Author: Randolph McFarlane
Step back 12 months. The 2015 end-of-year predictions were all singing the same: 2016 will be the year of the challenger banks, bringing new innovation, lower prices and improved customer service. So what actually happened?
In January 2016, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) jointly launched the New Bank Start-up Unit.
The aim? To help solve the long-standing problems of competition and consumer choice by helping new, prospective banks to enter the market. By helping to increase competition, the unit would help to lower prices, improve service quality, give consumers better value for money and bring innovative products to market.
What has actually happened with start-up banks?
While new banks have launched – including Atom Bank in April, Fidor Bank in September and Tandem Bank in November – we’ve found in our focus group discussions that awareness about these new banks has not filtered down to UK consumers.
Instead, the big four banks (namely Barclays, HSBC, Lloyds Banking Group and The Royal Bank of Scotland Group) have retained the vast majority of the retail banking market in the UK. But these older and larger banks traditionally don’t offer the high service levels and innovative services customers demand today.Larger banks traditionally don’t offer the innovative services customers demand today Click To Tweet
As such, you’d expect consumers to have started to jump ship and hop on board with the new banks by now. What’s more, you would have thought recent high profile media stories of cyber attacks, cash point downtime and failure to meet stress tests would have loosened loyalty and made consumers more willing to switch.
Consumers stay put
But despite the 7-day switch promise and the lure of an agile, new bank able to offer innovative products and lower prices, consumers have stayed firmly put.
In fact, the Competition and Markets Authority found that only 3% of personal customers and 4% of business customers switch to a different bank in any year. This is in start contrast to other markets, such as the airlines, where new challengers have had a rapid and significant impact on their market.
And so, the older and larger traditional banks haven’t needed to invest heavily in new products, reduce prices or improve service quality to win and retain consumers.
But why do customers stay put?
It could be that consumers see banking as a chore, not exciting enough to invest time in. It could be that consumers struggle to understand what their current bank gives them and to compare that with what other banks are offering. Whatever the reason, consumers are avoiding change.
Even the supermarket banks are struggling to gain market share despite a strong brand and rich customer data that allows them to deliver customer-focused services. Virgin Money with its store that focuses on the individual’s need is struggling, along with Metro Bank and its focus on customer service. Atom Bank and Fidor Bank were hoping to reverse the trend by tempting consumers with innovative products and tapping into the social trends of the online generation.
It would seem that the banking crisis – now many years ago – really brought home the risk. It really shook trust. Even now, consumers still lack confidence in banks and the banking system.
What will 2017 bring in digital banking?
One thing is clear: consumers will benefit from the disruption brought by the challenger banks in 2017, even if they choose not to hop on board themselves. Why? Because challengers are forcing the traditional banks to reassess what they offer.
Over the coming year we can expect two things to happen:
- Some of the challenger banks to carve out a niche market and really own that space as best-of-breed players.
- The other challenger banks to work with the traditional banks. This win-win move will allow the new banks to gain scale and to navigate the regulatory landscape, while providing traditional banks with the skills they need to innovate.
And so I predict 2017 will be an eventful year in banking, hopefully bringing the innovation and improved customer service levels that today’s consumers expect.
Are you looking at how digital will help your innovation in 2017?