The Creative Destruction of the Banks Could be Sooner Than They Think

03/07/2012 10:48 BST | Updated 02/09/2012 10:12 BST

The scandal around Barclays' interest rate fixing and the computer glitch chaos experienced by RBS, NatWest and Ulster Bank customers recently are just the latest reminders of the systemic problems facing the UK's banks.

Pitched into turmoil by the financial crisis and irrevocably scarred by the bonuses fiasco, these issues follow a long series of troubles for the banking sector, with customer confidence at an all time low.

The BBC's Robert Peston described it as "a tragedy for all of us, because we need these institutions."

For several years it has been clear that this is a segment of the economy that is ripe for disruption - and fittingly a new wave of entrepreneurial contenders have started to break through.

With the launch in 2010 of Metro Bank and its subsequent expansion - it recently raised £126 million from investors - the bank's emphasis on customer service, long opening hours and a pleasant customer experience is proving to be a promising model, which provides a contrasting alternative in the market.

As Britain's first new high street bank in over 100 years, Metro Bank calls itself a "revolution in banking", and many disillusioned customers feeling badly treated by the main banks have turned to this fresh, entrepreneurial contender.

And there is more good news for small firms, with the recent announcement that Silicon Valley Bank is to be the newest entrant in the sector.

Silicon Valley Bank's UK chief Phil Cox has pledged that the bank will increase its lending in the UK to billions "very quickly". The bank has promised make loans of between £300,000 and £30m to established companies looking to expand and has undertaken to help the UK's entrepreneurs "meet and exceed their ambitious goals" - a welcome assurance and a wake up call to other UK retail banks that have been continually attacked for restricting lending to small businesses.

In response, a host of innovative businesses have stepped in to fill the gap. Peer-to-peer lenders such as Zopa, Crowdcube, and Funding Circle are providing innovative new ways for startups to raise investment and their rapid growth is ample demonstration that dissatisfaction is often the vital spur required for entrepreneurial innovation.

These disruptive upstarts have caused Andy Haldane, head of policy at the Bank of England to agree that small peer-to-peer lenders could change the way entrepreneurs finance their business, and even in time replace high street banks.

The economist Joseph Schumpeter famously used the phrase 'creative destruction' to describe the act of replacing something old and defunct with something new and fresh.

Right now our banking system has to address a perfect storm of perceived incompetence, alleged criminality and widespread distrust. With customers crying out to be treated better, these things have to be addressed or they will vote with their feet.

With the arrival of new businesses that can do it better, faster or smarter, the incumbents need to watch out - the 'creative destruction' of the banks could be sooner than they think.