The Fellowship of Challenger Banks

The banking sector has changed.

For the better? I hope so. But for many the jury is still out.

The sector’s reputation has taken blow after blow. We’ve seen crashes, closures and court cases. The economic backdrop has changed and is evolving rapidly.

This uncertainty has led to a general lack of trust in banking institutions among the public and made worse following sustained periods of political uncertainty, Brexit and other such events.

The savings market is very saturated. Rates have been consistently low for years, largely due to the base rate remaining between 0.25% – 0.75%.

The mortgage market is becoming increasingly more competitive, and as a result has left some lenders no choice but to bow out. As a result, consumers understandably feel disillusioned and disengaged from the market as a result.

There has been a shift towards more alternative methods of saving and banking. The emergence of Open Banking has created more competition in the banking industry and to encourage better services and more innovation to improve the banking experience for consumers.

It has provided a new way for new entrants and online service providers to access bank accounts and offer a range of online services, ultimately helping consumers manage their money more easily.

Amidst this uncertainty and disruption, we’ve seen an overabundance of retail ‘Challenger Banks’ shine through. We have welcomed ‘Challenger Banks’ with open arms.

Monzo, Starling Bank, Revolut, Monese and many others have captured the hearts and minds of UK consumers. Each of them, in their own unique way, are trying to improve the relationship we have our finances.

To some people’s surprise, their success hasn’t been short lived.

Over the last ten or so years we’ve seen these companies grow from strength to strength.

Their success can be attributed to several different things but for me it has been down to their ability to create a ‘fellowship of customers’. A community of users who believe these new entrants are the solution to their money problems.

Take Monzo as an example, in July it launched its first TV ad which resulted in attracting over 250,000 new customers. By the looks of things, they have the Midas touch when it comes to marketing; and Starling Bank is likely to be looking to replicate the same success with its first ever advertising campaign launched in October.

Revolut on the other hand, launch a heavily criticized advertising campaign in February and just over 6 months later they are on a quest to raise $1.5B. No one can question it – there is a certain aura surrounding these challengers.

But why is this?

  • Are we, as consumers, attracted by shiny new things?
  • Have we been waiting longingly for these knights in shining armour?
  • Or are they, like Frodo Baggins, possessed by the quest to make profit?

For me, it is simple. The implementation of Opening Banking has led to consumers and businesses being offered much more choice and flexibility when it comes to managing their money, and Challengers offer a customer journey that is simple and easy to understand.

This evolution and diversification for the sector has resulted in greater competition, innovation and disruption.

Creating a Fellowship

Fellowships aren’t just about a specific item or product, or a ring in Frodo Baggins’ case.

According to the dictionary, Fellowship is a ‘friendly feeling that exists between people who have a shared interest or are doing something as a group’.

The Fellowship of Challenger Banks is based on relationships. The companies have a deep understanding of their customer’s needs, they involve them in business decisions and most importantly they bring people together to collectively reach their goals.

This approach is then translated through authentic and experience-based marketing.

By doing this we are seeing customers move away from having a one-way traditional banking relationship to a dynamic dialogue with their provider. This allows these banks to be achieve the holy grail of marketing – being authentic.

Monzo did exactly this when they launch their Business Accounts back in February 2019. They launched the business banking product as a response to customer feedback ‘We’ve heard your calls for business banking’. This collaborative approach to business not only engages customers to drives loyalty and recommendations.

There and Back again?

Like any long journey someone is bound to ask, ‘Are we there yet?’ and the same must be said when we look at the ‘Challenger Bank’ sector. When does a challenger bank stop being a challenger and become a household name? Should this be judged by customers numbers? Profit? Number of employees?

For me, it should be judged by acquisition rates and customer satisfaction. Creating an exciting banking experience that attracts new customers whilst retaining them with excellent customer service should be the goal for these businesses.

It requires both size and agility to do this and very few businesses in the UK have this…yet.

A strong and dedicated Fellowship is one way of taking down the ‘villain’ that is the ‘big 4’ but questions remain over the profitability of retail ‘Challenger Banks’.  Shareholders and media remain skeptical but as consumers we can remain hopeful that these new entrants will continue to look after our ‘precious’ money.

The Sequel

Traditionally the needs of SMEs have been under-served but we have seen over an emergence of new entrants trying to resolve this problem over the last decade. We are finding more business banking providers focus on helping businesses grow by investing in truly understanding what they need.

We’ve seen the likes of OakNorth, Tide, Starling and several new entrants build reputable businesses, but I wait to see if these companies can drive the same consumer traction and fellowship as their retail counterparts.

The BCR’s Capability and Innovation funding shows a real commitment to growing competition in SME banking.

A whole host of commitments have been made by ‘Challenger Banks’ who successfully bid for this funding, meaning SMEs can expect to see a range of new products and services introduced that will make their business banking easier, and built with their needs in mind.

It’s early days for these commitments to come to fruition, but it will be interesting to see how these businesses turn this fund into customer growth and fellowship – the opposite problem that faces retail ‘Challenger Banks’.

Building a Fellowship isn’t easy. It takes a real understanding of what your customers what, expertise on how to cater to their needs and business nausea for turning this into business growth and profit.

However, what we have seen from these businesses is inspiring and their success has changed the reputation of the industry.

As the sector develops, these businesses will mature and undoubtedly face scrutiny, and it will be their ability to maintain a fellowship and trust that will ensure they continue to be successful.

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