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Are challenger banks winning the war for customers?

22 January 2020: it’s the battle of the banks – big players vs all-digital challenger banks. We look at how neobanks like Monzo and Starling are tackling the big players and question who’s got what it takes to win the war for new customers.

At first glance, digital-only challenger banks such as Starling and Monzo look every bit the banking equivalent of a sleek, electric-powered Tesla. Legacy players, by contrast, smack of the diesel-powered past: dominant, built-to-last, but over-polluting and slow.

But are fintech neobanks winning the war for customers? Scratch around for hard stats on market share in start-up land and you’ll struggle. There’s little being said by the FCA or the voice of the UK banking industry, UK Finance.

It's clear that while challenger banks are winning sales – Monzo has more than three million accounts – many customers run two accounts in tandem. Salaries are dropped into the main "pot" while mobile-first banks are often used for everyday budgeting and easy peer-to-peer transfers. Small and medium-sized enterprises’ (SME) account balances, however, are far higher than those of mobile-only banks. For instance, Starling’s average account balance is £900, while SME accounts average £11,000. It’s a nuanced picture.

Alexandra Frean, Head of Corporate Affairs at Starling, says that many digital bank innovations have been snappily copied by high street banks. “We introduced a gambling block. Barclays introduced a gambling block. We introduced a card lock. Barclays and others introduced a card lock.”

She goes on: “RBS/NatWest has gone as far as creating their own digital bank. They wouldn’t be doing this if they weren’t worried.”

Another reason the major players might be worried is the airtight operational resilience of neobanks. Frean says that Starling has a track record of protecting against outages and ensuring business continuity, quoting “no reportable incidents in the last year”. Meanwhile, traditional bank shutdown stories make headlines almost every week, with legacy bank security massively unwieldy.

Accounts from Monzo and Starling come with all the regulatory safeguards enjoyed by the bricks and mortar competition, including full Financial Services Compensation Scheme (FSCS) protection, while offering a spread of analytic tools (the ones you really want, like budgeting and savings tracking).

“They [the big banks],” Frean adds, “want our features and our customer loyalty. We don’t have that ‘hate’ relationship that many people over the years develop with their bank.”

Although First Direct has garnered stellar customer loyalty over several decades, Frean’s sentiment is believable. Also, no big player can approach the digital bank cost base, freed from mainframe legacy tech that constantly needs to be patched and filled; or the crushing bricks-and-mortar outgoings.

While legacy banks face undeniable competition from the neobanks on budget and digital accessibility; challenger banks need to get people to pay in salaries direct. The ultra-committed don’t need convincing, but the serious money must be in the still-to-come second or third wave.