The trillion-dollar question: why pick one bank over the other?
by George White
While the threat of an imminent global recession may have been premature, indications are that a decade on from the financial crisis, we’re on track for another.
The last time around, the global order was flipped on its head. Banks went from trusted stalwarts to shady institutions – bankers from money-men to persona non grata – in a short breath. Billions were lost in market capitalisation, GDP took five years to recover, productivity growth became the weakest since modern records began.
One place where productivity seems to have bucked the trend, though, is the fintech sector. It’s a strange thought, but without the financial crisis, there would be no Monzo, no Starling no Revolut or N26.
The UK’s fintechs have filled the gap left by cash-strapped high street lenders that failed to innovate due to shareholder pressure. Digital first with user experience at their core; none of the baggage of financial crises past; no mis-sold PPI or dodgy restructuring to tarnish their image, the sector is going gangbusters – UK fintech investment hit £16bn in 2018 and is already on course to hit £19bn this year.
One might argue that the term ‘disruptor’ applies more to fintechs than any other nascent industry. Remember, many in the general public paid for the misdeeds of bankers through recession and austerity, instilling a loathing of greed and a desire for change. The most successful fintechs – many of their founders privy to said misdeeds before losing their jobs in 2008 – leveraged this desire to build new brands.
Neobanks, such as Monzo, revolutionised banking through promising to right the wrongs of the incumbents. For the first time profit wasn’t first, people were. Customers not only expected easier banking, but help optimising the way they use money – a financial ‘Fitbit’ if you will.
Monzo in particular continues to seize headlines with whizz features, helpful apps and outlandishly free services, making it a win-win for customers. Choosing a neobank had never been so easy. Gamified behavioural nudges hold some cultural currency, but it is the identity of the ‘challenger’ neo-bank that is directing consumer choice. Quite simply, Monzo may have a banking license, but it is not perceived as a ‘bank’. It doesn’t act like or have the values of a bank. And people like that.
We’re in an era where not only values and ethics need to align with consumer choice, but also serve as a form of self-expression. That ‘coral pink’ Monzo card is a statement of identity, of demonstrating one’s progressiveness, of rejecting the status quo. So much so that one in twenty of us in the UK have one.
The innovative approach taken by the neobanks has shrunk the Big Four’s UK current account market share from 92 per cent a decade ago to around 70 per cent today. The new kids on the block are chipping away for sure. No doubt they want a bigger slice of the personal banking pie. But to keep eating, they need to resist the urge to become what they set out to change.
When a product is so tied up in values and ethical decision making, anything counter to that is highly unappealing to a client base built upon a promise of change. A big part of the neobank’s appeal is the perception that they are not like traditional banks, they are the challengers trying to redefine the new norm. But this is a perception is fragile, and needs protecting as they look to grow.
The expectation of the neobanks is to continue to subvert the system – and for the most part they are still doing so. Subscription service fees akin to Netflix are being championed by N26 and Revolut. Following on from the successful option to ‘block’ gambling, Monzo’s planned “merchant block” means one can start shaping purchases around the values that one holds. Even Starling’s broker-style marketplace offers an emerging path to profitability at the user’s benefit.
But this innovation cannot be restricted to mere product features. Our choices are influenced by our perception of the brand and vitally the actions they take. If Monzo and other neobanks want to accelerate their priceless challenger identity, they have the potential to harness a like-minded community to drive social impact causes to a powerful and profitable effect.
And this is where the legacy and neobank mindset is different. Legacy banks do ‘CSR’ initiatives to protect their reputation first. Neobanks can champion and disrupt the social causes of world because what matters to the consumer is by its very nature part of their identity. In real terms, an enviable culture first brand-building opportunity.
These challenger brands grew so rapidly because customers wanted change. They wanted institutions that were like them; that shared their values and ethos, that ultimately wouldn’t re-tread the path that led to such misery for so many. Neobanks put people first, profit second. They personalised, they listened, and the results have been staggering. Yet no fintech is anywhere close to the capitalisation of a high street lender. Their capital is cultural relevance. With a recession approaching, that is something worth noting.