So-called ‘challenger banks’ such as Starling Bank, Monzo and Revolut have been making waves in the financial world for the last five years. With their brightly-coloured debit cards and feature-packed apps, they’ve proven particularly popular with Millennials.
Yet looking at data collected in recent months, it appears that while such banks are popular with their users, ranking highly for customer satisfaction, the majority of the public – 83% – feels that they are not as reliable or trustworthy as ‘traditional’ banks. That’s against a backdrop of relatively high trust in banking institutions and online banking services in the UK.
A ‘challenger bank’ is a relatively small bank that’s been around for less than a decade – in opposition to ‘traditional banks’ or ‘established banks’ such as the big four of HSBC, Barclays, Lloyds or Natwest. Some banks meet this criteria but operate broadly like traditional banks with physical stores, like Metro Bank and Virgin Money. Others are solely app/online based, such as Monzo, Starling Bank and Revolut.
Challenger banks emerged from the ashes of the 2008 financial crisis, when new UK regulations meant a freer market with less expense and red-tape were involved in setting up a bank. Newspaper headlines from 2015 excitedly asked whether challenger banks would be the “saviour of British banking”, shaking up a staid system and giving consumers additional choice.
Differences range from the trivial to the more substantive. On the former side, they tend to be aesthetically pleasing, with nicely-designed apps and brightly-coloured debit cards. On the latter, challenger banks distinguish themselves through their digital services, which traditional banks have often been slow to innovate with.
Their mobile banking apps have features like instant notifications when you make a payment or receive money, budgeting tools, and interactive spending breakdowns by topic or vendor. They also often have perks such as no foreign exchange fees, international money transfer services, free international ATM withdrawals and cryptocurrency integration.
In a Which? survey analysed by Moneytransfers.com, Starling Bank was awarded five stars out of five for its customer service, communication, transparency of charges, handling of complaints and app, with an overall customer satisfaction rating of 88%. Monzo and Revolut also scored highly in similar areas, and received 82% and 77% for customer satisfaction respectively.
The argument goes that the money these banks save on renting and staffing physical stores can be put into areas like customer service and digital innovation. Spending notifications, savings pots and budgeting tools are also popular with younger people trying to be more money-savvy, while others are attracted by international payment and money transfer options.
The UK is one of the societies that is most trusting of online banking – 74% of people say it is safe to manage their money online, according to YouGov polling, above 70% in France and Spain, 57% in the US, 56% in Germany and 53% in Hong Kong. Meanwhile 68% of Brits in another YouGov poll said they trusted their bank.
Yet they are still wary of challenger banks. Only 17% of people polled by YouGov said they were “as reliable and trustworthy as other banks,” rising only slightly to 25% among 18-34 year-olds. Nationally, 29% of people said challenger banks offered “truly innovative products and services,” a sentiment held by a more substantial 58% of 18-34 year-olds.
That’s despite the fact that – to take the examples of Monzo, Revolut and Starling Bank – all have a banking license, are authorised by the authorised by the Prudential Regulation Authority, are regulated by the Financial Conduct Authority and are backed by the Financial Services Compensation Scheme, a government fund that protects savers’ money.
It’s perhaps unsurprising that a majority of people are unsure about using new institutions to store their hard-earned cash, particularly with past banking failures still in recent memory and tech-based start-ups being notoriously volatile. Covid-19 may also have had an impact – YouGov has also found that 64% of people say they will only use established and recognised providers as a result of the pandemic.
Challenger banks have faced some well-publicised difficulties, particularly a focus on growth and scale leading to unprofitability; placing a question mark over their future. If you search ‘is Monzo…’ on Google, the search prediction software would display ‘Is Monzo closing down?’ as one of the top autocomplete suggestions.
The company reported an annual post-tax loss of £113.8 million in its 2020 accounts, up from the £47.1 million in 2019. It is trying to turn that around with the introduction of paid and business accounts.
Starling Bank has had greater luck in this area, announcing in late 2020 that it was the first of the UK challengers to become profitable, generating money from net interest income, gross fees and commissions income.
As long as people bank with a challenger that is properly regulated and is signed up to a financial protection scheme, their lack of trust is misplaced. The banks that do stick around will likely grow in customer numbers and trust over the decade to come, as their word-of-mouth reputation grows. This could result in an increased demand to send money online, or through money transfer apps.
The real challenge for the challengers will be to remain attractive to existing and new customers while finding a path to profitability.
Banking customer satisfaction ratings were collected by Which?
Attitudes to banking and trust in online banking polling was conducted by YouGov and released in a presentation of its global banking and finance report 2021 Extra information on challenged banks was gained from YouGov, The Telegraph and Finextra
Keith is a digital specialist with a background in the financial industry, both as a marketeer and a journalist. Keith joined MoneyTransfers.com in order to take the business to the next level and expand our offering in multiple international money transfer markets.