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How the “challenger banks” have become the ‘challenged’ banks

[fa icon="calendar"] 28-Jan-2019 10:30:00 / by Jamie Cooke

Jamie Cooke

traditional bank and mobile

Better customer service, cleaner user interfaces, simpler language, spending insights and even gambling blocks…digital banks or ‘challenger banks’ as they are commonly referred to, have taken the UK banking market by storm and with features like these, no wonder they are signing up thousands of new customers every day. However, as the large incumbents awaken from their slumber, are they starting to realise they must fight back no matter how much they make light of these new players?

Jamie Cooke, Managing Director of fscom, gives his opinion...

Open banking will drive an even more competitive and innovative market

As the financial regulator acts to further develop a competitive landscape with initiatives such as Open Banking, the result will be a very different banking experience for the customer. The rigid governance structures and legacy IT architecture makes it hard for the large incumbents to be as innovative as they want to be, while the PRA and FCA revised approach to banking authorisation has made it easier for the new agile digital banks to enter the ecosystem and start to gain some of the market share.

Putting the customer experience at the heart of banking

The rapid growth of the customer base of these new banks shows there is a real hunger for banks to do things differently. The digital services offered by the mobile only banks are designed with the customer at the centre of everything they do – to make banking easier, more transparent and break down the ‘us and them’ rhetoric. 

In the last few years, most large incumbents have not felt unduly concerned by these new entrants and cite statistics such as “a quarter of customers would not open an account with a bank unless they held at least one local branch”. However, the digital banks are already on the case and are finding ways ‘around’ these objections. The most recent example, Starling Bank, has become the first of these banks to partner with the Post Office to allow their current and business account customers to deposit and withdraw cash through the Post Office’s 11,500 branches nationwide. This partnership now solves the key objection that a quarter of customers cite as a reason not to use a digital bank by providing the additional physical presence that many customers value highly.

With innovative changes like these, any large traditional banks who are currently dismissing the challenger banks as a distraction, would be unwise to do so. This view is supported by the latest Current Account Switching Service dashboard from BACS (October 2018) which comments that leading digital banks, Monzo and Starling, are making significant captures. In fact, the statistics show that outside of HSBC and Nationwide, both digital leaders have the highest net gains of consumers. 

In any case, the traditional banks have been responding by adapting, albeit more slowly, but they are responding. Most of the traditional banks now have mobile apps with user friendly interfaces and are working to provide further benefits such as the spending insights.

There are others who are moving a little bit quicker and have started to fight back with similar consumer benefits such as Barclays Bank.

Most recently, Barclays debuted the ability for customers to block payments to certain categories of retailer, such as gambling services, premium rate websites and phone lines. They are the first of the UK’s incumbents to follow the example set by the challengers, Monzo and Starling Bank.

What does this mean for the challenger banks? Do they now feel pressured by the response of the large incumbents or are they confident that they can keep ahead of the incumbents?

I believe they have and will continue to disrupt the large incumbents because of the pace that they can respond to consumer demand for new features and their appetite for adopting key regulatory initiatives, such as Open Banking, for a competitive advantage. The response to Open Banking between challengers and incumbents was stark. Digital players such as Monzo view the regulation as an opportunity to provide consumers with more competitively priced financial products with the bank as the central platform. This positive response is in contrast to many larger banks who failed to meet the deadline to meet the new regulations.


Survival of the fittest

The bank who keeps the customer at the centre of everything they do is the bank that will prevail. The tables have turned, and it is the customer who will hold the bank accountable now so there is little room for error. In today’s digital world, consumers now have many social media platforms to voice their dissatisfaction or pleasure with banking providers.  As the customer becomes more informed, aware of their options in relation to banking and can take advantage of the ease of switching, they will not be as loyal as they once were.

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Topics: PSD2, FINTECH, challengerbanks