Home Banking Challenger Banks Are Challenged on Trust, So How Can They Earn Customer Confidence?

Challenger Banks Are Challenged on Trust, So How Can They Earn Customer Confidence?

by internationalbanker

By Rebecca Crook, Chief Growth Officer EMEA, CI&T





Trustworthy, faithful and friendly. These are all words that banks use to promote themselves, particularly traditional, well-established players such as the Big Four. But ever since the United Kingdom opened its market to new banks post-2008, multiple challengers have been launched using fresh financial technology to win over customers.

On paper, these neobanks have enjoyed huge successes. In 2019, neobank Monzo Bank Limited sported the strongest customer advocates of any brand in the UK, with 84.4 percent of its customers stating they would recommend the bank to a friend or colleague. Meanwhile, other digitals, such as Starling Bank and First Direct, have consistently topped the UK’s customer-satisfaction ratings

However, of the UK’s circa 20 million challenger-bank customers, only one in five regarded their neobank accounts as their primary bank accounts, according to 2019 research. Do these rising stars of the retail-banking sector face a problem gaining long-term customer trust—and is this holding them back?

Banking on the unfamiliar

Indeed, the stats show that while neobanks have captured customers’ hearts, they haven’t quite conquered their minds. In 2020, more than two-thirds (68 percent) of Britons stated they trusted their traditional banks, while less than one-fifth (17 percent) agreed that digital challenger banks were as reliable and trustworthy. Customers also said they would rather bank with a traditional institution over a neobank (47 percent versus 11 percent) and that if both parties brought out the same financial-services product, they would pick the one offered by the incumbent (45 percent versus 7 percent). Why is this? 

One theory is inertia. Many customers open their first bank accounts around the age of 18 on the recommendations of mentors, such as parents, grandparents and other elders. These “influencers” tend to be more strongly affiliated with traditional banks and make recommendations accordingly. And once you start a relationship with a bank as a young adult, there is often little motivation to change.

Meanwhile, the recent headline-grabbing collapses of some of the world’s biggest contemporary banks may have damaged trust in digitals further. During the first few months of 2023, the United States suffered three of its four largest banking failures in history as First Republic Bank, Silicon Valley Bank (SVB) and Signature Bank, with combined assets of $556 billion, all failed. If traditional banks can survive hundreds of years and numerous financial crashes, why trust anyone else?

This lack of trust is a huge issue for the UK’s challenger banks and will take time to overcome. So, how can a digital bank build confidence and acceptance and become the number-one choice of its customers? Let’s take a look. 

  1. Offer experiences too good to turn down.

Today, many of our day-to-day purchase decisions often boil down to price, particularly in the age of comparison websites and Tesco Clubcard offers. But with most banking services free to anyone eligible, it can be difficult to persuade customers to switch from their familiar banking providers. Instead, digital banks can earn trust and stand out from incumbents through experiences. As mentioned, neobanks already lead legacy banks in terms of customer satisfaction. So, it’s all about extending that lead by adding more outstanding services until it becomes almost impossible for consumers to bank elsewhere. 

In particular, agile challenger banks can grow their market shares by pivoting faster than the traditionals to meet customers’ new, urgent needs. For instance, many Britons find it tough to manage their finances in today’s cost-of-living crisis. By harnessing customer relationship management (CRM) technology, neobanks can quickly analyse their customers’ banking data and build 360-degree profiles of their individual situations. 

The bank can then connect those finding it especially tough with free in-house advisors and/or money-management tools, providing personalised supports to help them safely navigate the volatile economy. It is a simple way to secure long-term customer relationships, with research from J.D. Power showing “overall customer satisfaction with retail banks rises 155 points (on a 1,000-point scale) when customers cite that their bank supports them during challenging economic times”.

Meanwhile, neobanks must also remain at the forefront of technology. From advanced AI (artificial intelligence)-powered chatbots to automated online onboarding, from hyper-personalisation to multichannel engagement—offering services that meet and even exceed the expectations of digitally native customers, such as Generation Z (Zoomers), will mean challenger banks become the number-one choices of younger customers as they grow into the dominant purchasing-power generation. 

  1. Provide stability during volatility.

Alongside outstanding experiences, challenger banks must also offer safety and stability—particularly in today’s unpredictable economy. 

Traditional banks are well versed in this, having fought off financial crises and crimes for decades. And while we’d expect tech-savvy digitals to be at the cutting edge of online safety, a 2022 FCA (Financial Conduct Authority) review found weaknesses in some challenger banks’ financial-crime controls, with certain instances even revealing that “challenger banks did not have financial crime risk assessments in place for their customers”. 

Fundamentally, protecting customers against threats from fraudsters and cybercriminals must be the top priority for any digital business. So, neobanks must maintain their trademark agility while upholding the same levels of security as their traditional competitors. As banking failures and record inflation rates hit the headlines, challengers must invest in solid infrastructures underpinned by security and transparency. Not only will this reassure customers of the safety of their money but also the longevity of their banking providers. 

  1. Above all, do the right thing.

As we navigate another potential recession, it becomes even more important that challenger banks earn trust by doing right by their customers and maintaining clean public images. This is an area in which the traditionals have often fallen short, from the misselling of financial products to the hefty bonuses handed to bankers during wider economic squeezes. 

To set themselves apart, neobanks should begin by re-evaluating their marketing strategies to target customers with only products they genuinely need. This shouldn’t be too much of a stretch, given the hyper-personalisation data capabilities discussed earlier. Alongside proactive educational-advisory services, challengers can also become more subtle in how they care for their customers—for example, with smartphone notifications updating them on their monthly budgets or reminders on how to avoid unnecessary fees when making online purchases. 

Ultimately, trust is earned in any walk of life by demonstrating that you truly care about someone’s best interests. Finance is no different, and showing customers that they care is the area in which challenger banks can make their greatest headways. It’s also perhaps where competitions and comparisons with traditional banks should end. By focusing on creating meaningful customer experiences, neobanks can instead compete on loyalty and trust rather than size and profit. Change won’t happen overnight, but by carving out their own places in the market and earning customers’ confidence in the process, challengers can continue to chip away until they finally overcome the behemoths. 


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