Rising to the challenge

Before the start of the pandemic, challenger banks were riding a wave of investor appetite and customer satisfaction, but few had managed to turn an actual profit. Therefore, when Covid-19 hit the shores of the UK and people began to tighten their purse strings, companies such as Revolut, Monzo and Starling – who were expanding at a rate of knots – had to devise plans to save their businesses. These three major UK players have met the challenge in three distinctly different ways and, as a result, they might have emerged stronger from a time of real crisis.

Revolut, the largest of the three institutions, saw transaction fees drop by around 40% as foreign travel dried up and spending on light entertainment all but stopped. Its immediate response? To cut costs to improve the profitability of the business so it can begin to break even. Despite taking the biggest hit of these three competitors in terms of app downloads and new customer sign-ups, it managed to get past the initial impact relatively unscathed.

After the initial impacts of the pandemic were dealt with, Revolut turned to expansion of its product range to keep existing customers and start winning new ones again. It capitalised on 2020’s boom in retail investment, carving out a niche offering among its peers where customers could trade in stocks and cryptocurrencies. Revolut CEO Nik Storonsky believes that offering these new services is not only helpful for consumers, but also improves its investment case as it becomes more diversified in terms of revenue.

Back to basics

Starling approached the crisis from a more traditionalist standpoint. CEO Ann Boden has stated that it is almost the “polar opposite” to Revolut because it focused on acting as a bank first and foremost through the crisis. It focused on its current account customers, as well as boosting its lending to businesses to over £2bn, while cutting costs elsewhere in the business. This resulted in it continually turning a profit since September, the longest run since its inception.

Meanwhile, Monzo took a similar strategy to Revolut in terms of its transaction fees, new customers and new app downloads at the start of the pandemic. It even warned in its annual report last summer that the ability to perform normal operations was a ‘going concern’.

However, a raft of new products Monzo released in the last 12 months proved popular, moving it closer to profitability. In particular, Monzo’s CEO TS Anil has spoken of the success of its new business account as the public made strides to move their lives online over the lockdowns. He also touted external factors such as the raft of UK bank branch closures as assisting this accelerated uptake of its products. Furthermore, the firm saw transaction fees rebound as it became more successful in persuading existing customers to use Monzo as their main bank.

Points of difference

The result? All three banks have emerged from the pandemic having grown in strength and stature. They have proven they can strip back expenditure to be profitable, subsequently helping strengthen their investment case. The pandemic has also somewhat forced their hand by accelerating the rate they are bringing out new products. Consequently, they have started to differentiate their propositions from each other and the rest of the market. These challengers now have a chance to escape comparisons with one another and focus their communications explaining to customers why their proposition is unique.

While the last 12 months may have been hard for these banks – as it has for everyone – it also seems to have helped them on their road to maturity, successfully separating themselves from the crowd.