May 4, 2016
Despite the hype over challenger banks and their potential threat to traditional players, the game is not easy for anyone in the financial services industry. Meant to challenge traditions in the banking industry, challenger banks have their own challenges to overcome. One of those challenges is customer acquisition. When it comes to banks, in a nutshell, customer acquisition is an account transition. When it comes to challenger banks, it is essentially the same. And if there is no need to change the account, they need to find a way to sway clients’ habits from the mobile banking application they have with their bank to the challenger’s mobile banking app.
In any case, there has to be a strong incentive for a customer to even bother switching either his/her account or start using a new mobile banking app. Meanwhile, banks haven’t been sitting idle and waiting for challengers to take away the attention of their customers. They have a financial power to offer monetary incentives to open an account, high-interest rates on deposits and expertise of a customer service.
Even if challengers try to beat the odds and offer an extremely appealing incentive shaped as a top interest rate on deposits in the market, it would be a risky venture to get into. Clientele attracted by the incentive will surely be a win, but the sustainability of the offer is in question. To guarantee the ability to pay high-interest rates on deposits, challengers may have to be constantly attracting financing until they are able to sustain the model themselves. With growing competition in the market and all the difficulties related to fundraising, it can be a tough task.
The situation doesn’t get easier for challengers with the statistics on the number of bank customers changing their accounts. In 2015, 1 million people switched bank accounts, which is an 11% drop in comparison to 2014. Growing reluctance to switch the bank account may speak of either lack of competition, the strength of a habit, a strong headache with the switch or, maybe, improvement of traditional players and growing satisfaction. Whatever the reason may be, if customers are not willing to switch bank accounts, that creates obstacles in the competition to acquire clients.
The UK has demonstrated an interesting example when a seven-day switching service was introduced. Even though it became easier for bank customers to switch their accounts, in more than two years, only 2 million people have actually switched. The expectation was that the number would reach 5 million customer switches per year after the service was launched.
Just to make things even harder for challengers around the world, at the end of last year, a study by IBM found that 70% of bank customers have indicated a higher trust in their primary banks than in nonbank competitors. And 67% of customers trust their primary bank compared to other bank competitors. But there is good news for challengers – 35% of bank clients think their banks are doing a good job encouraging strong customer loyalty. It means there is a good chance for challengers to sway away the other 65% of clients that are not quite impressed with the loyalty programs of their primary banks.
Another problem challengers face is the financial power of their traditional opponents. Banks are learning their lessons and are able to invest significant funds in interface and experience improvements when it comes to mobile banking. User experience is not quite rocket science and can be changed and improved given effort, creative taskforce and funds. There is nothing that could stop banks from hiring design studios to improve their mobile banking experience. In that case, bold and creative opponents won’t have any leverage left.
Finance and manpower are another set of challenges. Over time, with the growth of challenger banks and their impact on the industry, regulators will start treating them as strictly as the corporate world is treated.
Clearly, challengers have their own challenges to overcome. Whether they will be successful at that or not, time will show. However, banks have shown their ability to evolve and improve, which intensifies and complicates the market situation for challengers.