Challenger banks have been a black cloud looming over the ‘big four’ for the past few years. The traditional high street banks have been braced for these challengers to shake things up and create an entirely new environment, just as budget airlines did to the aviation industry in the 90s. And with the FCA keen to see consumers benefit from ‘effective competition’ for regulated financial services, the time seems right. However, while those working in the industry are tracking every move of the challengers and what they offer, this awareness has yet to filter down to customers. With the big four still holding over 90% of the UK market, and consumer awareness of challenger brands failing to gain momentum, is the impending shake-up going to happen, and if so, when?
The big four are portrayed as clunky behemoths held back from innovating by complicated legacy infrastructure that’s creaking at the seams. In just the first few months of 2016, customers of some of the major banks have experienced cashpoint outages, data breaches and system failures. What’s interesting, and at odds with consumer behaviour in other industries, is that customers are not reacting by switching brands in their droves to new suppliers, despite the seven-day switch service introduced by the UK government in 2013, which makes switching current accounts easier than ever. So why the complacency?
The path of least resistance?
New challengers are offering faster, cheaper transactions with greater flexibility than ever, yet customers are still hesitant to switch. Banking is seen by customers as a chore, and many customers lack confidence in financial planning matters. Consequently, spending time researching and understanding different banking products, switching to a new bank or account, and then getting used to a different way of doing things, is something many people avoid. This is why UK customers are collectively losing out on £3bn through money sat in low-interest savings accounts, and it’s why the challengers may well continue to struggle to gain traction against the tried-and-tested big banks.
Step forward the challengers
The challengers to traditional retail banking take several forms. First off, supermarket retailers such as Tesco, M&S and Sainsbury’s were quick to head into the banking space with uncomplicated current and savings accounts. It made sense: these are heavily data-rich organisations, putting them in prime position to offer customer-centric services. They have the on-street presence through stores across the UK, and can interact directly with their customers without huge startup costs.
The next wave of challengers concentrated on putting the customer at the centre of their communications. Virgin crashed into the market in 1995 with Virgin Money, branding its high street outlets as stores rather than branches, with a new focus on customers’ individual needs. Metro Bank arrived in 2010, introducing a softer side to the retail banking market with its mission to create ‘fans not customers’. Growth for these new players hasn’t proven easy, however – Virgin Money only has 75 stores nationwide, compared to Lloyds’ network of nearly 1,300 branches – and there has also been a string of banking startups that have failed during the same period, the most well-known of which is Prudential Banking’s internet bank, Egg, established in 1998. The costs of creating a high street presence to rival that of the big four make the direct high street challenge almost impossible, and without a high street presence to back them up, online banks have historically struggled to gain traction and retain customers for the long-term.
Don’t talk, tap
A new breed of mobile-only and mobile-first banks is hoping to reverse those trends and succeed where others have struggled. In an age where laptops are being replaced by mobile devices, where people trust new brands like never before (think Uber, Netflix and Airbnb), and where we are moving to mobile for more of our daily tasks and activities, these new banks may just have their timing right.
Atom Bank intends to build relationships with customers by never being more than one atom away from them, using mobile technology to enable seamless integration into everyday life. Atom, along with Starling, Fidor and Open Bank, all recognise that the new age of customers demand to use services on-the-go. These customers live on their mobile phones and expect to be able to complete all of their transactions that way. These new players hope that customers will value the fast and convenient features and services, from biometric authentication to digital wallets, above a traditional high street presence.
This low cost-base proposition allows the mobile banks to lead with low-interest loans and high-interest savings. And the new breed is also tapping into cultural trends such as social networking and online communities, to appeal further to today’s customers and to help them self-serve. Fidor even links its number of social followers to its interest rates, and is using a community-centric model to help enable it to serve its 300,000 customers with just 32 employees.
Unify to achieve scale
Whether the challengers succeed or not, customers will benefit from this period of market disruption, as it’s forcing traditional banks to reassess their services and ensure they remain competitive. My view on the future of retail banking is ultimately one of unity. I expect there will be further challenges to the incumbent banks, but there will be two long-term survival strategies: stick to a niche market, serve that market well and own the space; or work together with the traditional banks to gain scale. The incumbents will need to innovate faster and faster, but tied down by legacy systems and processes, they cannot do it alone. The challengers offer technological innovation and slick customer experience in spades, but may struggle to gain traction against customer inertia and to navigate the regulatory banking landscape. Joining forces would be mutually beneficial to both the incumbent and the startup, and ultimately the customer.