How your bank is reacting to competition

New lenders may struggle to prise customers from traditional banks even though their borrowing and lending rates can often be much better, research from the BBC suggests.

Borrowing money from a peer-to-peer lender or changing currency with an online firm can be cheaper.

But the lure of free bank accounts, and hidden risks associated with peer-to-peer are muddying the waters.

And, for customers without debts, old-fashioned banks may come out on top.

Meanwhile, these traditional banks also have an eye on the competition.

Best return?

Alternatives to bank loans come in the guise of peer-to-peer lenders, who connect lenders with borrowers directly.

That means you can earn a better rate of interest, but there is no expensive pile of capital owned by bank share holders to bail you out if borrowers default.

BBC research suggests that while borrowing from a peer-to-peer lender may cost less, who to deposit your cash with for the best return is less simple.

A £2,000 peer-to-peer loan typically costs £7 to £27 a month compared with as much as £123 for a bank overdraft or £50 with a credit card.

Free bank accounts while you are in credit, and the protection of the Financial Services Compensation Scheme, which guarantees deposits of up to £75,000, means comparing bank deposits with investing in peer-to-peer is tricky.

While a 7% peer-to-peer interest rate clearly trumps the 1.5%-or-so top bank rate, you don't have deposit protection and may be constrained on when you can withdraw your money.

Warren Mead, a financial technology analyst at KPMG, said banks still have big customer bases and "despite everything, a degree of customer trust in banking".

'Inefficient' banks

Meanwhile, banks are setting up their own funds to invest in smaller peer-to-peer competitors.

They are also trying to develop their own financial technology, or "fintech".

But they are at a disadvantage compared to the newer entrants.

"Retail banking is relatively inefficient" because of old computer systems dating in some cases back to the 1970s, said Mr Mead.

They are spending billions of pounds to try and right this through mobile applications for phones and tablets, but still rely on elderly computer "plumbing".

'EBay model'

The newer firms have a lot to offer, they say. Giles Andrews, founder of Zopa, a peer-to-peer lender, says his business model relies on efficiency to be cheaper.

"Customers know where their money is going" and it goes to "lots and lots of people" to spread risk, he says. His business gathers data about borrowers to price the loans, he says.

"We were inspired by what eBay had done to retail," he says. "We thought well, that was a really interesting inspiration, let's see if we can apply similar technology to the world of lending and borrowing."

But comparing them with a bank directly is hard. They don't have as much capital as traditional banks, he says. Regulators don't require it.

"Banks are regulated to take deposits and protect their depositors and hold a lot of regulatory capital to do so. Because we connect our lenders and borrowers directly" that capital isn't required by regulators, he says.

He identifies a way banks can muscle in, however. Big banks may well partner with smaller challengers similar to his, although many will stay independent, he adds.

The challengers will also struggle so long as there is free banking - current accounts with no regular, or transparent, fees.

Prototypes for business

Taavet Hinrikus, of transfer service Transferwise, says "keeping your balance is something where banks are in the best position to do", but on everything else, they are being challenged.

The BBC found changing currencies with a newer online firm was less than half the price of an average bank transaction.

And there are opportunities for firms like his to grow. Only about a third of consumers have used non-banks for financial services, he says.

But traditional banks are fighting back in more ways than one. As well as buying up the competition and offering guarantees, they are trying to win over customers by helping them with their businesses in less traditional ways.

Barclays, for instance, is using vacant space above branches to offer its customers work space and coding lessons. People can come in and get business advice.

Jon Paterson runs a 3-D printing service, which prototypes design ideas at a bank branch in Brighton. "We are cutting down on time spent sending things to China, sending to overseas," he says.

The facilities are open to everyone, with the bank offering free trials on Fridays to lure in new customers. But it is in the bank's interests to have successful businesses with a need for financing and burgeoning deposits under its roof.

It is also an attempt to put banks back at the heart of economic growth, says the lender.