HSBC has announced its intention to overhaul First Direct, its digital challenger bank, in order to better compete with digital-first
, reports the Financial Times. For the context, First Direct was the first
in the UK – it was launched in 1989 and was acquired by HSBC in 1992.
HSBC’s decision highlights the impact of the rise of British neobanks on traditional banks. UK-based neobanks are expected to nearly triple the number of clients over the next year, but they are still struggling to be profitable. Neobanks like Monzo, Revolut, Starling and N26 are expected to grow from 13 million customers to 35 million in 2020, according to a study by Accenture.
On top of that, neobanks are seeing customer growth outside of London, in part due to rural areas hit hard by branch closures in former UK banks. For its part, First Direct has nearly 1.5 million customers, and while it does not publish separate financial data, it has been profitable for more than two decades. In contrast, neobanks as a whole struggle to achieve profitability.
First Direct responds to this threat by adding features that will open it up to a wider audience. First Direct CEO Joe Gordon said it will make a series of improvements, including the addition of new features that will make it “more accessible to a wider audience.” Some of the planned features include an in-app marketplace and a “financial autopilot,” which would use AI to make personalized recommendations and automate activities like reloading savings accounts.
In addition, digital banking will allow customers with limited credit history to open accounts while providing services to improve their credit. Providing services to consumers with little or no credit has been a major selling point for neobanks to reach underserved audiences. Combining this same strategy with new personalization features could position First Direct as a serious threat to its neobank competitors.
HSBC will work intensively with fintechs to retool its neobank, an arrangement that may serve as an example for other traditional banks in the future. First Direct works with several fintechs, including UK-based Bud, in which HSBC has invested this year, as well as Goldman Sachs. Similar partnerships are increasingly common: 81% of bank executives in a Finextra survey cited collaboration with partners as the best strategy to achieve digital transformation, highlighting how traditional banks and startups are moving towards the collaboration.
And nearly half of the financial services companies surveyed by Lloyds said they have made deals to acquire or take a minority or majority stake in fintechs. Many of these bank-fintech partnerships have yet to fully materialize, but HSBC’s strategy of leveraging its partnerships to revamp its digital arm is an example of how these partnerships and investments could develop.
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