Will Atom split the banking industry?

The latest online lender has attracted top City backers. But can these new challenger banks really change the face of the industry?

Will the new internet bank Atom be a nuclear-powered competitor that shakes up the established banking order, or will it end up as little more than a pint-sized irritant?

It seems as if retail banking is the hot business to be in right now. And Atom, set to launch next year, has a string of big-name backers, a line-up of City royalty to make any new venture drool. In addition to the high-profile fund manager Neil Woodford, there is Jim O’Neill, from Goldman Sachs, the veteran venture capitalist Jon Moulton, and the car dealer-turned-philanthropist Sir Peter Vardy. They certainly think Atom, which will be free of any legacy disciplinary issues or legacy costs from expensive branch networks, will make a splash.

Atom is the brainchild of Anthony Thomson, the co-founder and former chairman of another challenger lender, Metro Bank. It will be run by no less than Mark Mullen, the former boss of the HSBC subsidiary First Direct, which was itself revolutionary when it launched as a telephone bank.

But Atom is joining an increasingly crowded field. Rules allowing smaller and start-up banks a lighter capital burden than the industry giants, combined with increasing public disillusionment with lacklustre service and a string of ugly scandals, have tempted a host of rivals.

A couple of years ago, Royal Bank of Scotland’s former chief executive, Stephen Hester, told a Treasury Select Committee inquiry into banking competition that big was better. Dismissing the need for these new entrants, he said: “[Scale] allows us to compete more successfully, to offer customers a better solution, and to be better ourselves for the constituencies we serve.”

Vocal supporters of greater competition in banking, such as the Treasury Committee’s chairman, the Tory MP Andrew Tyrie, disagree. Mr Thomson believes he can prove them right. He said: “The great malaise in UK banking over recent years is that banks have forgotten that they are in business to provide a service. They think they are in business to make money. That’s the wrong way around. We intend to offer a great service. I think what we will see in banking is lots of new competitors for different bits of banking, profitable bits of banking, and I’m sure Atom won’t be the first new digital entrant.”

But even if it grows like Japanese knotweed, Atom will scarcely register on the radars of the “big four” lenders: Barclays, HSBC, Lloyds and RBS. Not all of the challengers are starting off small, though. Others, such as TSB and Virgin Money, have either bought, or been spun out of, existing players. They are much bigger, and more diversified, but can even they really shake up the market?

Garry White, chief investment commentator at the stockbroker Charles Stanley, believes banking’s Davids still have a lot to do before they worry the industry’s Goliaths. “The reputation of the big four banks remains in tatters following the financial crisis, but customer inertia means that many are unlikely to switch,” he said. “New rules were introduced to ensure that switching banks was easy, with the process required to be complete within seven days, including the transfer of all direct debits.

“But in the first year of the new rules, just 2 per cent of the UK’s 54 million active current accounts were switched. With the reputation of banks being so tarnished, and the amount of publicity that greeted the change in regulations, this is hardly a spectacular outcome. David has much work to do.”

White also points out that should any of the challengers fail, people may then decided that it’s better the devil they know.

Ian Gordon, one of the sector’s most perceptive analysts, wonders whether there is any real need for a shake-up. “What we do have is an attractive, generally rational retail banking market which offers opportunity for new entrants and incumbents alike and, if you are ‘legacy-free’, is currently highly profitable.

“We have enough proven examples – Aldermore, Shawbrook, Metro Bank, One Savings Bank, Virgin Money, etc – of challenger banks which can grow assets (usually mortgage-led, usually driven by intermediary distribution). Additionally, and importantly, liquidity from retail depositors is currently cheap and plentiful.”

It helps that loan impairments are extremely low, and the big four are operating under constraints, some regulatory, some self-imposed. So they are not about to try to squeeze out the new boys. Not just yet. “I don’t particularly argue that they can, or will, or need to ‘shake up’ banking,” Mr Gordon said. “To a significant extent, they are operating below the radar, constructing rational/attractive niche businesses without inviting retaliatory action from incumbents.”

In other words, we probably will not see the new banks having the same sort of impact that, say, Lidl and Aldi have had on the grocery market.

Mr Thomson sees things a little differently. He said: “New entrants can change industries; take transatlantic flight. A few years ago, it was a transit business. Then Virgin came in and changed it into an experience. Metro Bank, in a small way, changed banking. Before anyone else, we were rewarding staff for the quality of the customer experience based on customer surveys. We came in and did it before the regulators forced other banks to do it. So we played our own small part in changing the industry.”

Even the gimmicky dog biscuits and bowls Metro offers its pet-owning customers are important. “If you can bring a dog in, and we don’t mind if it pees on the floor or worse, then people will think maybe we care about them as a customer,” he said. “That actually became quite important.”

Perhaps banking doesn’t need challengers to shake it up. Because what it now offers is something that didn’t really exist before it was actively encouraged: genuine choice. If you want to switch, you can try Atom, or TSB, or Metro Bank if you want. That’s an option that didn’t used to be there.