Challenger banks and fintech startups leverage the online and digital world to facilitate market entry, scalability and acquisition. However, the same digital platforms allow their customers to switch to other providers in the blink of an eye.
Comparison sites such as Go Compare, Compare the Market and Money Supermarket provide consumers with transparency and access to information that makes switching providers easier than ever before. Although, it’s not only customers that show a lack of loyalty. When these comparison sites are being paid commission for every new sale made, they have no reason to promote brand loyalty for the companies that advertise on their sites. As such, the online world can be a double-edged sword for financial services providers.
Fintech startups spend much of their time and money acquiring new customers, however, they will be painfully aware that it is far cheaper to retain users than to attract new ones.
So, in an era where ‘swiping right’ on financial services providers is so incredibly easy, how can firms increase customer retention?
The Changing Landscape of Financial Services
The digital world and innovations in technology can be both a help and a hindrance to society. They make our lives easier, but we’re always just a click away from a pop-up advertisement. For example, an advert reminding us to make use of our £20,000 ISA allowance, or to put our money to good use in ethical investments.
We’re bombarded with enticing offers to switch to a new bank such as cash rewards, gift cards and competitive interest on savings, although, making sense of it all couldn’t be easier. The likes of Martin Lewis from Money Saving Expert, as well as consumers, proactively share knowledge and information about service providers. They tell us everything we need to know including how to switch to a new provider through reviews, social media, videos, articles and more. With so much information at our fingertips we can change providers with ease and confidence.
A New Approach to Managing Finances
30 years ago, almost all your financial requirements were provided by your high street bank; everything from savings, to foreign exchange and insurance. What’s more, there’s a good chance that your parents, their parents and their parents too, all used the same provider for decades.
However, nowadays there are so many more providers to choose from and a multitude of ways to search for them. As a result, the customer is in control and can make an educated decision on where to take their business.
Millennials and Generation Z are embracing innovations in banking and tend to be the early adopters of digital-only challenger banks, savings apps and budgeting tools. They take a holistic approach to managing their money and embrace change.
For example, 1 in 4 people under the age of 37 have an account with a digital-only challenger bank and up to a third have two or more accounts with challenger banks
When looking at UK bank customers across all age groups – 14 per cent have at least one mobile-only digital banking provider.
These statistics suggest there is a growing trend toward managing money using multiple accounts and mobile apps, and that perhaps rather than switching, customers are opening additional accounts. But why would they need multiple accounts? Surely, using several mobile apps and providers makes managing finances more complicated. Perhaps customers lack trust and are hedging their bets, perhaps one app alone doesn’t fulfil their needs or maybe they open new accounts to take advantage of rewards. Whatever the reason, managing multiple accounts isn’t convenient or sustainable. It certainly doesn’t reflect the concept of fintech being an innovative solution that meets customer needs and wants quicker and easier.
Customer Retention: Traditional Banks vs Fintech Startups
Customer retention is as big a challenge to financial services firms as customer acquisition. However, for some, the priority seems to be acquiring new users and gaining a bigger share of the market above and beyond keeping existing users happy.
For example, HSBC is enticing new customers with an income of at least £75,000 to switch from their current provider to HSBC Premier. They are offering a night away in a choice of 50 luxury hotels as a reward for switching¹. However, if you’re an existing HSBC customer, and upgrade your account to a Premier account, you won’t be rewarded for your loyalty.
UK challenger bank Monzo is making a bold statement in a bid to acquire new users. The startup is using their hefty marketing budget to splash ads across London’s underground and our TV screens. However, they’re also on a mission to build a loyal community of advocates by making customers a valued part of their mission.
For example, they ask for feedback on product launches, they allow users to invest in the company through equity crowdfunding rounds and they also hold 12 community events per year aimed at turning customers into brand evangelists. These strategies certainly seem to be working as 80 per cent of new users are acquired through word of mouth referrals.
What’s more, statistics from BACS show that Monzo has some of the highest net gains of consumers outside of big established banks like HSBC and Nationwide. However, despite positive signs of growth, the company is yet to post a profit, and with so much being spent on marketing, the cost per acquisition versus retention rate could become problematic in the future.
Challenger banks and fintech startups may be gaining market share, but we’re yet to see whether they can retain it. In some ways the big banks have an advantage over newcomers; they have many more years’ experience in understanding the market, customer behaviour and what retention strategies work best.
Arguably, the lines between traditional banks and challenger banks are blurring.
They are all innovating, adapting and disrupting, and they are all talking about empowering customers… I was recently passing through south east London by train and couldn’t help but notice 3 billboards side by side, all promoting banks with short, sharp slogans that have an emphasis on ‘customer’; ‘By your side’, ‘Together we thrive’ and ‘You make Monzo, Monzo’.
It’s clear to see the similarities behind their intentions. Putting customers first is a high priority for most financial services providers, however the market is becoming fragmented. There is more choice than ever before, the competition is growing and new products are being launched in quick succession. As a result, the world of finance is becoming more complex and attention is divided. This means customers are now managing a disconnected portfolio of providers, apps, cards and accounts, which doesn’t result in a seamless experience and makes customer retention more challenging.
Established Players and Startups Working Together
While traditional banks are continuing to close hundreds of physical branches and drastically reduce opening hours, some fintech firms are ironically bucking the trend. Starling Bank has become the first challenger bank to provide a physical location for customers. They have partnered with the Post Office to allow their current and business account holders to deposit and withdraw cash through the Post Office’s 11,500 branches nationwide. Despite being a digital-first bank, Starling Bank has recognised the value that customers place on physical branches and believes this will help to acquire and retain a bigger share of the market.
Interestingly, we’re also beginning to see partnerships and collaborations between would-be competitors. Some established banks and fintech startups are joining forces. For example, Chip, a UK savings app has partnered with Barclays to host their customer accounts. Chip doesn’t have a banking license and so partnering with a bank was crucial for market entry. Similarly, Plum, also a UK savings app, is reliant on MangoPay which has a banking license and can hold client funds on their behalf. Could increased collaboration between established players and startups facilitate customer retention?
The Key to Customer Retention in Financial Services
Ultimately, the customer is in control and so a customer-centric approach is essential for retention. However, it’s important for financial services providers to ensure that customer-focused initiatives are used to retain, not just acquire. What’s more, firms need to strike a balance between acquisition and retention activity, using both in tandem, rather than switching the taps on and off between the two, or excluding existing customers from offers. Prospective, new and existing customers should be treated equally and firms should dedicate sufficient budget to retention – something that many may overlook.
At the most basic level all firms should proactively engage users and prospects to share their feedback and ideas. They should have a process to collate information, review it and act on it. Another vital factor in delivering a great customer experience is product development, especially because of the fast-changing nature of finance and technology. Product teams should always be looking for ways to improve their service and react quickly to changes in the market.
Lastly, finance companies should follow the tried and tested tactic of loyalty reward schemes that have proven popular across many industries from retail and ecommerce, to travel and hospitality. They could offer tiered loyalty rewards that are linked to customer in-app activity, referrals, feedback, ideas, community engagement and more.
We’re yet to see the winning formula for retaining customers in the fast-growing UK financial services market. And when comparing the big banks with fintech startups, it’s difficult to determine who is getting it right, only time will tell.
¹ Information correct at time of writing
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