Atom Bank could be first real threat to traditional banks

Digital-only bank could be the first real challenge to high street banks if it turns its low-cost operating advantage into better rates for customers

Digital-only Atom Bank could be the first real challenge to high street banks if it can turn its low-cost operating advantage into better interest rates for customers.

While new banks offer the latest and greatest technologies to make banking easy and appealing for a more tech-savvy generation, little is expected to change unless they can deliver competitive products.

However, Atom Bank founder Anthony Thomson told thisismoney.co.uk low operating costs at the bank – which will launch in 2015 – may result in financial benefits for its customers.

Thomson set up Metro Bank in 2009, which was the first banking organisation to open in the UK since the end of the 19th century. But things have changed since then, he said.

Ovum analyst Rik Turner said if Atom can offer a current account, high savings rates and low borrowing rates, it could provide the first genuine challenge to traditional banks.

“All the iPhone and Android apps in the world are meaningless unless these new banks have attractive products," he said. 

"We have been talking about competition for traditional banks since the financial crisis but new banks have so far done little to change things.”

Traditional retail banks in the UK have IT budgets that run into the billions of pounds and 80% of it is spent on maintaining legacy systems. These banks also have expensive branch networks and large workforces.

However, a growing number of customers want to be able to bank whenever and wherever they want. This means they require banks to use modern technologies that give them instant access to accounts 24 hours a day.

The government is encouraging more competition in the retail banking sector and new banks – many of which take advantage of modern technology – are emerging. Several challenger banks have either recently been given a banking licence by regulators or are going through the process of receiving one. 

Charter Savings Bank, which will be online and telephone-based, was recently given a banking licence, while German digital bank Fidor Bank has applied for a licence. Technology companies such as Google and Facebook are also planning financial services, mainly around payments and information enrichment.

But what makes Atom different is its plans to launch a current account.

A combination of state-of-the-art digital technologies, full service ranges and better interest rates could make Atom, or other new banks, genuine challengers.

No change in account switching

In 2013, the Payments Council launched a system that enables consumers to switch bank accounts within seven days, rather than 30 days. But figures have shown the rate at which people are switching has not changed. In fact, if the number for the first half of 2014 was repeated in the second half, the actual number of people switching accounts will be fewer than in 2012.

The slow rate is because people don’t see much reason to change as current accounts barely differ between banks, while new banks have not come forward with alternatives.

If Atom Bank launches a current account and offers customers benefits such as high interest rates on savings and low borrowing rates, the seven-day switching service might prove to be worth the £750m it cost.

One source told Computer Weekly starting a current account is a challenge for new banks. 

“Current accounts are usually loss makers because people want them for free," said the source. "It will be interesting to see if Atom Bank plans to charge for current accounts. If it finds a way to do it this could make a difference.”

A recent survey of 2,000 people by banking software supplier Fiserve revealed 80% of people would trust a bank if it had the right technology in place. 

More than half (56%) said a new bank would have an advantage over rivals if its IT was reliable. But new banks need to underpin these advantages with competitive product offerings.

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