It’s now pretty much universally acknowledged that the UK retail banking market is being disrupted by new, digital-first competitors – the so-called ‘direct’ banks. The narrative is that these agile upstarts are stealing customers away from incumbents by offering compelling new services and unprecedented levels of convenience. It’s a great story and one that makes complete sense in a world where industry after industry, sector after sector, is being disrupted by digital. But is it really happening on the scale suggested?
According to this year’s FIS Performance Against Customer Expectations (PACE) study the answer is both ‘yes’ and ‘no’. Let’s look at the ‘yes’ part first.
The rise of the challengers…
There can be little doubt that direct banks are gaining prominence in the UK. Market demand is clearly in their favour, with 71% of all banking interactions now digital or online. Mobile in particular is in demand: 59% of banked UK consumers have used mobile apps to access financial services. Millennials are particularly demanding in the regard, with 40% choosing a primary bank with a mobile banking app.
And as these market entrants become a little more established, they’re clearly delivering the experiences their customers demand: a whopping 88% of direct bank customers say they’re satisfied with their provider (compared to 70% of customers of one of the top 50 global incumbents).
The key question to ask here is whether this level of customer satisfaction is a game-changer? Is it enough to tip the scales in favour of direct banks? With 45% of consumers citing referrals as the reason they chose their primary financial institution it’s clearly going to play a role, but is it enough for incumbents to sweat over?
This is where things become a little more complicated.
…the resilience of the incumbents
The fact is, that whilst the new, branch free, digital challengers offer innovative solutions which are picking up new customers, gaining prominence and prestige, the established banks still have something on their side. Loyalty.
According to our research, people tend to stay loyal to their established primary bank for a very long time indeed – even for a lifetime. Over three quarters of the people we spoke to still have a global top 50 bank (i.e. an incumbent) as their provider. What’s more, most of these people have been with their primary bank for more than ten years. This is the sort of customer loyalty marketers in most other industries salivate over.
Significantly, this loyalty isn’t an ‘age thing’. Millennials are every bit as ‘sticky’ as their elders: in both cohorts 72% of the people we spoke to said they were extremely or very satisfied with their bank. Indeed, the overall switching rate between primary financial providers was only 5% – this compares to 18% in the electricity sector.
However – and this is a big ‘however’ – where we do see customers switch providers it’s the incumbents that are losing out. Fully 72% of the people we surveyed who had switched providers had done so from a global top 50 provider. This compares to just 7% churn at direct banks. The main reasons cited by customers for their change of provider were the monetary benefits – such as better deals, low fees, cash back offers, etc. – as well as, of course, being unhappy with their service.
Disruption in the slow lane
So, what can we infer from these figures? For me, it shows that disruption is happening in the retail banking sector, but at a much slower pace than in other industries. This means that there’s still all to play for. Whether incumbent or direct bank, the slow pace of change gives you time to make the right strategies and plays to win customers over. It’s worth the effort, because as we now know: once you win them, they’ll stay with you forever.
From the perspective of incumbent banks, they now see that they must evolve new customer experiences to (at the very least) keep pace with the innovations coming from direct bank competitors. Customers say it themselves: 64% state that the availability of frictionless and easy customer experiences is key when choosing a financial service provider.
Here, banks need not go it alone. Indeed, the proliferation of Open Banking services and API-based models offer incumbents a new and effective way to create secure and innovative customer experiences: by combining the innovative flair of FinTechs with their scale and access to customer data. We know that customers are beginning to adopt these services: 13% of the people we spoke said they are using at least one FinTech service. Banks can provide the customer base and resources to bring these services to a much wider market and ‘wow’ their customers in the process.
A matter of trust
Of course, opening your bank to new partners and innovating new services may not always go hand in hand with building trust. If a partners’ system leads to a data breach, for example, its likely the incumbent bank’s brand would be associated, and damaged, to one degree or another. Yet it’s a balancing act that must be achieved: banks can’t afford to go it alone, but nor can they afford to lose the trust of their customers.
There’s also a benefit to getting the trust aspect right: it encourages each customer to engage more fully with the bank. According to our research, people who believe their banks are trustworthy have more accounts and products with their primary financial institution, such as current accounts, debit cards, credit cards, etc.
I believe that banks that can open up to new FinTech partners to co-create innovative customer-centric services will be able to attract new customers. However, the only banks that will be able to maintain these customers and make them truly loyal will be those that embed transaction security, fraud prevention, and data protection into their partner ecosystems.
Significantly, it’s exactly these areas the people we spoke to scored lowest in terms of satisfaction. This whole area around trust is therefore ripe for exploitation by banks as they look to differentiate and take on the new market entrants.
Everything will change – but quietly
There’s never been a more exciting time to be a banking customer. We have more choice than ever, from traditional banking services to direct banks to discreet services from FinTech innovators. But the rapid disruption of business models seen elsewhere is happening at a slower pace in banking. Customer loyalty is strong and incumbent banks are taking up the opportunities to leverage industry partnerships to take on the market entrants.
Make no mistake: what we’re seeing is a revolution, but it is a quiet one. We won’t see the switching frenzy we’ve seen in the UK utilities market, instead it’s likely change will take place across the industry. What will come about is not a question of whether old banks will lose out to newcomers so much as how new partnerships will come about to transform the operations and business models of all players. For customers, the news couldn’t be better: these changes will result in ever-more convenient and secure services that center more directly on their needs. Welcome to banking’s new golden age.