'Too big to fail? The modern day threat to traditional banking' by Jon Murphy, Executive Director at ea Change Group
The sheer volume of capital and expertise tied up in the UK's largest banks seemingly rendered them an untouchable tier within the financial sector. Yet, as with many other business sectors, the rise of technological innovation is placing unprecedented pressure on traditional banks to retain their customer base and outperform competitors closing in on every area of their work.
The term 'Challenger banks' has become accepted vernacular, as we see telecoms companies and online service providers expand their service range to include bank accounts and investment opportunities. It is almost a given that you can open a current account at the same place you do your weekly shopping; with Tesco, Sainsburys and Marks & Spencers all clamouring to sweep up any defective customers.
So what has led to this growing market - and how wary should the traditional banks be?
I would argue that it is not any great difference in interest rates that is luring the clientele away, but rather a more delicate case of trust. Following the crash we have seen a relentless tide of 'bank bashing' attacking everything from policy to personality - all accumulating to undermine public trust in the figures holding their financial future. This creates a space in which other trusted brands, from the world of retail or telecommunications, have an opportunity to utilise this trust in moving to another space. For example, as a consumer Amazon have repeatedly exemplified how reliable they are by delivering my every order on time - so why would I not consider trusting them to open an account? In a recent ad campaign, online investment management company Nutmeg take direct aim at the banks and their lack of public trust, using this in combination with their alternative online offering to draw out potential customers. If a brand can promise trust the opportunity is there. However this is not the only factor threatening traditional banking dominance.
This sudden shaking of the tree has combined with a rapid cultural shift towards banking online, with over half of us now using an online account to manage our finances. Customers now expect flawless online systems and services with up to date apps and instant social media communication - offering a clear opportunity for challenger banks to dominate this space and create a real point of difference. In highlighting the sheer speed of this sector we can compare the 13 years it took Barclays to achieve 2 million IB customers, to the two months it took them to achieve the same level on mobile banking. A good social media offering also links back to the importance of trust, as it is seen by many as an indicator of transparency. Zopa, one of the largest peer-to-peer lending groups, operate solely online and have won repeated awards for most trusted loan provider - outshining the banks. Less investment is needed in physical premises, and credible companies can spring up from almost start-up-like proportions.
This has made differentiation difficult. Most traditional banks look to claim customer service as their USP - thereby clearly discounting it - yet even the definition of good customer service has changed. For a bank to really offer customer service, and also to build trust and sense of openness, this must also be reflected in their engagement through social media and other digital avenues. In Germany, Fidor bank have proved vastly popular through their tactic of paying higher interest on savings when a customer 'likes' them on Facebook - a true melding of worlds. Spanish bank BBVA have predicted that only 5% of customer interaction will be via the branch by 2017. In response to this we have already seen branch consolidation occurring up and down the country, and vastly expanding social media departments clamouring to engage with their customers in a faster and wittier manner than the next.
So what hope is left? I would say plenty. We should not leave imagining the banks are doomed, as their dominance is still overwhelming. But they should learn valuable lessons from these ferocious challengers, and must focus on embracing reinvention if they are to meet the financial needs of retail and business customers in the 21stcentury.