There are so many good reasons why the big banks should have gone out of business by now. They weathered a storm of criticism and blame for the financial crisis. Their monopoly in the financial services market was challenged by new legislation that threw the doors open to fresh competition.
The stage was set for consumers to run into the arms of their new financial service saviours and for old-school banks to fade into irrelevance like Blockbuster video rental shops. But five years later, it still hasn’t happened.
It would be unfair to say that banks haven’t changed with the times, but it’s been slow. From Medici’s use of general ledgers in the fifteenth century, to wired money transfers in the 1870s, and cash machines in the 1960s, banks have long enjoyed the luxury of changing at their own pace.
More recently, change has been forced on banks through new regulation that made it possible for non-banks to offer financial services. This coincided with the mass consumer adoption of new technology – specifically smartphones and apps.
New entrants initially focused on providing specific services for which consumers had been historically overcharged and underserved by banks, such as the ability to compare money exchange rates and find more competitive travel currency services.
Today, technology is evolving faster than ever and consumers are embracing a new digital lifestyle. Netflix saw its customer base grow by 15.77 million subscribers in the first three months of 2020.
In 2019, app-based ride-hailing service Uber reported the number of trips made by its customers had risen 28 percent to more than 1.9 billion compared to the previous year. Such rapid growth proves that many people will turn their backs on long-established institutions such as the great British black cab to snag a cheaper and more convenient ride.
With such clear evidence that consumers are willing to adopt online services from new market entrants, what is holding them back from financial service challengers that are offering lower fees and improved user experience?
According to research, the level of bank switching remains low in the UK compared to consumers’ willingness to switch providers of other important services. In 2019, ten and a half million people switched energy providers while only one million people switched their bank accounts in the same year.
While the apps of the challengers may be fun and easy to use, they may have overlooked some fundamental points.
Consumers will be used to their banks complying with stringent regulation introduced by the Financial Conduct Authority. However, many of the new entrants are not actually banks and instead use something called an e-money licence which means they are not required to comply with the same stringent standards, which could affect trust.
A similar point can be made around data security. In 2019, the Independent newspaper reported that the phone numbers of 419 million Facebook users were found online in a huge data breach. Forbes reported another Facebook data breach affecting millions of customers less than 12 months later.
Travelex, which provides an alternative to banks’ travel currency services using prepaid travel cards, made the BBC news after it was held to ransom by hackers in 2020 when a cyberattack forced the firm to turn off all computer systems and resort to using pen and paper.
From the outset, finding an alternative to bank products takes time. While the fees of alternative providers are likely to be lower than their current bank offers, consumers are then faced with the prospect of moving their money to a third-party with whom they have no prior relationship or trust.
Let’s imagine that a consumer takes a leap of faith and chooses a challenger’s product. Their new cheaper travel card is likely to be a prepaid card. They transfer £1,000 to it and go off to Spain on holiday. Every day, they anxiously check their balance and keep topping it up. They get home with £100 still left on their card but, by the time of their next trip, the card has been lost. While they enjoy reduced fees on each transaction, there are a number of compromises and inconveniences.
Consumers are flirting with financial service challengers but not committing to long-term relationships. Let’s look at a very brief case study of Monzo, one of the more well-known digital challengers that do not have a physical presence on the high street. Founded in 2015, this app-based challenger has built an eye-catching brand with lower fees for travel money. The problem is that the vast majority of its customers do not pay their salary into their Monzo account – their average deposit is just £357. Challengers may eventually earn the coveted position of primary account, but it is taking a long time.
A stark illustration of consumer trust in traditional banks can be seen in consumers’ spending habits and use of holiday money while abroad. Despite the availability of a huge variety of travel money services from non-banks, UK consumers use their high-street bank debit cards an average of 28 times a year while abroad, incurring fees that could range from 3-7% each time.
Research by Currensea found that consumers generally feel satisfied that their money is secure with their current high street bank. Furthermore, 54% value the convenience and ease off using their existing bank account, despite the high fees they pay.
Although consumers might be interested in new services such as being able to compare Euro rates or find the best travel money rates, the reality seems to be that moving away from a trusted financial services provider may sound like too much of an unwanted risk when planning a trip to a foreign destination.
Open Banking is a term that is gradually breaking through into the consciousness of UK consumers. It is perhaps the biggest boost to consumer choice in recent years and could be the missing link between the trusted bank account and the benefits of new financial services.
Open Banking enables consumers to give permission for their banks to share their personal financial data with non-banks so they can access additional and often very useful financial services. Consumers do not need to move away from their trusted bank account, but instead augment its services. Open Banking can improve financial experiences for consumers with apps that connect to their bank account and can help with virtually any aspect of their finances, from savings and budgeting through services such as MoneyBox, to managing your pension through services such as PensionBee.
This is how today’s financial service innovators are beginning to deliver services that work with, rather than against established banks.
Thanks to Open Banking, it is now possible for consumers to attach an alternative debit card to their trusted bank account. That means they can enjoy lower fees for foreign transactions without the inconvenience of needing to top up a prepaid travel card.
While new technology is changing so many aspects of our daily lives, perhaps there is something that consumers don’t want to change about their money. Amongst the new skyscrapers and chains of boutique coffee houses in the City of London, the Bank of England has retained its steadfastly solid position for nearly 300 years. Maybe we feel the same way about our money and want to be confident it will always be there when we look for it.
Spectator magazine may have summed up consumers’ feelings about big banks most succinctly when they wrote, ‘the pandemic has proven that while we may not love them, we do more or less trust them. And trust remains the commodity that is hardest to acquire.’
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