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In the immortal words of Glenn Frey, the heat really is on:-

Will challengers break into the majority and gain a significant number of primary-use customers to be able to really challenge incumbents?

Will legacy banks imitate all of the additional value created by challenger banks’ leveraging of new tech and customer experience propositions?

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14 comments

7 months ago

The one bank account days are over. As Ron Shevlin put's it, you're big 4 account will become a "paycheck motel". Where and how you spend, make p2p payments etc will all be outside of your bank. As pointed out in the blog and on here, there's nothing forcing you to close an old account. If the account pays you on average£15 per month like my Santander one does then it sits there and does the DDs, takes the paycheck and I spend with credit that's repaid at the end of the month.

Santander has no useful data, it can't categorise my spending as it just sees a monthly aggregated amount. That's why I strongly believe that non-banks with AISP / PSIP capabilities will win the engagement war eventually. The money will sit in one or more paycheck motel acting like a vault with next to no data on which to add value added services. Whilst the engagement layer gains more and more insights and the gap widens, I predict that shortly people won't even bother downloading a banks supplied app as there's no need for it. With lower usage then the features and effort to compete will dry up creating a death spiral will occur.

Just my 2p on this.

7 months ago

I completely agree with your points about the importance of access to the transaction / payments data. That's why I believe the challengers will need to provide account aggregation too.

7 months ago

It may not necessarily be an easy but certainly a long road for challenger banks. I do not think challenger banks can compete with incumbents on the same basis but they can continue to grow and gain market share by constantly creating new market spaces / redefining the basis of competition with new products / business models to suit their targeted market segment which to me is the young, tech savvy people. Unfortunately, majority of customers do not adopt new products as quick as challengers are willing to innovate - except for the few early adopters which is why the incumbents are not too bothered.

While challengers boast of their cost base as a competitive advantage, Incumbents can adopt a penetration pricing or use financial incentives to woo and retain customers and make profits from other products / service offerings in their large product portfolio. We all like the sleek UI / UX but we can deal with a certain level of friction for some value (interest rates ; rewards for switching etc) - so go the easy way, maintain our accounts with incumbents and open new accounts with challengers, either way the customer wins. Tech inspired Socio-cultural changes impacting our lives including how we manage money varies according to demographics; what % of the population are challengers and their product offerings appealing to? I think they appeal more to the younger tech savvy generation, but the entire population have more of the older generation who are less likely or slow to adopt new products.

Consumerism is driven by information. While most challengers depend on word of mouth, communities and social media, incumbents use their large budgets to control the mainstream media and shape the narratives around banking and financial services. How many people outside the fintech bubble know the challengers and their product offerings well enough to trust them with their finances? Gone are the days of customer loyalty and single accounts for everything. There is room for growth but a lot of work to do. Its the tech companies that challengers should really be wary of, because that is where their competition will come from - they already have distribution and can rapidly innovate.

7 months ago

This a really interesting topic, getting into the later stages of the adoption curve or at least, reaching scale, is obviously key for the challengers.

You won't be surprised that I'm going to take a slightly more optimistic perspective here so I apologise if it seems like I’m picking your argument apart here, I’m not doing it to be vindictive 😇 I’m just playing devil's advocate 👿 At the end of the day, neither of us can see the future so I could be completely wrong 😉

This is a common theme when it comes to pushing digital on a predominantly non-digital population.

our ability to interact with or understand these digital things are still rather low, and a byproduct of that is lower trust 

I completely agree that a lack of familiarity makes people wary & causes lower trust. But I’m not sure that the UK’s population is predominantly non-digital anymore. There’s been lots of stats on this but to quote a couple, 60% of Lloyds users are ‘digitally active’ while Yolt found that 70% of UK consumers use money apps. I can only see this trend increasing as digital services become better & more important to people’s lives. While frankly, the people who will never use digital die off - eventually.

many more have also been burned by the woeful state of digital capability and the subsequent service that legacy institutions had provided to them

This does worry me & it’s one of the reasons why it’s so important that the challengers present themselves differently from the incumbents in my opinion. It’s also why the barrier to trying these services has to be very low e.g. opening an account in 3 minutes from your sofa. If people can be convinced that the challengers are offering something truly new, then I assume that they’ll probably try it. Word of mouth referrals have driven a lot of the challenger’s growth so far & that feeds into this.

How people interact with and see the value of tech and mobile is a huge dependency on challengers banks’ potential success.

Do you not think that people do value tech & mobile already? There’s quite a lot of people that spend £500+ on their mobile phone..

7 months ago

I can only see this trend increasing as digital services become better & more important to people’s lives.

Totally see this rising, the stats are definitely promising. But with any research of this nature, we have be wary. What does 'digitally active' mean? I know some firms are happy with a single login per month - that, to me, does not constitute 'active'. For the Yolt research, 70% of UK consumers having a digital banking app or PFM is awesome, but how many of them are 'active' and how many of them truly derive value from their interactions? (which brings me to the point below).

Do you not think that people do value tech & mobile already? There’s quite a lot of people that spend £500+ on their mobile phone.

Totally - people love their phones! But there are a couple things at play. 1) Many are on contracts, not buying outright, which, like most credit products, lessens the blow of a purchase, allowing consumers to get a nice expensive phone because they want it rather than particularly need it. 2) Deriving value from general tech and digital is easy - I love watching Netflix on my awesome 4K TV, or playing games and WhatsApping on my iPhone X, or having great WiFi speeds for downloading music, or, or, or... That's deriving value in the form of pleasure - is managing your finances 'pleasurable', or do you do it as a means to an end to achieve an improved emotional state?

The tech in question here is finance tech - I hypothesise that, even assuming 60% 'digitally active' users, the proportion of those who truly understand how their interactions with the tech generate action and leverage value is much lower.

7 months ago

That's deriving value in the form of pleasure - is managing your finances 'pleasurable', or do you do it as a means to an end to achieve an improved emotional state?

Monzo's said that they see a similar level of activity from active users as Facebook's app. Whether those users would call that pleasurable or not, I don't know but it suggests that there's value there.

7 months ago

numbers around switching banking providers are really low

We haven’t yet heard the numbers for people switching to the challengers. But over 15% of users are using Monzo as their main account. And I expect that number to increase, as their proposition becomes more compelling. Particularly once the marketplace is built out.

I’d suggest that the curve is actually skewed and that the early and late majorities are not evenly split.

You might be right (it’s hard to know for sure or to know where to draw the line) but this is a good time mention that I don’t think the challengers will or are aiming to capture the entire adoption curve.

The most obvious reason that I can think of for the challengers being so keen to expand internationally is that it gives them access to new pools of early adopters to acquire. Revolut’s already used this strategy to great effect.

The challengers have acknowledged that their products need to be 10x better in order to convince users to switch & they’ve clearly got a long way to go, both in terms of offering core services e.g. joint accounts & adding value. But if they can get there, then I’m confident that they’ll be able to convince a decent portion of the early majority & at least some of the late majority.

That last part may be the most difficult — rewards. Challengers’ very existences are based on the assumption that people will care about the tech and the customer experience and that this is reward enough.

I think they have slightly higher ambitions. For now the challenger’s services only really add value for people that need help managing their finances (plus people who want a decent travel money card). But through the marketplace, they will everyone to save money e.g. you should switch energy suppliers & make money e.g. you would earn more interest on your savings if you switch to this provider. When you factor in the incumbent’s current downsides - punitive fees, poor UX & weaker service etc. there’s the potential to add significantly more value.

7 months ago

I expect that number to increase, as their proposition becomes more compelling. Particularly once the marketplace is built out.

Completely agree. Once the challengers have more marketplace propositions in place, they're much better placed to entice those to become the converted rather than just adopters.

I don’t think the challengers will or are aiming to capture the entire adoption curve.

I think this is a really important point - what do the challengers want? It's easy to write off this question when it comes to incumbents because the status quo is so immovable. But for the challengers, is it a modest piece of the pie; is it, as you mention, a modest piece of adopters everywhere; is it full-scale customer war against incumbents; or is it full-on global domination?

7 months ago

is it full-on global domination

Ultimately that's what Monzo wants & I suspect Revolut does too. I guess that means that they'll have to dominate some markets, while taking a portion of the market in lots of other countries.

7 months ago

Revolut are currently attempting to bridge an initial chasm between the early adopters and the early majority, while Starling and Monzo are still in the early adopter stage

A fairly minor detail but it’s worth remembering that Revolut’s users are spread over several countries. They had about as many users in the UK as Monzo back in November so I expect they’re actually still at the early adopter stage too - but with more users.

HSBC’s Connected Money app is a great example of how legacy institutions can simply ‘copy’ challengers and almost immediately bring the tech into the early majority due to sheer size, scale, and reputation

I've not had a chance to check it out yet but is it? How competitive is the app with the challenger’s?

To sum up, you’ve made a lot excellent point & this is a great round up of the concerns that we should all have about the challenger’s potential. But there’s lots of reasons to be optimistic too & for now, I’ve not seen anything that makes me seriously doubt that the challengers can make it over the line 🤞

7 months ago

A fairly minor details but it’s worth remembering that Revolut’s users are spread over several countries. They had about as many users in the UK as Monzo back in November so I expect they’re actually still at the early adopter stage too - but with more users.

Very good point that I didn't point out. Thanks.

How competitive is the app with the challenger’s?

Bringing together some of the points around knowing what's out and actively demanding more, HSBC's app doesn't necessarily need to be competitive. HSBC can go out to its customer base, tout the new app, and many customers who have missed the fintech craze outright could potentially fall for it being the first and only. I am, you are right though, extrapolating on the basis of day one downloads (since updated figures weren't readily available).

7 months ago

HSBC's app doesn't necessarily need to be competitive. HSBC can go out to its customer base, tout the new app, and many customers who have missed the fintech craze outright could potentially fall for it being the first and only.

I expect they would but if HSBC can't keep up, I doubt they'll retain those customers forever. In fact, the app could be a good stepping stone - showing users that there's greater potential there, before they realise that the challengers do a better job of delivering - but perhaps that's too optimistic.

7 months ago

While frankly, the people who will never use digital die off - eventually.

While there will be a demographic shift, it's not that simple. The reasons people don't use digital aren't as straightforward as not being habitual users of digital. It's intimately bound up with socio-economics, diversity and, in particular, functional literacy. This is where government has struggled with 'digital by default' and have had to look at different, assisted digital approaches for the final 30%

This was a standout quote for me:

When it comes to primary spending accounts, it’s not the same as mobile phones — when you get a new phone, you generally stop using your old one, but it takes more to close or stop using your old account than just signing up for a new one.

That is, that the challenge isn't just making it easy (and attractive) to onboard - but also looking at how to persuade people to use it regularly thereafter. Which is about a lot more than a nice UX, but ensuring the entire proposition offers value that is clear/attractive to the mass market.

7 months ago

The reasons people don't use digital aren't as straightforward as not being habitual users of digital. It's intimately bound up with socio-economics, diversity and, in particular, functional literacy. This is where government has struggled with 'digital by default' and have had to look at different, assisted digital approaches for the final 30%

I take your point. But again, I don't think the challengers need to capture the entire market. I'm sure banks will continue providing branches for quite some time & some people will insist on using those too. International expansion means that they can focus on the digital natives, there's enough of those to try to capture to keep them occupied for quite some time.

That is, that the challenge isn't just making it easy (and attractive) to onboard - but also looking at how to persuade people to use it regularly thereafter. Which is about a lot more than a nice UX, but ensuring the entire proposition offers value that is clear/attractive to the mass market.

I completely agree!