Think of banking and think of lending. Lending is largely associated with the segment where the mass-market, profitable action resides. It is called ‘standard credit’. Its consumers have OK-to-good credit scores.
There is also a long-established alternative market, called ‘non-standard credit’, for consumers with less attractive credit scores. Lending to those with impaired credit scores is a different business, requiring specialist underwriting, distribution, pricing and customer-management skills.
Non-standard credit may be a niche, but it’s a big one. Provident Financial – the daddy of non-standard lenders – reports 10 million people in the non-standard segment, with a further two million in a sort of credit ‘grey area’.
But, of course, banking is not just about lending, even if credit is where most of the money is made. It is also about savings and current accounts. The standard banking market is well represented here, and things will spice up further as the neo-banks chew whole limbs off the old banks. People with half-decent credit scores now have increasing choices of standard lenders, digital savings accounts and new, cool current accounts.
For those with less-than-decent credit scores, the options have always been much less tasty. The majority does not have money to save, so savings accounts are low priority. While credit-impaired consumers can access non-standard loans, they have remained painfully anchored in current accounts with banks who simply don’t want their business. (They are loss-making customers.) Consequently, the banks serve them poorly, because they can’t wait to see the back of them. But they had nowhere else to go. Until now.
Simple digital technologies and not-so-simple business solutions have now been combined to create non-standard current accounts. A new wave of non-bank providers now has access to the payments infrastructure to allow provision of fully functional current accounts. These new current accounts can complement non-standard credit accounts, serving up ‘full banking services’. Just as the neo-banks do, these non-banks easily innovate and delight – a process that is so painful for analogue banks labouring with their concrete technologies.
Where this leads to is an inevitable and rapid bi-section of the 300-year-old banking market. The old banks and neo-banks will battle ferociously to win those that are suited to their services. The non-banks and the non-standard lenders will emerge to serve those less well-suited to the banks.
This will create a non-standard banking segment. Standard banking will be for those suited to banks; meantime non-banks and non-standard lenders – working perhaps in tandem – will serve the remainder, provisioning a full, non-standard, non-bank service.
The consequence is that between 20–25% of the population need never touch a bank again, as they unbank to a more suitable solution.
This is not a holy war against the banks. Rather it helps them. It allows them to focus on what they can do well, and leaves the specialists to serve the non-standard banking niche.
It’s a new year, and a new market structure.
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