Retail banks are leaking customer business to competitor banks, fintechs and single-line specialists but these losses are being masked as customers typically keep their existing current accounts with their primary bank. Looking ahead five years, almost one in five European consumers may bank exclusively with a challenger bank reports Douglas Blakey
One in ten European consumers now deal solely with a challenger bank (11%). That is according to a report released by Fujitsu in mid November entitled Technology and the new banking customer.
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The figure is a little higher than the writer expected but no matter.
German consumers are the most likely to use a challenger bank for all of their financial needs (14%).
Meanwhile, men are more comfortable with the concept than women (14% compared to 9%). It is no surprise at all to note that millennial consumers are the most likely age bracket to use these services.
An estimated 17% of 16-24 year olds and 14% of 25-34 year olds are firmly in the challenger lender camp.
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By GlobalDataUK customers the most conservative bank consumers in Europe?
The vast majority of the public, however, still use traditional banks alone (68%). UK consumers remain the biggest traditionalists. Despite the prevalence of the fintech sector 77% of UK respondents only use a “legacy” bank.
A major shift is taking place, however, in the blurring of lines between institutions. A fifth of consumers now use a combination of a traditional bank and challenger bank (21%), with the German and Spanish public the most likely to take this approach (24%).
Consumers appear prepared to be “bankagnostic” – happy to pick and choose where they can get the best services.
Notably, however, a quarter of consumers say that nothing would make them switch to using a challenger-only bank (24%). And in regions like the UK, the majority of consumers plan to remain loyal to traditional banks alone (60%).
That compares with an estimated figure of only 48% for Europe.
2025: incumbents v start-ups market share forecasts
Looking at how Brits bank, access to reliable digital services is also a high priority for almost half (47%) of consumers. Notably, the ability to walk in to a bank branch is still important. In fact, two-thirds (67%) of consumers are more likely to do business with a bank if it has a high street branch.
By 2025, the Fujitsu report forecasts that:
- 17% of European consumers will bank only with a challenger bank;
- 35% will bank with a combination of challenger and traditional banks (from 21% in 2019).
If the Fujitsu forecasts are to stand up then switching rates will have to rise appreciably, especially in the UK.
UK switching rates remain a miserable 2% per annum
We have been here before. A lot was said-much of it patent nonsense-about bank switching rates having the potential to mirror switching rates in the energy and telecom sectors.
Such arguments were advanced, at length and loudly, when seven day switching of current accounts launched in the UK in 2013.
Around 46 million adults hold a current account. Only 2% of UK consumers switch every year. The harsh truth is that UK primary current account switching rates have fallen since the advent of seven day switching. In 2012 a total of 1.12 million switches took place. The increasing number of current account providers is meant to promote competition. And the success of Bacs in administering seven day switches efficiently was all meant to result in switch rates rising. There were 1,056,378 switches in the 12 month period to end June 2017. But in the 12 month period to end June 2019) there were only 941,708 switches.
That is down 2.4% from 965,317 switches in the 12 month period to end June 2018.
The threat of hidden defections
Bain’s report –As Retail Banks Leak Value, Here’s How to stop it – is the 10th in its loyalty series. And with the previous reports in the series, is well worth a read. The report surveyed more than 131,000 consumers in 22 countries.
It makes the valid point about hidden defections. Leakage of customers’ business to competitor banks and fintechs is often hidden because consumers retain their primary current account with their legacy bank. Bain argues that the outflow will only get worse for banks unless they significantly improve and digitalise the customer experience.
For many digital disrupters, the current stock of customers may be low compared with traditional banks’ customer base, but the flow is huge. Among all UK respondents, the share is low for challenger banks Revolut, Monzo, Starling and Monese, but for respondents who opened a new checking or savings account in the past year, the share doubles. For younger respondents who opened an account, the share increases by four times.
Ian Bradbury, CTO, Financial Services, Fujitsu UK & Ireland, sums up the challengers versus incumbents battle succinctly. He says:”The key question for the banking sector is can the challengers offer enough positive differentiation to pull existing customers away from their traditional banks before these incumbents transform themselves to be truly digital companies.”
