The game is up for high street lenders

Goldman Sachs is rolling out its internet bank, Marcus, in the UK. Monzo, a smartphone based bank, has just hit a valuation of $1bn (£778m) following a $150m funding round. Those two stories have something in common: they are both powerful signals that traditional banks are now coming under ferocious assault – and it can’t be long before they crumble.

The UK is home to some massive retail banks, and they are a key part of the economy. But with technology start-ups nibbling away at their market, with big companies from other industries muscling into the business, and with brands that have been trashed beyond salvation, they are looking in more trouble than any other sector apart from retailing.

Just about every week seems to bring news of more challenges. This week, Goldman Sachs announced that it was bringing its retail bank Marcus to the UK. A move into the seemingly dull business of deposits and consumer loans seemed an odd one for the ultimate Wall Street investment bank when it was launched. But Goldman has made a success of it, raising $20bn in deposits and lending $3bn to consumers. In the bond and equity markets, no one ever made money by betting against Goldman, and now that looks as if it might be true of consumer finance.

The week before Monzo announced that it had raised an extra $150m in funding from backers that included Silicon Valley’s Accel Partners. Its value is now estimated at as much as $1.5bn, four times the value that was put on it at its last fundraising. The bank already has 900,000 customers and is growing fast. It is not just Monzo, however. Start-ups such as Atom and Starling are also expanding rapidly, and so are branch-based newcomers such as Metro.

For years, the major retail banks have managed to swat away competition, relying on their dominance of the market, their branch network and perhaps most of all the inertia of their customers. And yet, every industry can reach a tipping point, where the scale of the challenges overwhelms it. Banking is approaching that moment. Here’s why.

First, the internet has made it easier for fintech start-ups to gain market share. It still costs a lot of money to launch a bank online, and to grow it significantly, but nothing like as much as it did. A new bank used to be launched once in a generation. Now they are launched all the time, targeting specific niches in the market, or else particular tasks. Increasingly, customers are using different apps for different services, and in time they may not even need a current account at all. The net result? Not every start-up will necessarily win a huge number of customers. But each one takes a few, and when you add them all together, the market keeps getting more and more fragmented.

Next, the demise of branch banking is allowing new companies to come into the market. Goldman is moving in from Wall Street. Amazon is moving in from online retailing, launching a checking account in the US, and will probably launch that here as well if it is successful. In this country, supermarkets have dabbled in financial services for a long time, but as it gets easier and easier to start up, any major company with a lot of loyal customers can suddenly set up a bank.

Finally, the major banks have trashed their brands beyond redemption. For years, they have mis-sold products, from PPI and small business loans to packaged accounts, and imposed an endless series of stealth charges on products that were meant to be free. They could get away with it for a long time. But not forever.

When competition suddenly turns ferocious, loyal customers who feel committed to a brand will stick with a company – look how well John Lewis has done in a brutal retail market, at least until recently. But if anyone out there likes their traditional high street bank, they are keeping themselves well hidden.

Inertia has kept the major banks afloat for a long time. Yet, in truth, banks such as Barclays, Lloyds and HSBC are now looking in long-term trouble. They may hang around for a while, but it is increasingly looking impossible for them to reinvent their businesses in a way that will actually save them.

‘If anyone out there likes their high street bank, they are keeping well hidden’