There was a time when we couldn’t get enough of challenger banks.
Before the emergence of digital financial services providers such as Monzo, Revolut and Starling, customers had no choice but to deal with the pain of traditional banking: limited online services, prompting you to have to call the bank, only to be told by a robot, after 20 minutes of waiting, that to make a simple transfer the trip to the branch was inevitable.
Fintech attacked the industry exactly at its Achilles heel – the long neglected customer experience. They changed the way in which financial services were delivered – making it easier, quicker, more convenient and just more pleasant for people to manage, share and save their money.
Before 2020, the typical challenger banking customer was a young professional and technologically literate individual travelling abroad – hence the need for multi-currency accounts. The Covid 19 pandemic, however, made digital banking a necessity for all.
While traditional banks were closing their branches and reducing operational hours to respect social distance regulations and lockdown rules, over 30 digital banks around the world were launched last year – delivering critical financial services with just a few clicks from a mobile phone.
The UK emerged as the global hotspot for challenger banks with 37 currently open for business. The nation is home to one-third of Europe’s total neobank market and remains the world’s most active market.
And the trend is here to stay – once we go back to post-pandemic reality, not everyone will rush back to a local banking branch. If we can meet our financial needs in minutes from our phone, why waste precious time?
The space, however, is getting more competitive with heavyweights entering the arena. Traditional banks have by now learnt their lesson and are catching up with their digital banking proposition (such as Bo by RBS and Marcus by Goldman Sachs). Tech giants such as Google will be making an entry this year, as well as more niche digital providers such as GO2bank, a challenger bank aimed at low-to-middle-income consumers. The lines are further blurred by online payments and commerce platforms like Stripe, Shopify, and fintechs like Transferwise – which offer many customary banking services.
Is there space for all? Unlikely.
Many banks are already fighting for survival and this year will be a pivotal moment in the race for market share. This new type of bank knows very well how to lure in new customers – develop an attractive and easy to use app with no fees on almost everything – but not how to retain them, or even how to become financially solid and profitable.
We are already witnessing an increase in casualties. In November, BBVA agreed to sell its US subsidiary to PNC after mounting losses. While the transaction is still taking place, the bank also announced the winding down of its digital offering Simple, the personal finance app created in 2008 and bought by BBVA in 2014 in a bid to enter the neo-bank race.
Customers of Simple are now being wooed by One, a brand new challenger bank that offers higher interest rates on savings, early paycheck access and other enticing features. But this might not be enough to regain consumer confidence.
Meanwhile Monzo and Starling – the big superstars of the UK digital banking scene – have also recorded significant losses. Monzo laid off employees and struggled to break even, and faced a barrage of criticism from customers that had their accounts frozen, making its future look uncertain. Its rival, Starling Bank, had to work twice as hard to balance the books by getting into SME lending – especially during the Covid 19 and only made a profit for the first time in the month of October last year.
Foreign entries such as N26 announced it is expanding to Brazil, after closing their UK operations due to Brexit. As they pulled out, Revolut gained new ground by applying for a UK license. The app was granted a European banking license by the Bank of Lithuania in 2018, but has operated as an FCA authorised e-money institution in the UK until now.
Unicorns like Revolut still have enough funding to back them up, – only time will tell when and if they bring value to its investors, – but this is not the case of smaller challenger banks who, without a viable customer proposition guaranteeing customer loyalty, will just go out of business.
2021 may be a challenging one for challenger banks. It is no longer about the millions of customers you can onboard, and how much investor cash you can throw into it (let’s face it, Google can outspend and outreach you). There needs to be true value to customers, and true value to the shareholders. A great customer experience and freemium model will no longer suffice.
A recent survey conducted by Accenture unveiled that just 45% of consumers think challenger banks will be around in a year. That’s not a good way to begin 2021 – and it should be a wake up call to all digital banks – regardless of their size.