates, with 18 per cent wanting free transactions abroad and 12 per cent needing the capability to trade stocks and cryptocurrency with their digital-only bank account.

Loyalty to traditional banks is still a crucial retaining factor

Of those who claimed to need more information before considering opening a digital-only bank, or don’t intend to open one at all in the near future, a significant 50 per cent said that the fact that their current bank has always treated them well was a key reason for them not switching.

Thirty-four per cent prefer to have the option to speak with someone in person, which could help explain why a lack of physical bank branches in the local area is such a popular reason for individuals switching to neobanks.

Likewise, 24 per cent don’t trust digital-only banks, being the main reason for retaining an account with the incumbents. Other reasons for staying mentioned in the research include difficulties in transitioning account information to digital-only accounts and further issues in opening a new account.

A trick up their sleeve

“This year, we can really see the impact that high-street branch closures are having on the banking market, particularly for the older generations, comment finder.com’s Kate Anderson, reflecting on the company’s most recent findings.

“The fact that such a significant proportion of the silent generation has opened a neobank account due to the closure of physical branches suggests that the wind could finally be changing when it comes to older generations avoiding digital-only banking,” continues Anderson.

“It’s clear that digital-only banks are doing everything they can to appeal to these demographics, including making the process of owning a digital account easier than ever.”

Despite the many benefits of digital banking, Anderson sees the value that Brits place on being able to talk to someone in person as the primary deterrent to switching to digital-only accounts.

“The fact that so many claim that they do not trust digital-only banks is also a big problem that needs to be addressed in 2023 if these neobanks want to keep progressing in the market,” she concludes.

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