The rise and rise of challenger banks - Aspect Software

[Pages:20]The rise and rise of challenger banks

The critical role of mobile for challenger banks and building societies

INTELLIGENCE PAPER: CHALLENGING THE DOMINANCE OF THE BIG FOUR

INTELLIGENCE PAPER: CHALLENGING THE DOMINANCE OF THE BIG FOUR TWO

Executive summary

The financial services sector is currently undergoing a transformation like no other. Small, agile and digitally native challenger banks and building societies are starting to challenge the dominance of the Big Four (Barclays, HSBC, Lloyds and RBS), slowly but surely siphoning off their customers.

A relaxed regulatory regime has seen new entrants flood into the financial services sector, who, unencumbered by technological and cultural legacy constraints, have been able to redefine the banking model ? placing customer experience at the heart of it. Technology ? mobile technology in particular ? is breaking down the relationship that banks have historically had with their customers and reinventing it. Disruptive players like PayPal and Apple Pay, for example, have transformed the payment industry, while Metro Bank has re-engineered the high street bank model to better serve the needs of customers.

At the same time, a growing distaste for the traditional banks that have been relatively slow on the uptake of innovative new technologies ? either out of complacency or practical considerations ? had rendered many customers open to looking at alternatives. There is a tangible market opportunity for more agile challenger banks to fill the void and let their customers transact with them in ways they want to.

These factors, combined with the fact that it has never been easier to switch current accounts, mean that the threat that the new wave of challenger banks pose to the old guard is clear. A report published in 2015 by McKinsey1 warned that retail banks could lose as much as 40 per cent of their revenues and 60 per cent of their profits by 2025 as a direct result of the competition from new entrants to the market as well as broader changes in the industry.

It is something of a perfect storm but there are no foregone conclusions; to date, challenger banks have been little more than an irritation to the traditional banking industry. In spite of the fact that they have the means to quickly switch from one bank to another, in the form of the Current Account Switching Service (CASS), consumers have proved to be more loyal and cautious than many had first thought.

The Competition and Markets Authority (CMA) has found that many consumers remain reluctant to switch their current accounts, perceiving it as "complicated, time-consuming and risky". The CMA's report2 into the matter found that just 3 per cent of consumers switched their personal current account in 2014, and that over half (57 per cent) had been with their current provider for over a decade.

A 2015 report warned that retail banks could lose

40% of their revenues and 60% of their profits by 2025

Hoping to capitalise on this inertia and maintain their market-leading positions, the big banks are investing heavily in technology, ramping up their customer service and customer satisfaction efforts, and leveraging the vast amounts of data on their systems. With financial clout and size on their side, they may yet fend off the challenger banks' assault.

The ultimate victors in the battle for market share will be the banks that can master customer relationships and the customer experience. This research project sought to better understand how far along the challenger banking industry is to achieving just that.

This Intelligence Paper summarises the results of this research and sets out to comment on the following: 1 The challenger bank landscape 2 Running the business 3 The Big Four 4 Going mobile

1 McKinsey, Global Banking Annual Review 2015, industries/financial-services/our-insights/the-fight-for-the-customer-mckinsey-global-banking-annual-review-2015 2 CMA proposes better deal for bank customers, .uk/government/news/cma-proposes-better-deal-for-bank-customers

THREE

INTELLIGENCE PAPER: CHALLENGING THE DOMINANCE OF THE BIG FOUR

Methodology

Aspect Software commissioned independent research company Vanson Bourne to assess the state of the UK's fledgling banking industry. They interviewed 100 non-technology, business decision makers from organisations that: ? Operate in the UK ? Have at least 100 employees in their banking/financial services arm ? Provide a current account product (or equivalent) to individuals and/or commercial bodies

Split between so-called challenger banks and building societies (defined below), the sample was divided evenly by size, with 33 coming from organisations with 100-500 employees, 501-1,000 employees and more than 1,000 employees.

Definitions

CHALLENGER BANKS

A relatively small retail bank set up with the intention of competing for business with large, long-established national banks such as HSBC, Barclays, Lloyds and RBS. Something of an umbrella term, challenger banks include high street names like Metro Bank, Handelsbanken and Virgin Money, smaller lenders such as Aldermore Group, and large retailers such as M&S Bank and Tesco Bank.

BUILDING SOCIETIES

Originally established as privately owned lending companies whose principle purpose was to provide loans secured on residential property (mortgages), a regulatory shakeup in the 1980s allowed building societies to offer current accounts and banks to offer mortgages. Following a wave of demutualisation, most building societies were either acquired by banks, or now function similarly to banks with a particular emphasis on property-based lending.

FOUR

1. The challenger bank landscape

The challenger banking landscape is a diverse one, and the variety in those institutions and companies that might sit under the challenger banking banner makes analysis of the sector a complex task. While some model themselves on the Big Four and invest heavily in high street branches, others, like the recently-launched Atom Bank, only offer services digitally.

The customer numbers given by respondents in this research offer some indication of the broad church that constitutes the challenger banking industry. While some respondents reported having fewer than 100,000 individual customers, others in the sample reported well in excess of 4million. However, respondents' organisations have, on average, just under half a million individual customers and roughly 340,000 commercial customers.

How many customers have a current account with your organisation in the UK?

Average number of individual customers Average number of commercial customers

494,433 340,924

These disparities go some way to explaining the differing services and capabilities of the organisations included in this research. While it is the majority (62 per cent) that offers branches, telephone and online banking to customers, around one in ten offer only online and mobile services and 4 per cent offer only telephone banking services.

Taken as a whole, online banking is the most common service offered to personal customers, provided by 84 per cent of respondents, while telephone banking is the service most likely to be offered to commercial customers (81 per cent).

Which of the following personal banking services does your organisation offer to customers?

Physical branches Telephone banking Online (web-based) banking Mobile banking (app)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% PERSONAL BANKING SERVICES

FIVE

INTELLIGENCE PAPER: CHALLENGING THE DOMINANCE OF THE BIG FOUR

Mobile banking is the method least likely to be offered overall, which is somewhat surprising considering the fact that the vast majority of respondents report targeting mobile-hungry 18-40 year olds. Challenger banks are, however, twice as likely to offer a mobile service than are building societies (73 per cent and 35 per cent respectively).

Does your organisation offer mobile banking to customers?

25%

YES NO

75%

67%

33%

CHALLENGER BANKS

BUILDING SOCIETIES

Many of Britain's budding new banks are enjoying double-

digit growth and attracting significant

investment

Still a relatively recent addition to the banking industry, when compared to other services, the results outlined in chapter four of this report indicate that this area will grow rapidly over the next few years.

Growth strategies

The challenger banking industry is in a buoyant state; while growth amongst traditional banks has somewhat stagnated, many of Britain's budding new banks are enjoying double-digit growth and attracting significant investment as a result3.

Respondents, on average, reported having seen their customer bases increase by around 15 per cent in 2015, but it is clear that the smallest organisations are enjoying the greatest gains. Organisations with fewer than 500 staff increased their customer numbers by 18 per cent; considerably more than the 10 per cent achieved by those with more than 1,000 employees.

To the best of your knowledge, at what rate is your organisation growing its customer base in the UK, from 2015 to 2016?

40%

30%

20%

10%

0% 1%-5% 5%-10% 10%-15% 15%-20% 20%-25% 25%-30% 30%-35% 35%-40% 40%+ 100-500 UK EMPLOYEES 501-1,000 UK EMPLOYEES 1,000+ UK EMPLOYEES

SIX

3 Questor: Virgin Money is proof challenger banks are beating big lenders, telegraph.co.uk/business/2016/03/02/questor

Around six in ten (61 per cent) respondents' organisations focus their growth strategy more on the UK market than international markets, but over a third (35 per cent) have their growth strategy focused evenly on both UK and international markets.

Does your organisation's growth strategy focus more on the UK or international markets?

4%

UK

35%

EVENLY ON THE UK & INTERNATIONAL

INTERNATIONAL

61%

Given the propensity of banking customers to stay with their current account providers for years, if not decades4 (though the market may well become more fluid in years to come), it would be a fair assumption that challenger banks would look to catch them young and before they enter the system.

However, the data suggests that only the minority of challenger banks and building societies consciously target the youth market, instead focusing their efforts on 18-40 year olds. By neglecting this demographic, they may well be missing out on an opportunity to gain loyal, long-term customers.

Which of the following age groups does your organisation target?

OVER 50

UNDER 18

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

18-30

CHALLENGER BANKS BUILDING SOCIETIES

41-50

31-40

4 CMA proposes better deal for bank customers, .uk/government/news/cma-proposes-better-deal-for-bank-customers

SEVEN

INTELLIGENCE PAPER: CHALLENGING THE DOMINANCE OF THE BIG FOUR

Contact centres

The contact centre has never been more critical to the banking industry. While a growing number of consumers are comfortable ? and indeed, prefer ? conducting the majority of their banking transactions via online and mobile portals and applications, there are times when only the human touch will do. With physical banking branches disappearing from our high streets at a rate of knots5, and some new challenger banks foregoing them altogether in favour of digital routes to market, the contact centre, in many cases, may well be the only channel able to satisfy that need.

It should come as little surprise, then, that the vast majority of challenger banks and building societies operate, or plan to operate, a contact centre. 89 per cent currently operate one, employing over 400 agents on average, and a further 7 per cent have plans to establish a contact centre in future.

Does your organisation operate a contact centre?

Yes ? in the UK Yes ? in Europe Yes ? outside of the UK and Europe No ? but we plan to have one in the near future No ? we have no plans to have a contact centre

Total

77% 20% 13% 7% 4%

Challenger banks

80% 30% 16% 6% 0%

Building societies

74% 10% 10% 8% 8%

The vast majority of challenger

banks and building societies operate, or

plan to operate, a contact centre

EIGHT

5 Questor: Virgin Money is proof challenger banks are beating big lenders, .uk/news/reports/world-of-change/#.VzSmBRUrKi4

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