Amongst the many long-term behavioural shifts driven by the Covid-19 pandemic was a significant increase in digital banking. Estimates suggest that almost three-quarters of the UK population now utilise digital banking and Mastercard reported last year that 35 per cent of customers globally had increased their use of digital banking specifically because of the pandemic’s impact.
It might, therefore, be fair to assume that digital-first challenger banks benefitted, as they were offering exactly what consumers needed. The reality is more nuanced.
Jehan Sherjan, SRM’s Insights Director, champions the power of interpreting data to uncover insights that drive positive change for businesses and customers. His career spans over 20 years with a range of leading consulting businesses.
SRM’s UK-based Insight & Data Analytics team has delivered in-depth customer loyalty research focused predominantly on UK retail banks and building societies since 2012. The research carried out in July 2021 delivered a post-pandemic baseline to help understand banking performance during Covid and the factors which had shaped customer loyalty during this time. However, as Sherjan explains, challenger banks may have missed a significant opportunity.
Cast your minds back to 2019. Customer engagement with traditional banks was waning as the appeal of challenger brands started to take hold. Then came Covid-19. Overnight, the shift to digital and remote impacted every aspect of life. Bank branches were shuttered or operating reduced hours, whilst for customers shielding at home, visiting a branch simply wasn’t an option. Contact centres similarly dispersed to the kitchen tables and living rooms of those on the customer service front line.
The conditions for digital-first banks to succeed were ripe, yet their performance was mixed at best.
Our research covered a range of metrics with the aim of revealing the factors influencing customer loyalty and whilst it was easy to flippantly assume that digital-first banks would benefit from increased online banking, the reality was that many traditional banking models did as well, if not better.
In part, this is because the ease with which transactions can be executed online is only part of what customers need from their banks – not least over the past two years.
The ability to speak to a human – especially for complex transactions, but also peace of mind or convenience – remains a real need for many consumers and the appeal of shiny and seemingly innovative apps wanes quickly when other aspects of the overall experience don’t meet expectations.
Then there’s the fact that many challengers simply don’t offer the products and services that customers required the most support with when the pandemic hit. Those needs were primarily focused on debt products where customers sought mortgage holidays and loan deferments.
So, on that basis, retail banks with a high-street presence fared well in our research? Not exactly. Whilst the big banks have made transformative steps in digital engagement, those that we consider as ‘traditional’ banks occupied half of the bottom ten performers. Issues around being overwhelmed by the sheer volume of enquiries and reduced branch hours all impacted their overall performance. No doubt the complex nature of the enquiries that they were dealing with and the sheer scale of their customer base, further exacerbated this situation.
Instead, it was First Direct that continued to be the strongest performer in all areas. Perhaps once considered a ‘challenger’ bank, it is now recognised amongst the UK’s established retail banking brands, albeit without its own branded branch network. Significantly, though, it maintained a strong element of customer contact, remaining accessible to customers via a range of touchpoints – despite its own challenges responding to significantly increased call volumes. First Direct’s culture and desire to do the best by its customers, continued to come to the fore during the pandemic; a fact made all the starker when you consider it shares much of the same operational and technical infrastructure as its parent HSBC, which performed significantly less well in terms of customer engagement.
Of course, nothing is ever clear cut and a closer look at the data becomes necessary. Looking specifically at the pandemic, that data covered three key measures: how highly the customer felt valued, how the brand maintained expected service levels throughout the pandemic, and the timely and relevant communication of information.
With these measures in mind, it’s interesting that only two pure-digital banks appeared within the top ten. Those were Starling and Monzo at 3rd and 10th respectively. Atom fell just outside of the top ten (11th) and Revolut came in at 17th, reflecting its popularity for use whilst travelling abroad – something that simply wasn’t happening.
Several locally-focused building societies fared well precisely because of their proximity to their customer base and their ethos of being there to help. Both Sainsbury’s and Tesco Bank also performed well at a time when their parent brands were at the frontline of serving the population with their most basic and vital needs – groceries.
This tells us that customer loyalty is gained via a robust mix of factors. Excellence in one area alone, even if that is the digital experience during a period when it is much needed, is no more than table stakes.
There’s also the simple fact that ‘digital’, however you choose to define it, is not a ‘fix and forget’ component of the service proposition. A first-class digital experience only really gets tested once a critical mass of users engage with it and it’s then that their expectations rise, and they demand more. With that in mind, Starling Bank convincingly assumed its role amongst the leading pack thanks to easy to use and functionally rich digital channels and, importantly, a genuine sense of relationship with its customers. Inconsistent performance in the overall service experience and aspects of their pandemic performances, though, negatively impacted Revolut and, to a lesser degree, Monzo.
Consider this comparison: in 1998, Amazon was simply an online bookstore, albeit one meeting with resistance from those loyal to their local independent bookseller. Over time, it evolved to sell everything with the added convenience of near-immediate delivery. However, it has evolved further to offer physical stores – seemingly in direct contrast to its very raison d’être. Why? So that it further eats into the competition – the high street; so that it appeals to the digitally disinclined; and, importantly, because sometimes a physical presence is just more convenient. In a crowded digital landscape, a physical presence provides Amazon with an alternative means of standing out.
Whilst challenger banks may not have seized Covid-driven opportunities to increase customer loyalty to the extent one might have assumed they would, there’s no denying the impact that they’ve had overall. They’ve raised the bar for the sector, immeasurably improving the focus on the customer and raising the benchmark for sweating the detail on user experience.
Indeed, the focus that the challengers have placed on the importance of the digital experience hasn’t been ignored by the more traditional models which continue to close the gap on the digital distinction that once was the pure preserve of the challengers.
As recognised in a recent FCA study, competition is starting to impact the retail banking sector. Banks are now in race mode and irrespective of the model, must continue to sprint smart to remain relevant.
