Are challengers always going to be the secondary bank?

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Bank challengers have always claimed they are a on a digital mission to shake up the banking industry figures, however research from Curve shows that even among the keenest early adopters, traditional banks are still used for four in every five purchases.

The challenger banks have always claimed they are a on a digital mission to shake up the banking industry with slick apps and new features which make managing money, and collecting rewards, far more user friendly.

However, the latest research from Curve would suggest they still have a long way to go. The service that allows customers to manage multiple bank cards through a single platform believes it is a unique position to research spending habits for those who have a choice between challenger and high street accounts.

The result may make uncomfortable reading for the challengers. When given the choice, Curve users pick their high street card over a challenger’s for more than four in every five transactions.

This finding prompted Curve to delve deeper to better understand consumer behaviour among those who have a choice of using either a high street or challenger bank. The conclusion will make unsettling reading for the new brands. Only Monzo appears to be making any major sign of inroads in competing with the high street in a year when we have already seen the closure of N26 and NatWest’s, Bo.

Curve, CEO Shachar Bialick, believes its figures prove investors backing the challenger banks may be in for an uncomfortable surprise when they look beyond the promise of disruption and focus on actual day-to-day statistics.

“Investors from all over the globe are flocking to fintech and showing their support by pumping in billions of pounds,” he says.

“However, as our data shows, there is a problem for these challengers: they may have captured the imagination of the general public, but they’re yet to capture their confidence, and many users still remain hesitant to fully trust these banks with their life savings, particularly in the unsettling economic times.

“The greatest strength of challenger banks is also their greatest weakness; they’re new. With regards to their savings, people desperately want safety, predictability and security.”

Spending league table

So, what do Curve’s figures show when its researchers delve deeper?

To begin with, it is worth noting that the platform is clearly used by early adopters. Around 60% of its users have a card from a challenger bank running alongside a traditional bank. This would be put the platform way ahead of average adoption rates for challenger accounts in the UK of 10%, which rises to 15% and 16% for millennials and Gen Z customers, according to a recent report from Fujitsu.

Curve top issuers by value UK

Even on a platform of eager early adopters, though, a top ten of which bank’s cards see the most spending only includes one challenger bank – Monzo. It is in eight place in a league table headed by HSBC, with Barclays in second. To find the other challengers, one has to drill down to the top 20 to find Revolut in 16th place and Tandem in position 18, one spot above Starling, in 19th.

The data would suggest there are two clear reasons for this. Firstly, customers have a preference for using traditional high street bank cards. Even when a customer has a challenger and a traditional bank card loaded on the Curve platform, they use the high street bank 83% of the time and the challenger, 17%.

Of this 17% nearly half is accounted for by Monzo, which makes up 8% of total spending on Curve. Starling and Tandem each account for 3.1% of total spending and Revolut just 1.5%.

It not just a case of the challenger banks being used less frequently. Curve further claims its experience is new banks’ cards are more usually associated with smaller purchases. This means the average spend on a conventional card on Curve is £32.67 whereas it is £20.37 for a challenger.

Curve Proportion of Spend UK

Secondary accounts for nights out

This matches what Samantha Seaton, CEO of Moneyhub, sees in the market, and there is a clear reason why. Challenger banks have succeeded in changing early adopters’ behaviour through supplementing traditional banks, but not replacing them.

“People get paid into their traditional bank account, so are spending their main outgoings from that account,” she says.

“People tend to transfer a small portion of any ‘spare cash’ into their challenger account, which they will use to spend on day-to-day small costs, like going to the pub or out for dinner. People will often feel safer bringing out their challenger bank card if it has a much smaller amount on it, rather than their main bank card where there is more to possibly lose.”

Seaton’s observation concurs with what happened when the UK went into lockdown. Almost immediately, at the end March, Curve figures show use of challenger banks fell around 90%, compared to 60% for traditional banks. The platform believes this could be down to challenger banks offering attractive deals on travel and foreign currency transactions.

However, spending did return to near normal levels by mid-April, according to Curve, which suggests Samantha Seaton may be correct in associating an initial drop in usage with the observation that challenger cards are being used for discretionary spending on nights out.

“As people were confined to their homes, suddenly there was no spend on things like meals out and trips to the pub, meaning that lots of people have had little to no use for their challenger account,” she says.

“In fact, according to Moneyhub’s data, restaurant spending was down 42% over Easter this year compared to last year, whilst Netflix payments more than doubled for March 2020 versus March 2019, at 145% – with subscriptions more likely to be linked to people’s traditional accounts.”

Trials under lockdown?

Although this initial drop in use might sound a warning bell for challengers, the recovery in spending by mid-April could be an opportunity. According to Elias Ghanem, VP for Fintech in Continental Europe at Capgemini, the challengers may have suffered a frightening drop in usage but a ray of light has emerged during lockdown.

“During uncertain times, customers typically become more conservative, focusing on their “original” provider,” he says. “Priorities may have shifted, for instance changing from a higher savings rate, offered by a challenger banks, to keeping money consolidated in a single safe place, a traditional banks). Leading to a decline in usage.

“However, digital usage has increased and as people familiarise with non-physical modes of banking. Challenger banks will have the upper hand due to their experience-driven approach. We’ve found that consumers trialled new players during the COVID-19 pandemic in the UK and around 32% would likely switch to FinTech or BigTech provider if their primary service provider failed to deliver satisfactory services.”

Can challengers fight back?

This optimism is partially supported by research from Fujitsu that suggests just over a fifth of millennial and Gen Z customers will switch to challenger-only banking by 2023. However, Ketan Parekh, Managing Director of Financial and Insurance Services at Fujitsu, points out there still remains a major obstacle – trust. The apps may be slicker but consumers tend to trust the banking brands they grew up with.

“While adoption of these fintechs has been increasing steadily, our recent research found that 77% of all Britons bank only with a traditional high street bank,” he says.

“In fact, two-fifths (40%) of consumers said they don’t trust challenger banks at all – highlighting a huge stumbling block. Trust is one of the most important factors in selecting a bank, given their role in our financial lives. As long as this lack of trust exists, challenger banks will likely struggle to become the ‘go-to’ option for the majority of consumers.”

The challenge of trust

The take-out is clear, then. Challengers are having an impact on customer behaviour, but they are becoming additional, bolt-on accounts. Even among early adopters on the Curve platform, they are only used for one in every five purchases. Each time they are used, the average transaction level is half that of the average payment made on a traditional bank card. It is also worth noting Curve shows very nearly half of all challenger bank activity it sees comes from just one new brand – Monzo.

So, as the country emerges from lockdown, the UK fintech market will start to get a feel for whether optimism is called for. Usage of challengers currently suggests they are secondary banks for discretionary spending on weekends away, a night down the pub or having a meal in a restaurant. If optimistic experts are correct, though, and consumers have trialled challengers under lockdown, those brands may start to see new customers using their services once people are more confident to go back to work and start spending again.

Even the most optimistic fintech expert, such as Fujitsu’s Ketan Parekh, openly concede the challengers have a long way to go in building trust levels to a point where they truly rival the big names on the high street consumers have grown up with.

Monzo, Revolut, Starling, Tandem and Monese were repeatedly contacted for comment for this feature but did not accept the offer.

Curve UK User Base Proportion Retail V Challenger Curve Transaction Vaule Tradtional v Challenger Banks UK

Curve Average Transaction Value UK Users

UPDATE: We would like to apologise for causing any offence with the title of our article on bank challengers, published on Saturday. While it was never our intention, we now realise that using the term “mistress” was not appropriate and we have changed it immediately. We are committed to equality and diversity in every aspect our business.

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