Since first emerging in the UK several years ago, challenger banks have had a significant impact on the financial services landscape.
Many are demonstrating strong growth (Monzo now has more than two million UK customers) and the competition they provide is forcing established banks to introduce new digital offerings and address shortcomings in how they operate.
The likes of Monzo, Starling, Revolut, Atom and ePayments offer a superior customer experience and more flexible banking services for both consumers and small businesses.
This is proving attractive to younger consumers: the bright coral Monzo card is now a lifestyle accessory for Millennial and Generation Z consumers. Research by GlobalWebIndex backs this up, finding that 59 per cent of users of the Monzo, Starling, Revolut or Atom apps are aged 16–34.
Despite tending towards a younger demographic, these users are actually more likely to be in the top income groups – one-third are in the top 25 per cent of income, 1.6 times the UK national average.
While they may be small, digital-only banks are making headway with banking consumers, the GlobalWebIndex research demonstrates. The proportion of people who have used at least one – Monzo, Starling, Revolut or Atom – rose from 3.6 per cent in Q3 2018 to 6.6 per cent in Q1 2019. That’s an 83 per cent increase.
This does represent healthy progress, but it should be noted that the proportion of these bank users remains relatively small: just six per cent of internet users used the apps of the same four banks in the month prior to the research being conducted.
The real impact of digital banks is their focus on providing the kind of customer experience that many consumers increasingly want. They have done away with the need for bank branches, offer customer services via mobile devices, and provide value through a community of users.
Many customers have been tempted by challenger brands through capabilities like being able to see transactions in real time, rather than having to wait hours or days for payments to show on their account, or to manage their finances better with the help of spending trackers.
Of the challenger bank customers surveyed by GlobalWebIndex, 47 per cent said having the latest technological products is important to them, with 25 per cent saying they’d buy a service simply for the experience of being part of the community built around it.
Thanks to vast legacy business processes and infrastructure, large, traditional banks just haven’t been able to offer the same level of customer experience, although they are now reacting by introducing new digital brands and platforms. However, it has been argued that challenger banks have what it takes to stay ahead, thanks to their inherent flexibility and the fact that traditional banks are aiming for where the challenger banks are, rather than where they will be in the near future.
To better compete with challenger banks, traditional players need to offer greater personalisation, a sense of community, innovative new products and the ability for customers contribute ideas for those products. Customers of challenger banks value innovation that provides real value in their lives, making it crucial for brands to create novel and meaningful interactions based on consumer needs.
Examples include a chatbot-based virtual financial adviser called Cleo, which helps consumers track their finances and offers tips and reminders if they overspend. K2’s BankBot, meanwhile, allows users to type in questions and commands to complete tasks, rather than needing to navigate through an app interface.
For some UK challenger banks, the next step is to expand abroad, with Monzo announcing it will expand into the US this year. However, they are likely to face increased competition from other fintechs, as well as new entrants like Facebook’s Libra digital currency, which is likely to attract more adventurous consumers who already dabble in cryptocurrency.
Financial services have been given a reboot by these challenger banks, meaning expectations around customer experience have rapidly increased. Whether or not these brands become dominant forces in the future, their impact on financial services is undeniable.