OPINION-ED BY Howard Womersley Smith, Partner, Reed Smith – 2020 was always going to be a pivot point for both UK challenger banks, and the FinTech sector as a whole, even before the crisis.
However, few at the start of the year could have predicted just how much global lockdowns would upend our daily lives and, with it, our spending habits.
Much has been made of the drop in use of challenger banks during the Covid-19 crisis. Recent research from Curve, for example, has found that, as the UK entered lockdown, use of challenger banks’ products fell by 90%, compared to just 60% for traditional banks.
For all the widespread speculation, this drop is not the product of the inherent undesirability of the challenger offering; rather it reflects a temporary change in spending habits. With consumers trapped indoors, it’s inevitable that challenger tech – often used for a coffee here or a sandwich there – should briefly decline in use. Larger transactions are typically made using account holders’ traditional banks, which store their larger deposits (such as salaries and savings) and will therefore have better overdraft limits.
Additionally, the challenger banks’ USP has been based on the ease of use of their apps and the transactional data that they provide. Lockdown has slowed down the frequency of transactions and therefore the reason for using challenger banks.
Moreover, whilst the card payment data provided by Curve provides a snapshot of the use of a card that is linked to a bank account, it does not provide an accurate snapshot of the use of a bank’s services or the usefulness of the underlying account – both key user advantages that the challenger bank sector maintains over most traditional banks
App usage is a better indicator of the usefulness of a bank’s products but not the effectiveness of its customer services. However, the challenger banks use push notifications to provide the information for which account holders would typically access their online apps, meaning that fewer challenger bank customers will be recorded as opening their apps, despite their shiny new aesthetic. This may go some way in explaining the change in banking habits triggered by lockdown. In short, we’re witnessing a temporary aberration, not the start of a prolonged decline.
Are challenger banks losing the race?
Exploring the differing business models of challengers, as compared with traditional banks, sheds interesting light into why they have performed differently under the recent financial pressures.
Challenger banks’ business models and growth plans have been based on targeting specific sectors of the market, such as millennials or SMEs. These two example sector groups are good starting points, as they are open to change and improvement through innovation.
However, the concept of change requires moving from a current practice to something new. The research from Curve found that traditional banks are still used for four in every five purchases, suggesting there is still a long way to go in the process of transition. That transition will involve maintaining the old way of banking, just in case the new way doesn’t work out. That is an instinctive and clever approach given the exit of N26 earlier this year.
Additionally, UK challenger banks measure the number of account holders that use them alone, rather than in conjunction with others. This is a good indicator of UK challenger banks’ acceptance and trust by account holders, and should be a sign of their maturity in the UK banking market.
What can challengers do to secure long-term loyalty?
The fast-growing challenger bank, driven by the tech-hungry consumer, has certainly achieved cult status. However, they should be careful to ensure that this status does not end with them falling out of fashion. Despite a bruising time recently, the savvier challengers will be looking to broaden their target customer bases and boost customer loyalty and dedication, such as with senior account holders and children, as we have seen with Revolut Junior. This is when the UK challenger banks shine and will really see singular adoption of their offering over and above others, including the traditional banks.
In a drive to be the single bank of choice, UK challenger banks have been on a campaign to encourage account holders to pay their salaries straight into them. Incentives, such as Get Paid Early, have helped with this but again it does involve a process of transition away from their traditional banks.
The future of challenger banks
We should be careful not to read too closely into the temporary dip in usage challengers experienced during the start of lockdown. Despite the data from Curve suggesting that challenger banks have failed to overtake their traditional counterparts, significant disruption lies ahead as we continue to transition from the current practice of using traditional banks. The consistent trend toward user-friendly applications, while maintaining their digital obsession, shows that the future is very much in the challengers. Transition is never smooth but change is as sure as the tide.
As with all sectors during the pandemic, the challengers are under close media scrutiny but we should expect to see them flourish in the years to come. We should check in together towards the end of year to see how the challenger banks have fared during a challenging year.
