As Deutsche Bank plans to reduce 18,000 of its global workforce to try and revive its ailing fortunes, the future of traditional banks looks a little ominous. 

And challenger banks are looking to break the monopoly of well-known high-street banks by capitalizing on a wave of enthusiastic payment trackers

Challenger banks promise branch-free banking and customer service at the tap of a button, all ready and waiting on your smartphone.

The UK, which is one of the international centers of fintech innovation, is home to some of the fastest-growing challenger banking brands including Monzo, Starling, Revolut and Atom. 

Since they began to pop up in the UK in 2015, the rise of this next generation of financial technology start-ups has been startling.

Even since Q3 2018, those in the UK who have used at least one of Monzo, Starling, Revolut or Atom in the last month has increased by 83% (from 3.6% to 6.6%), an impressive increase in half a year. 

But with both high street banks and tech giants like Facebook and Google eyeing to get in on the act, the sector is becoming increasingly competitive. 

To retain their competitive edge, financial brands need to deliver truly consumer-centric services, which means focusing in on who their consumers are and what they want.

Who’s using challenger banks?

In the UK, still only 6% of internet users have used a Monzo, Starling, Revolut or Atom app in the past month. 

Of these users, 56% have tracked their spending and 44% have used a mobile payment service in the last month. 

These users skew slightly male (58%), and the majority fall into the 16-34 age bracket (59%). 

While they tend to be younger, users of these UK-based challenger banks are actually much more likely to be in the top income groups. 

One-third of this audience are in the top 25% of income, 1.6 times the national average. 

Chart showing demographic breakdown.

Their high-income status is reflected in their most distinctive attitudinal statements. 

  • 46% say they consider themselves to be more affluent than average.
  • 47% say having the latest products is important to them. 
  • 25% say they’d buy a service simply for the experience of being part of the community built around it. 

This is a group that has strong status-seeking, cosmopolitan and aspirational viewpoints as a result of their young age and high wage. 

Chart showing the most distinctive attitudes.

How can brands stand out?

While more established banks may view automation as a way to reduce cost, challenger banks can’t risk taking that position or they become vulnerable to the next wave of disruptors who create a better online banking experience.

Automation has many advantages beyond cost-saving, including transforming user experience. Highly developed chatbots, for example, offer users a degree of personalization, aiming to get to the heart of what consumers want and connecting them on a deeper level than ‘transactional’. 

Unsurprisingly, challenger bank users are 1.35 times more likely than the average UK internet user to say they want their favorite brands to provide useful apps and online services. They are also 1.7 times more likely to say a live-chat box would be a purchase driver. 

Chart showing what users of challenger bands want from their favorite brands

This audience also wants brands to:

  • provide personalized recommendations for purchases.
  • let them contribute ideas for new products. 
  • to provide innovative new products.

This is a group that value innovation, but only when it provides real value in their life, and creating novel meaningful interactions based on consumer needs is crucial for brands to stand out. 

For example, Cleo is a chatbot-based virtual financial advisor that helps consumers budget and track their finances by giving them useful tips and reminders for when they’re about to overspend. 

K2’s Bankbot is another example of understanding client needs. Instead of navigating menus and complicated interfaces, K2 allows users to type in questions and commands such as “transfer £20 to Ella” or “set up a monthly transaction to my estate agents”. 

Creating actual workflow requirements of its users where AI and chatbots can come to understand systematic patterns of activities is a great example of paying attention to consumers’ needs and behaviors.

A changing model

Challenger banks should look for different ways to generate revenue through premium subscription services.

Technology giants over the past decade have worked to revolutionize the customer experience, all looking to provide value-added services to bolster customer engagement and increase their user-acquisition rates.

Look at the meteoric rise of Netflix. The prevailing factor of its success lies in its ability to leverage consumer data to provide personal experiences. 

By establishing a subscription-based model, each user constantly provides the platform with valuable insights into their viewing behavior and preferences. 

Monzo already does this to a certain extent by categorizing its users’ spending to provide detailed reports into their consumption habits at the end of each month. 

Challenger banks may have the upper hand here; increasingly, users are separating out transactional and lifestyle accounts. 

Through a mixture of distrust, apathy and ‘shoeboxing’, people are still sticking with their traditional primary bank accounts for taxes, utility bills and annuity services, while using challenger banks for more discretionary transactions.

This includes everyday lifestyle, entertainment and consumption payments, which tends to give a much more vivid picture of a consumer’s personality and preferences. 

Creating additional value

Evolving consumer behavior points has led to a rethinking of the core banking model. 

In 2018, Meed, a U.S.-based fintech announced a subscription-based mobile banking program. For a subscription fee of $9.95 a month, the Meed package includes checking, savings, a debit card and a line of credit up to 75% of a person’s savings. 

This is on trend, with more and more financial services offering particular add-ons, discounts and bundle deals.

More than 250,000 Revolut customers — about 5% of the total — pay a monthly fee for perks such as travel insurance, while almost a third of N26’s UK customers pay £14.90 a month for its premium account.

Research conducted by Cornerstone Advisors found that 3 in 10 respondents would open a banking account with Amazon if it were bundled with other services, including services that helped them save money, add convenience and offer protection.

Another study conducted in the UK by CitizenMe found that 45% would pay a monthly bank fee to receive subscription media services arranged by their banking provider, such as Netflix and Amazon Prime. 

This shift in strategy to differentiate on trust, financial health and bundled offerings that transcend a product-centric approach presents a more holistic and personalized value proposition. This will be viewed favorably by young, price-savvy consumers. 

What does the future hold?

For challenger banks in the UK, the real test will not only be getting ahead of the pack but also to establish themselves abroad.

With more than 2 million customers in the UK, Monzo announced its U.S. expansion this year. 

Although they will face just as stark competition in the states as they do at home, battling it out with the likes of PayPal’s Venmo, BankMobile, Grasshopper Bank, and Chime. 

Perhaps of even greater concern to traditional and challenger banks alike is Facebook’s plan to launch a digital currency called Libra in 2020, that will allow its billions of users to make financial transactions across the globe. 

This is primarily targeted at the many millions without bank accounts but with access to mobile phones

But this could also be a tempting offer for challenger bank users, who are almost three times the national average to say they own a cryptocurrency.

But whether Facebook is successful in its ambitious plans or not, the strong rise of challenger banks demonstrates the importance of user-friendly banking, even if users are still using traditional banks as their primary bank accounts. 

Obtaining trust and loyalty is a hard-won, lengthy process. 

Challenger banks will have to offer services beyond that of pure banking. This will not only entice new customers, but double down on their current users to ensure they’re the preferred option for primary bank accounts rather than back-ups or test accounts.

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Written by

Duncan is a Senior Analyst and Writer at GWI. Duncan produces a wide range of assets including reports, infographics and dashboards, along with our Chart of the Week series. Moving to GWI after completing a degree in psychology, Duncan specializes in online consumer behavior and motivations.

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