RISE OF THE FINTECHS - DEATH KNELL OR WAKE-UP CALL FOR TRADITIONAL BANKING?
January 23, 2020
By Guest User
Disruption in the UK banking sector
The UK banking sector is widely regarded as the most disrupted in the world. Fintech challenger banks such as Monzo, Starling and Revolut have burst onto the scene, providing a feature-led mobile experience and challenging the customer inertia that has categorised UK banking.
Does this disruption signal the death knell for ‘traditional banking’? Or is it simply a wake-up call for the big banks to accelerate digitalisation and renovate their offer around changing customer needs?
The consumer perspective
At the end of 2019 Netfluential partnered with a number of large banks including TSB to evaluate the disruption to banking attitudes and behaviours in the UK. Whilst market share for the fintechs is growing, it is still relatively small at just over 3%. We decided to zoom into the early adopters, with quantitative surveys amongst 356 fintech current account holders, alongside 20 in-depth qualitative interviews.
We covered a wide range of topics:
How are fintech accounts being used, and why?
How does the experience of using a fintech compare to traditional banks?
Are the fintechs likely to be used for more banking services in the future?
Ultimately, we aimed to assess the threat posed by the fintechs to the banking establishment, and identify the levers that traditional banks could pull to retain their customers.
The fintechs have gained a foothold in everyday spending
Our research confirmed that the majority of fintech account holders are ‘multi-banked’, with 85% using their new digital bank alongside at least one traditional bank account.
The fintech accounts are being used for everyday spending, with a fixed amount often deposited into the account at the beginning of the month. Money management features such as spend notifications and budgeting provide a powerful everyday spending experience.
As one Monzo user describes: “I was initially sceptical and didn't plan to use it as much as I currently do. The ease of use and usefulness of the various features have encouraged me to increase my usage over time. Initially I transferred small amounts every few days. Now I transfer large amounts rarely, i.e. £2-3k per month goes through my Monzo”.
Fintechs need to develop more profitable customer relationships
Meanwhile, salaries and regular bill payments continue to be the preserve of traditional accounts. Only 15% of fintech users have their salary paid into that account, and only 16% consider their fintech bank to be their ‘main one’. This challenge underpins the widely reported losses suffered by the digital banks. Monzo has confirmed that losses leapt to £47.2m in the fiscal year ending February 2019, while Revolut’s losses doubled as it continues to push for global expansion. Starling Bank, which has raised £263m from investors since its inception in 2014, is planning a stock market float in 2022 but must deliver on plans to break even to make that possible. The digital banks need to develop more profitable customer relationships, and Monzo in particular is pushing this aggressively with its #FullMonzo campaign.
An emotionally rewarding experience
The concern for the traditional banks is that the experience of using a fintech account is overwhelmingly positive. 60% of fintech users agree that it ‘makes it easy to manage my finances’ (double the figure achieved by traditional banks), and 53% agree that the fintech account ‘helps me to be more organised’ (vs 21% for traditional banks). And crucially this helps customers to feel more positive about their finances, generating feelings of control and empowerment.
As one Monzo user explained: “It has made me think about my day-to-day finances in a more positive way - it really helps making life easier. They help me know where I'm at and it's hassle free, I don't even need to log in to the app since I get the notifications straight away.”
Ultimately, we found no evidence that Monzo, Starling et al are distrusted. The fintechs match the traditional banks for trust, with an average trust rating of 8.1 out of 10 (vs 8.0 for traditional banks).
Window of opportunity
So how worried should the traditional banks be?
Despite the positivity towards the fintech challengers, only 1 in 4 customers intend to switch their ‘main banking’ activities (such as salary receipt) away from their traditional accounts. The #FullMonzo vision is still a long way from being realised.
The early adopters prefer a physical separation of accounts that they use for different purposes. This ‘jam-jarring’ approach to money management helps people to feel more in control. The fintechs are helping users to manage everyday spending, but are not yet providing a compelling reason for customers to consolidate all banking activities within one account.
As one fintech user explained: “I like being able to split my money so that I know where I stand. I like the idea of having a separate ‘space’ where I can spend in the safe knowledge that it won't hurt the bills that I’ve got to pay.”
The more profitable customer relationships enjoyed by the traditional banks seem safe, for now at least. But as this becomes a bigger priority for the fintechs they are likely to innovate to address the challenge. For example, making it easier for users to separate money into different pots for different purposes to facilitate virtual jam-jarring. And Monzo is already experimenting with offering monetary incentives that encourage people to go #FullMonzo.
The window of opportunity for the traditional banks to protect their valuable customer relationships is likely to be short. But the response is well under way, and some leading banks are now rapidly introducing digital money management features that mirror the pioneering efforts of the fintechs. 2019 saw Barclays offer features such as in-app card freezing, budgeting analysis and spending controls. RBS Group’s Natwest has recently updated its app to introduce a new range of money management features such as spend monitoring and notifications. And following a reported attempt to acquire Monzo back in 2017, RBS has now launched its own digital bank Bó. Bó offers features such as instant spending notifications and fee-free spending abroad under the promise of helping customers to ‘Do Money Better’.
What next for the banking sector?
The Netfluential research suggests that the rise of Monzo, Starling and the other fintech disruptors does not signal the end for the traditional banks. But they have delivered a powerful wake-up call to the establishment. Whilst market share for the fintech challengers remains relatively small, their impact will be felt more widely as some of the leading banks rapidly introduce innovation that meets changing customer needs and expectations.
How can traditional banks stay relevant?
Create a more customer-centric brand experience that mirrors the digital feature-led innovation of the fintechs. Spend notifications, budgeting tools and saving pots are rapidly becoming hygiene factors
Ensure that all innovation is guided by a clear vision of how customers should feel about their banking e.g. in control, optimistic, empowered. The fintechs have demonstrated that this quickly builds brand connection and trust
Win the race to providing virtual ‘jam jarring’ of money within a single account to protect the most valuable customer relationships
If you would like to learn more about this research, or participate in future research into this topic, please get in touch via hello@netfluential.com