The rise of the challenger banks

Mark Jopling is vice president, retail banking & financial services, at BT

The face of retail banking in the UK is changing. In July 2010, the sector witnessed something not seen in over 100 years – the launch of a new high street bank. And where Metro Bank led the way, new and non-financial consumer brands are following suit, writes Mark Jopling.

Reassuringly for retail banks, approximately four out of five of us remain loyal to one of the ‘big four’, trusting them to provide the core services, such as current accounts and debit cards, that we are so reliant on.

We are, however, seeing a gradual shift in the type of organisations that provide banking services and, as a result, the way that both these new providers, and the incumbents, deal with customers.

For example, in the four years since its launch Metro Bank has opened 26 branches (or ‘stores’ as they prefer to call them) and nearly 360,000 current accounts. Deposits now total around £2 billion. It seeks to bring about a ‘revolution’ in retail banking with a more customer-centric experience including more face-to-face contact and opening hours in-line with hectic work/life schedules.

But while Metro Bank is undoubtedly causing a stir, maybe change will be driven by the non-financial organisations – very often well-known consumer brands – that plan to set-up as competitors to the familiar faces on the high street such as Lloyds and HSBC”.

In many cases, these organisations are well known consumer brands – with deep wells of customer loyalty and even affection to draw from. In this respect, the potential challenge to the UK’s main retail banks is one that must be taken seriously.

One such category creating a stir in retail banking is UK supermarkets. For example, in June Tesco Bank, which already has 12 per cent share of the UK credit card market, launched its first current account. Sainsbury’s and Marks & Spencer are already well established players on the UK’s scene.

The entrance of the supermarkets is particularly interesting due to the positive perceptions that these organisations enjoy among their customers. A recent report by VerintSystems and the Customer Contact Association found that while 66% of people are happy with the service provided by their banks, 78% of people said they are happy with the service their supermarkets provide.

This suggests that supermarkets are doing even better than banks in terms of delivering customer satisfaction, and so might be able to capitalise on this with the launch of innovative competing services.

But perhaps a real ‘revolution’ in retail banking will be driven by the new consumer ‘mega’ brands. Starbucks now operates its own electronic payments system allowing customers to pay directly for their coffee in-store, while Facebook recently announced a plan to provide money transfer services.

Our own survey carried out with Avaya* earlier this year provides further evidence that retail banking is likely to look very different in the not too distant future – with this change in part being driven by evolving customer preferences.

We found that 61% of British customers would be interested in banking services provided by alternative suppliers such as Tesco, John Lewis, Amazon and Apple and 52% said they would be open to switching to another provider. Moreover, with the recent launch of Apple Pay, traditional bank card payments will soon face stiff competition from consumer brands offering alternative ways to pay.

With nearly two thirds of people happy with their current account, the UK’s leading retail banks have plenty to be positive about. However, they cannot afford to rest on their laurels. Last year’s launch of the ‘Current Account Switch Guarantee’ made it easier and quicker than ever before to move account. Add this to the rise of the ‘challengers’ and it’s clear banks must retain a laser-like focus on improving customer sentiment, removing any reasons – real or imagined – for people to switch.