Challenger banks hindered by lack of customer confidence

Despite news that app-based bank Starling became the first UK digital challenger bank to make a profit, there remains a lack of confidence in the burgeoning sector.

The Covid-19 pandemic has accelerated the take-up of digital banking services, with companies such as Starling benefiting, but many new challenger banks face major difficulties in winning customer trust.

In November 2019, Starling had 926,000 retail bank accounts, 82,000 business bank accounts and held about £1bn in credit. It now provides more than 1.25 million current accounts, 200,000 SME business accounts and holds more than £3bn in deposits.

If figures from Accenture are anything to go by, other challenger banks might struggle to emulate Starling’s success.

According to research from the IT services giant, only 45% of consumers think challenger banks will exist in a year’s time. This will limit the chances of such businesses growing as consumers will be reluctant to put funds into a bank they suspect might not be around for long.

Perhaps more startling for challenger banks that sell themselves as digital leaders that can help customers get more out of their data is the finding that only 10% of consumers place a lot of trust in them to look after their data, compared with the 41% who trust traditional banks.

One-fifth of respondents to the Accenture survey said they do not trust challenger banks “at all” to look after their financial well-being.

A further hurdle for challenger banks is the fact that consumers don’t appear desperate to change their current bank. Half of respondents said they wouldn’t bank with a challenger because they are happy with their current bank and 42% admitted being unfamiliar with the challenger banks.

Peter Kirk, Accenture’s UK customer insight and growth practice lead, said: “With such low confidence in challenger banks’ long-term survival, it’s clear that customers are seeking greater stability and consistency from their existing financial services providers – a flight to safety during the uncertainty of 2020.”

In many cases, it is the safety and security of what consumers know that prevents them from changing banks.

Gareth lodge, an analyst at Celent, said challenger banks will struggle to eat into the market share of the large traditional banks. “Inertia is a powerful force – many consumers will never swap banks, and likely use the one their parents helped them set up,” he said.

“Given they perceive banking to be free, and comparison websites focus solely on price, consumers will need to be convinced that they will get something better by swapping and experience alone will not be enough.”

David Bannister, wholesale banking analyst at Aite incumbents  still own the lending market, both in the residential mortgage market and in commercial lending, which are strong incentives for consumers and businesses to stay with their principal banking partner.

"I think the big litmus test is how the new players and some of the smaller old players get on in the small business market," he added. "It’s an area that has not really been addressed by the large banks – and one where they are vulnerable: they have alienated a large portion of the small business market with restrictive lending polices and been slow to integrate client account data with business accounting software like Sage or Xero, which very quickly became the norm for challengers on the back of Open Banking and API connectivity."