The progress of challenger banks has been one of the most exciting sectors to observe in recent times, but as some of them shift from adolescence to maturity, cracks have started to appear in the last year and a half. Moving from the exciting launch and growth stages to wider expansion is a difficult phase for any business and these disruptors are being faced with an uphill struggle to continue their uninhibited success to date. With many challenger banks, the problem lies fundamentally in their image.
Dented consumer and investor confidence
Meaningful competition in the retail banking sector remains limited. The space for unicorns was made after the last global financial crisis left consumer trust in banks at record lows. However, the latest data from the Current Account Switching Service showed it completed more than 1m switches in 2019. The number of challengers has risen, and millennials continue to use them widely, but there is still a noticeable reluctance to convert to challengers as their main bank account. In short, they have struggled to gain meaningful market share because they have not managed to present themselves as a genuinely viable alternative.
Recent attempts to secure investment have shown that confidence is waning. Last month Monzo completed a fundraising round at a 40% discount to its previous valuation after the coronavirus pandemic hit its growth plans. This drop could show investors lack of belief that the industry can transform its popularity in millennial circles into wider sustainable growth long term.
A major problem which any challenger bank has faced is selling its proposition in a different market and this has been shown recently in a couple of cases. N26 announced plans early this year to pull out of the UK market 18 months after launching. Fintech experts questioned whether it had given up after struggling to gain momentum in the unusually competitive UK market. Similarly, Monzo is withdrawing plans for US expansion due to the underperformance of the aforementioned funding round.
Nevertheless, there are still vital signs in this space. Both Revolut and Starling underwent successful fundraising before the pandemic (with more in the pipeline), primarily for their expansion, showing that investors think the promise is there if the model and approach is right. This might perhaps make the case that it is a question of when the revolution will happen, rather than if it does.
A welcome challenge
Challenger banks have helped bring the banking industry kicking and screaming into the 21st century. Banking is now an online industry which is increasingly customer-centric and streamlined, a change which can be attributed to the rise of ‘the branchless bank’ and a process accelerated by the pandemic with the temporary closure of physical premises.
Furthermore, recent personnel changes show these unicorns are aware of the changing landscape and upcoming challenges. Monzo co-founder Tom Blomfield has stepped down as CEO making way for former Visa executive TS Anil. Likewise, Metro has bought in Dan Frumkin and Robert Sharpe, two men touted to breathe life back into a company which some thought had lost its way.
To date, the rise of challenger banks has been largely unchecked and the current growing pains were inevitable, even before the pandemic hit. Fundamentally, at the heart of many of these issues lies a communication challenge; how do you successfully sell yourself in other markets and change your image to being unquestionably trustworthy? Being unshackled by some of the legacy issues facing their more traditional counterparts may give them flexibility, but earning consumer confidence is an ongoing challenge if they are to be promoted from their current ‘second in wallet’ status.