Over recent years, fewer customers are popping into bank branches, and more are logging onto mobile banking apps. Many have dispensed with wallets completely, because their smartphones do the same job, but better. Innovative start-ups, offering alternative banking models, become the new must-have accessory for trendy millennials.
According to GP Bullhound’s most recent Technology Predictions report, 91% of people surveyed prefer using a mobile banking app to visiting a physical branch of a bank. Banks are closing at an alarming rate – the consumer charity Which? found that the UK has lost nearly two-thirds of its bank and building society branches over the past 30 years, from nearly 21,000 in 1988 to only 7,000 at the end of 2018. Just last week, Santander announced it was closing 140 branches, necessitated by ‘changes in how customers are choosing to carry out their banking.’
And it’s no surprise – banks don’t offer a 24/7 service, customers are tired of long queues and archaic paperwork, and they’re left with a feeling that they don’t really have any control over their money. Plus, technology has allowed customers to make simple transactions – from checking their balance to transferring money – without having to go into branch.
Consumers want to be able to check their balance before they buy another round of drinks or freeze a misplaced card; they want a breakdown of spending at the click of a button and to be able to save as easily as they spend. This is where bright and innovative banking start-ups step in: the likes of Monzo, N26, Monese and Revolut hardly need an introduction. On top of the convenience and digital perks, they offer lower international exchange rates and have even incorporated cryptocurrency trading.
Other start-ups are growing at rapid rates by capitalising on consumer needs that larger players haven’t fulfilled. Brex, for example, recently reached unicorn status in under two years with its disruption of the credit card model, issuing credit cards to small companies and start-ups, and charging based on company revenues and credit history.
The traditional financial institution versus newcomer race is a fiercely fought one. Traditional financial institutions are working hard to keep up with disruptive start-ups. Banks are continually developing their apps and online functions to offer consumers the fastest, smoothest and most efficient technology and interactions.
JP Morgan reacted to commission-free trading and investing platforms with their own digital investing service that provides free or discounted trades and no-fee access to the bank’s stock research. Meanwhile Goldman Sachs’ Marcus increases access to its most elite products. Overall, this is resulting in better services for users, as competition forces innovation and expansion.
The story seems to be a classic case of archaic institutions being replaced by new tech and innovative entrepreneurs. But it is not that straight forward. There are risks and uncertainties attached to digital banking solutions. Low unit economics means digital accounts are fairly small, and thus unprofitable. The traditional players have a key weapon in their arsenal – the ability to cross sell a full array of financial products and drive higher revenue per user. It remains to be seen if the innovative newbies can turn their substantial customer bases into profitable relationships.
Digital and challenger banks are also more liable to risk. Recently, Metro Bank – one of the biggest challenger banks aiming to break the dominance of the big high street lenders – made loans miscalculations which resulted in a 40% decrease in the share price.
Indeed, consumers may use their smartphone as a wallet far more frequently than they use a bricks and mortar establishment, but banks need to be trustworthy if they are to gain customers. The existence of a branch offers this vital reassurance.
Most customers want to deal with another human for bigger personal finance questions, from finance goals to mortgages and pensions. GP Bullhound’s Technology Predictions report found that while US banking customers aged 18 to 44 said they normally banked digitally, over half said they would prefer to resolve some matters person to person. Just as business meetings are often most effective, and leave people most satisfied when they’re done face-to-face, customers are reluctant to leave their banking and financial decisions to an app.
For any banking institution, it is important to foster a sense of trust, rather than just focusing on profitability. The answer is to do both. Challenger banks can thrive if they add to their offerings of efficient and user-facing tech with the reliability and trustworthiness that larger institutions provide. And traditional institutions can maintain their prominence if they combine the trust and authority they have worked to establish, with new and innovative technology that meets customers’ day-to-day needs.
Digital banks must navigate these hurdles, but their future looks bright. As greater investment, more considerate regulation and increasing innovation push the industry forward, the market looks set to be well and truly transformed by disruptors and new solutions offering more choice and lower costs. The result lies in the balance between profitability, innovation and tech, and trust, reassurance and human interaction.
