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Mar 08

Category: In the News

The retail banking sector in the UK is dominated by just four big players. Barclays, Lloyds, HSBC, and Royal Bank of Scotland control almost eight out of 10 personal current accounts and nearly nine out of 10 small business accounts.

So, the numbers show the traditional ‘High Street’ banks are still in control. That’s beginning to change, though.

After the global financial crisis of 2007 and 2008 wrought havoc on the banking system, consumer confidence in the ‘main four’ fell off a cliff. At the same time, with RBS and Lloyds largely in public ownership, regulators spied an opportunity to introduce serious change in the market: new banks.

What are challenger banks?

The challengers are those new banks, created since 2010, in direct response to the financial crisis. Seeing increased competition as the route to a more stable banking sector that puts a greater emphasis on the customer, regulators set about shaking up the market.

Some new banks were created out of the larger banks being forced to sell off subsidiaries (think TSB — forcibly removed from Lloyds, for example), others were created by existing smaller players being bought out by ambitious existing brands (think Virgin Money taking over the troubled Northern Rock), while others still started out from scratch.

Of the startups, Metro Bank, now a prominent feature on the high street (in London, at least), was the first institution to gain a full banking licence in 2010 in over a century. Since then, six other new banks have been fully authorised, and a further 26 are working through the licensing process.

All are hoping to capitalise on consumer mistrust in the big banks and eat up their market share. In theory, conditions are ripe for them to do so. The Competition and Markets Authority has insisted that banks make it easier than ever for customers to switch accounts, and — research shows — consumers are more willing than ever to jump ship for better rates and higher quality customer service.

The basic problem for challengers remains, though: how to lure customers aware from the big banks?

What does the future hold for the challengers?

2015 was an important year for the challengers, according to insights from KPMG. Both in terms of market share (lending was up 16% at the new banks, compared to a 2% decline in the big four) and profitability (the challengers managed a return on equity of 18.2%, compared to meagre returns at the bigger banks), the challengers seem to have an advantage.

Some of this, KPMG note, is driven by cost advantages. In banking, scale doesn’t necessarily equate to cost advantage: the big players are bogged down by complex and out of date IT systems, intense regulation, and costly real estate issues. In the banking sector right now it is better to be small and nimble.

Some of the new challengers are turning their backs on a High Street presence entirely, in favor of an online-only model that’s been popularised by the success of First Direct. We’re seeing increased recruitment at new ‘digital banking’ brands such as Atom, Tandem, and Mondo — all of which follow the First Direct model combining a very high-quality web experience and exceptional customer service.

But a cost advantage alone isn’t sufficient. Jim Spowart, a veteran of several new banking ventures, argues that “when a new bank enters the marketplace, it must offer customers something different. There must be an innovation and a desire to give customers a better deal either by way of service, product, or price”.

Therein lies the biggest challenge for the challenger banks: sufficiently differentiating themselves in an increasingly crowded market so as to attract a significant share of a sceptical and risk-averse market.

Why do they present such an exciting marketing challenge?

The best marketers thrive on the challenge of building bold brands that set their firms apart from the competition. In the banking sector right now, one of the surest ways to succeed against the name-recognition and prominent High Street presence of Lloyds, Barclays, HSBC, and RBS is to differentiate through brand strength.

In a 2015 survey, YouGov found that while most consumers could name at least one challenger, few were breaking through in terms of name and brand recognition. The average brand awareness was just 7% among smaller challengers. That’s an exciting opportunity since the first challenger to breakthrough stands to benefit enormously.

Furthermore, if the future of marketing lies in owning the entire customer experience (as many argue it does), then the challengers represent an exciting opportunity. Whereas the big banks must grapple with a legacy of a poor customer experience and reputations that, some argue, are damaged beyond repair, the challengers have an opportunity to build a customer experience from the ground up.

That’s because, in this era of near-instantaneous mass communication, the customer is king — a few bad experiences can cause exponential reputation damage in our online world. The best among the challengers are using the lessons of the tech start-ups — obsess about customer behaviour online, constantly track and review customer data, and “fail fast” by trying new ideas, testing them, and moving on to the next strategy.

As in the tech world, history suggests that not everyone will survive, but that the benefits of getting this right could be huge. That these challenges are at the heart of the challenger banks business plans means that they present an opportunity for marketers to be front and centre of these businesses. That possibility is one that, for many marketers, is simply too good to miss out on.

Sound like an opportunity for you? 3Search works with a number of the major challengers in the financial sector. Check out our latest projects on our website or contact us to discuss how we could work together in the future.