Digital transformation has improved the efficiency, innovation, and access to services for customers, according to a report out today from the London lobby group TheCityUK.

Contactless payments have increased by 115% year-on-year in June 2017, which accounts for a total of 470 million transactions in that month alone.

As a result, cheques have fallen out of fashion, with payments down by 69% over the last ten years. Cheque payments now make up just 0.4% of all payments across the UK.

The use of online banking has doubled as 63% of customers’ accessed their accounts without the need for face-to-face interaction in the past decade.

From 2012 to 2017, UK banking apps increased from 21% to 61% with log-ins reaching 159 per second in 2016 across a total of 19.6 million users.

The financial and related professional services industry has made a large contribution to the economy, contributing £11 of every £100 of UK economic output and £14 of every £100 of UK tax revenue raised.

In 2016 to 2017, the industry contributed £72.1 billion of tax, which is half the total health budget.

TheCityUK chief economist and head of research Anjalika Bardalai said:

This industry is a fundamental part of local economies across the country. It is a major employer, providing high value jobs in all regions and nations of the UK.

It’s Britain’s biggest net exporting industry and its largest contributor of tax, helping to pay for vital public services like the NHS, schools or the armed services. Ensuring its ongoing growth and success will be critical to the future success and prosperity of the UK as it leaves the EU in 2019.

GlobalData principal analyst Daoud Fakhri supports these findings. He said:

Banks are in the process of enhancing their digital onboarding capabilities, which will allow them to sign up new customers online or via mobile – digital signatures and the ability to capture photo IDs via a smartphone camera are key technologies here.

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GlobalData’s Retail Banking Insight Survey shows that the proportion of online consumers in the UK who use mobile banking on a daily or weekly basis increased from 31% in 2016 to 38% in 2018.

Fakhri added:

Our survey data shows that there has been a shift from in-branch to online application for current accounts in the UK. Of these who opened their account in 2007 or earlier, 75% did so in-branch, 9% online. Among those who opened their current account in 2014-17, it was 51% in-branch, 38% online.

A big shift, but the branch is still a hugely important acquisition channel, so banks close them at their peril. Nevertheless, commercial pressures will force banks to continue closing branches, as these represent a significant fixed operating cost.

The financial services industry currently provides employment for 2.3 million people across the UK with two-thirds of workers outside of London and based in Birmingham, Bristol, Edinburgh, Glasgow, Leeds, and Manchester.

Fakhri told Verdict what the key facts mean for the financial technology sector.

He said:

There has been a lot of hype about fintech over the last three to four years, but the reality has lagged behind. Very few fintech firms have achieved significant scale, with Monzo, a mobile-only bank, being one of the few exceptions. Monzo has harnessed the power of social media and word-of-mouth recommendation to gain over 600,000 customers. However most fintechs  are far smaller and do not pose a significant threat to the established banks.

A new development in the UK and EU is the launch of open banking, where legislation has forced banks to permit third parties, such as fintechs, to access customer data (with their permission) via open APIs. The aim of this is to promote innovation and make it easier for fintechs to compete more effectively and acquire customers more easily. One possibility arising from open banking is the ability of banks to integrate third party services into their own digital platforms through open APIs. Monzo is doing this, as is Starling Bank, another mobile-only bank: a current account is the only in-house product that both providers are offering, and all other products — savings, investments, insurance etc— are being sourced from third parties and built into their platform.

So the future of fintech is more likely to be one of collaboration and partnership with the big banks, rather than outright competition. Both need the other: the big banks can supply the customers, the regulatory expertise, and the funding, and the fintechs can supply the innovation, technological expertise, and creativity.

While collaboration over competition may be the result of the expanding digitisation, a TheCityUK spokesman disagrees.

He said:

If any company fails to adapt to changing circumstances and the evolving needs of their customers they risk being over taken by competitors. This is in the nature of a market economy. But it would be fruitless to try to make predictions on which ones will success or fail – or what the outcomes of this would be.

In a CityUK report last year, the financial services body envisioned a world-leading industry by 2025. It predicted that the industry will have transformed itself to be highly digitised, emphasising the need for a shift from protected physical assets to protected digital assets.

It found the UK will also need to prepare for the potential threat posed by the lack of access to EU markets.

“The UK has a globally leading fintech ecosystem with an effective clustering of talent, capital, regulators, and clients. However there are funding gaps across the lifecycle and a need to further invest in cyber-security, while developing and adopting transformative enabling technologies,” the report noted.