Daoud Fakhri considers the impact on challenger banks following the security breach at Tesco Bank that saw thousands of customer accounts compromised.

The recent security breach at Tesco Bank, which saw up to 40,000 current accounts compromised, is unprecedented in scale. Not only will it severely damage the bank’s reputation, it will aggravate consumer doubts about challenger banks in general.

Over the weekend of 5-6 October 2016, Tesco Bank was subjected to a massive hacking attack that affected 40,000 of its 136,000 current accounts. Of these, around 9,000 had funds stolen from them, with losses totalling about £2.5m. The bank responded to the attack by barring online debit card payments from its accounts, though customers were still free to use their cards and to withdraw cash from ATMs.

Although Tesco Bank hasn’t divulged details about the nature of the attack, the fact that so many accounts were hit in such a short period suggests that vulnerabilities at the bank itself were targeted, rather than individual customers via, for example, phishing emails. The suspension of online debit card payments has led to speculation that the hackers were able to obtain customers’ card details.

Aside from the cost of reimbursing affected customers, Tesco Bank may also be subject to regulatory fines. Should investigations find the attack succeeded due to deficiencies with the bank’s systems, the Financial Conduct Authority or the Prudential Regulatory Authority may impose substantial financial penalties.

Bad news for challenger banks

However, the impact on reputation and consumer perceptions will be a bigger concern for Tesco Bank. The Verdict Financial 2016 Retail Banking Insight (RBI) Survey found that reputation is the single biggest factor that consumers look at when choosing a current account provider, cited by 66% of those questioned. Security is a hygiene factor, and its absence can only be hugely damaging to a bank’s standing. Consequently, the security breach at Tesco Bank could lead to the exodus of a significant number of customers.

However, this episode could also spell bad news for challenger banks in general. According to Verdict Financial’s RBI Survey, only 11% of consumers are very willing to consider using a digital-only bank, with a majority expressing a preference for traditional banks with established reputations. Nevertheless, more consumers than not believe that such banks offer better rates, and better online security. Losing this latter advantage will have serious consequences for their credibility and appeal.

Despite easier account switching procedures, the UK current market remains characterised by high levels of customer inertia. Challengers face an uphill battle to acquire customers, and have to offer market-leading rates to win new business. Following the Tesco Bank hack, the battle to win over consumers just became that much harder.

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– This article is reproduced with kind permission from Verdict Financial. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Main image: Profit_Image, Shutterstock.com

About the author

Daoud Fakhri

Daoud Fakhri is a senior analyst at GlobalData, specialising in issues related to the retail banking sector. He is well-versed in subjects ranging from the prospects for new and non-traditional entrants in the sector, to the future of branch banking, developments in online and mobile banking, and the issue of consumer trust.

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