PayPal is the biggest threat to British banks

The threat to UK lenders by challenger banks like Metro Bank and Virgin Money pales in comparison to that posed by PayPal, according to new research.

A study of 2000 banking customers by YouGov and the law firm Pinsent Masons found that nearly a quarter were more likely to switch to a digital payments service, such as PayPal or WePay, than to a mainstream bank in the next two years.

Just 13% said that they would consider a switch to a new bank in the same timeframe, and fewer than one in twenty would move to a technology company such as Facebook or Google.

I suspect people see them as trustworthy because they’re already proven in the payments space,” John Salmon, head of financial services at Pinsent Masons, told the Financial Times.

Nobody can doubt that transitioning to a digital strategy is essential for any customer-facing bank given the potential for greater speed, reliability and security of payments and other services.”

Although it does not offer full-service banking services, PayPal’s increasingly ubiquitous presence means that it can almost be used as a de facto bank account, and the company seems to have been flirting with the idea by experimenting with more “traditional” banking services such as cash deposits and supporting small businesses.

In October, following PayPal’s split with EBay, former VP Daniela Mielke suggested that the logical next step for the payments giant would be to pursue a banking licence and start underwriting its own credit products, cutting its dependency on existing banks.

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