Breathe a sigh of relief: Britain’s banks seem to be in a healthy state and they are once more returning cash to shareholders by paying dividends and buying back shares.

Private investors will be gratified by this news, which is proof that pandemic anxiety is receding. But some may also be wondering whether this is as good as it gets.

Fintechs, the new breed of challenger digital institution, are snapping at the heels of the mainstream banks – Barclays, HSBC, Lloyds and Natwest – whose legacy IT systems make innovation expensive.

Edward Firth of broker KBW says that the annual cost of operating a customer’s account at one of the traditional names is £150- £200. At Starling, the challenger bank with its cloud-based systems, it is about £57. ‘

The incumbents face a multi-year challenge that only looks set to get worse,’ he says.

Such concerns have been heightened by this month’s stock market debut of Wise, the money transfer group that allows customers to bypass the banks. Its shares have risen from 800p to 981p, highlighting the view that fintechs are the future.

Competition is coming from another source for the UK banks. US giant JPMorgan Chase has snapped up the British robo-adviser Nutmeg and may also try to sell home loans here.

John Cronin of broker Good body is among those who believe that a challenger could break into the mortgage business where Lloyds, owner of Halifax, controls 20 per cent.

The returns from this lending can be attractive – but only if costs are kept low. Anyone with a portfolio packed with traditional bank stocks may now be alarmed.

This would be an overreaction, given the huge market share still held by the High Street names and the inertia of account holders (idleness, not love keeps us faithful). But monitoring the possibilities for diversification into fintech would still be useful.

As Giles Worthington of Sanlam, the fund manager, says: ‘Catastrophe is not coming tomorrow.’

But the High Street names are being ‘disintermediated’ with rivals making inroads into profitable parts of the banking business, such as credit cards and foreign exchange. ‘Your bank should know more about you than anyone on the planet,’ says Worthington. Problem is, the traditional banks’ systems (bits of which were built in the 1970s) impede the use of their precious customer data to sell more products.

Newcomers, by contrast, exploit their knowledge of customers with ease. But what do we know about these interlopers? When will it be possible to invest in them? And how risky are they?

https://www.thisismoney.co.uk/money/investing/article-9844907/amp/Fintech-start-ups-challenging-old-guard-banking-world.html