The change has been a long time coming; the UK’s largest banks have now closed over 1,700 branches in the last five years in response to changing consumer behaviours. Whilst the banks have undoubtedly invested in their digital capabilities over the last few years, as the mobile channel has overwhelmingly become the de facto method of money management (HSBC, for example, noted that more than 90 per cent of its customer interactions came via digital channels, up from 80 per cent in 2016), the banks have also been dealing with the distractions caused by the changing compliance landscape and the ‘miss-selling’ challenges.
Although a myriad of new technologies have hit the market, not a lot has changed in the way consumers interact with their providers. This is somewhat surprising – especially when we consider that many of the latest fintech-focused banking providers compare very favourably to the high-street names when it comes to offering the best rates and services. Banks are working hard to price themselves as keenly as possible, with customers becoming savvier to the benefits of switching between providers – indeed, a new study found that 43 per cent of respondents were considering switching banks within the next year.
Consumer Attitudes: Building Trust and Dealing with Apathy
In the UK, our relationship with our banks is particularly complex however, and consumers are often reticent to actually make the change. 30 years ago when I started in banking one of the first things I was told was that on average our connection with our bank lasted longer than our relationship with our partner. That remains true today. When it comes to any other industry, from internet providers to supermarkets, we seek out the best service but with banks our benchmark is far lower, with consumers traditionally only making a switch as either a reaction to truly appalling service or when faced with an overwhelmingly superior deal. And while this may be changing – as noted previously – it is slow progress. For the challengers to pick up the next share of customers they need to somehow break through the ‘trust’ consumers still have with the traditional banks.
The new factor in the mix however is the introduction of the EU’s update to the Payment Services Directive – known more commonly as PSD2. It will be fascinating to see if this finally results in consumers taking a different approach and by picking the best products across the marketplace, wherever they come from.
Aimed at giving consumers greater choice in the financial services sector, PSD2 proposes to break the banking sector’s iron grip over money management by forcing them to provide third-party organisations with access to their customer’s accounts through open APIs (Application Programme Interface). It’s a game changer for the entire industry, meaning that traditional banks will no longer just be fighting against the challengers, but against a tide of new digital-first fintech providers.
Putting innovation at the top of the list
Excitingly for consumers, the regulation is likely to mean a rise in innovation within the sector, with increased competition forcing financial services providers to offer products that not only answer customer demands, but that are able to evolve according to the latest trends.
Once again, it looks like challenger banks could be set to regain the upper hand. Natives to this new digital world, the challengers have the agility and flexibility needed to best adapt to the open data requirements of PSD2. Traditional banks are likely to be concerned; with good reason – often supported by complex legacy systems, the idea of opening APIs will be giving many of their IT departments sleepless nights. Moreover, the concept of sharing data is somewhat alien for an industry that has typically prided itself on offering total lockdown. However it would be wrong to underestimate the commitment and focus that the traditional banks are giving these changes and to embrace this new paradigm.
No Clear Winner… Yet
This leaves the battle between challengers and high street banks in an exceptionally interesting position. With more threats than ever before, it is possible that we will see a sharp increase in instances of “co-operation”, with high street names working together with fintech focused challengers to ensure they are still able to stay relevant in the market.
Linking up with established rivals may represent the best chance challenger banks have in building up the credibility and trust that they need to become a fixture in the mainstream banking conversation. Certainly there is space in the market for challengers, particularly those focussed on delivering an outstanding solution in a niche market. Less clear is how the landscape may look over the next few years, and the position of today’s most established banks. Changes are being made, but only time will tell if they are being fast enough.