Digital Banking Challenges: Where Will The Next Curveball Come From?

Digital Banking Challenges: Where Will The Next Curveball Come From?
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The concept of business as usual has been torn apart by the devastating events of 2020. This certainly applies to digital banks, who are battling multiple threats, writes James Martin.

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It’s fair to say the world of digital banking is a fast-paced one at the best of times. But the recent impacts of the COVID-19 crisis has only accelerated the urgency for digital-first banks to pivot fast.

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Many people assumed that local and national lockdowns would play naturally into the hands of the challengers. This assumption would prove to be wrong. 2020 hasn’t been plain sailing for these disruptors. Far from it, in fact.

The customer was no longer king in the early days of COVID-19

At the start of the global outbreak, a quick shift had to be made by banks to digital-only transactions. It seemed to happen overnight, as apps and digital processes took the place of physical branch visits.

The question of whether or not customers liked to bank in this way – or even whether they had the technical skills to do so – soon became irrelevant, as the virus forced in-person banking to grind to a halt.

One of the key USPs for digital banks is convenience for the customer. It’s a key reason why they’ve managed to gain so much ground on the traditional banks since the aftermath of the global financial crisis of 2007-2008.

However, the complexity of lockdown worked against the more simple experience promised by digital banking.

Customers quickly popped up on social media to vent their frustrations about slow customer service and technical issues (let’s face it, if there’s one key thing people expect from the digital brands, it’s decent tech).

And with very few people travelling, the benefits of low or no fees when spending abroad and withdrawing cash were cut off.

Numbers that tell a tricky story

Figures commissioned by Sifted in April show how stark the initial effects were for the leading digital banks in their native markets.

Monzo, Starling, Revolut and N26 all saw their growth rates plunge by between 18% and 36% in March 2020 alone. In addition to big drops in customer sign-ups, transactions and consumer spending also fell across the board.

Inevitably, this led to a challenge in revenue streams for many companies. This was in contrast to initial commentary, which assumed new customers would simply be hoovered up by digital banks as everything went online.

Digital banking: Trust and consumer sentiment fell sharply

The negative impact on trust from consumers was evident too, as highlighted by stats published by Finder UK, which showed that sentiment for digital banks appeared to fall sharply in lockdown.

In the period between March and July of 2020, net sentiment for digital banks sank three times as fast as that of high street banks – with sentiment for digital banks sinking 14% compared to 5% for high street banks.

That isn’t to say that more traditional banks have had an easy ride. The challengers can take comfort in the fact that their overall net sentiment was still found to be higher at -12.5% than the incumbents’ -34.8% over three months of 2020.

A poll from Finder in August 2020 also found that some high street bank customers (3% of those surveyed) would never go back to an in-person branch.

Digital banking: Opportunities for a refreshed customer-centric model

Finder’s report questioned whether the honeymoon period for digital banks may have come to an end. But like any good marriage, there’s still plenty of reasons for optimism in the coming months and years.

Digging a little deeper into the stats, Monzo and Starling were two digital banks that featured in the top five overall for net customer gains in the first three months of 2020. These brands gained 19,049 and 15,153 new customers respectively.

This wasn’t a huge surprise given that these challengers were Finder’s top picks in last year’s Finder Banking Customer Satisfaction Awards.

Monzo’s ongoing strong performance is interesting to note, as it recently doubled down on its commitment to launching new features.

The “Plus” version of its original current account went live in July 2020, and now the feature-packed “Premium” version has also been launched.

Meanwhile, Starling continues to win plaudits, not least for its user-friendly app but also for its commitment to meeting the ever-adapting needs of its customers.

One example was seen earlier this month with the launch of a new online portal letting Starling Bank’s customers manage their money from their desktop or laptop for the first time.

The broader inference here is that throwing money at your product and putting the customer at the heart of what you do may be the way to go.

It’s something that tallies with the view of Nigel Verdon, CEO at Open Banking platform Railsbank.

Verdon noted that what helps fintech banks stand apart is that they are “phenomenal” in differentiating themselves through both marketing and customer experience.

Verdon added: “And it's not just banking experience, it’s your financial life experience because that's where [banks] can differentiate.”

The global picture offers hope - and threats

It can be easy to get caught up in the UK narrative, given that so many digital banks were born in London.

Panning out to the global picture, countries such as India, Malaysia and Singapore have some of the biggest percentages of online-only bankers – with around one in five adults holding a digital account. Brazil and Germany have the co-highest rate, at an estimated 28%.

So, opportunity is clearly there for digital banks, as one would expect to see these numbers grow in western and non-western countries alike.

That said, it can feel like another juicy plot twist is coming every week.

In Australia, it was announced last week that Afterpay would ramp up its very popular buy now pay later (BNPL) offer, by giving its 10 million-plus customer base access to Westpac’s digital banking platform.

Westpac is Australia’s oldest bank and it’s hard to think of a bolder move from one of the old guard in recent months.

Afterpay intends to offer a savings account and looks set to also move into cash flow and budgeting products. A move with more than a whiff of parking their tanks on the lawns of the neobanks.

So, there’s plenty to keep digital bank execs awake at night. Not least the following questions: How exactly will we respond? And are we up to the challenge?

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