Marketing savvy digital challengers segment banking

Breaking out of the traditional mould, challenger banks use bright cards, social media, and mobile phone technology to capture new customers. Using online banking, sophisticated credit analysis, and payment technology, challenger banks specialise in separate financial products

30 October 2018

There is satisfaction in swiping a flashy, eye-catching credit card to purchase goods. One of the first to break into mainstream usage, digital challenger banks have followed Monzo’s neon-coloured cards. The distinctive cards have come to symbolise those who are ‘in-the-know’ within social networks, privileged access, and low foreign exchange fees.

Differentiating themselves from high street banks, challenger banks have emerged, taking advantage of mobile phones, online banking, and sophisticated encryption. While high street banks offer a large range of traditional products, digital challenger banks narrow their offering to online accounts, FX, and payment technology. Most, if not all, make use of mobile apps to manage accounts, with features to help users monitor spend and budget.

Social media strategy and real-life community groups

Monzo’s iconic bright orange card offers current accounts with the majority of bells and whistles that a typical high street bank account offers. Originally deployed as a pre-paid charge card, Monzo’s digital account works seamlessly with existing accounts. Cash needs to be transferred from one account to Monzo’s, through mobile apps. A demonstration of its popularity, over 60,000 new customers open accounts each month.

In the UK, cash withdrawals of up to £200 per month are free. Equally, cash withdrawals from overseas are limited to a maximum of £200 per month before fees are incurred. For those travelling abroad, pocket money is available but not for large transactions.

Understanding customer habits is also key to Monzo’s USP, with key features of the bank’s app including budgeting and social media. While high street banks including Barclays and Lloyds have long provided current account users with spending data, Monzo’s mobile platform is easy to use and to understand.

Another element driving Monzo’s popular is the platform’s community and real-life events. The bank makes use of social media to uniquely market events - which are broadcast through meetup, the social media platform. The purely social element of meetup is a significant departure from the high street bank approach but not new. Earlier outreaches by Barclay’s Digital Eagles and Lloyd’s Community Programme have in-person elements, but focused on charitable endeavours.

The Millennial Card

Revolut has changed the digital banking market place. Issued in 2015, the fast-growing start-up founded by Nikolay Storonsky has moved quickly to establish itself. With a background in trading, Storonsky originally conceived of the idea of a card that could be used across multiple currencies.

Since 2015, the company, and its metal card, has grown at pace. Last year Revolut obtained a valuation of £300m from Balderton Capital and Index Ventures, two European venture capital investments. Revolut has since had a further fund raising round, leading to a valuation of $1.7bn.

Exchanging between euro, dollars and pound sterling is easy and low cost with Revolut. The basic plan, which costs nothing, allows customers to spend in over 150 base currencies at inter-bank rates, and fee-free withdrawals at cash points for amounts less than £200 per month. Monthly subscriptions then go up as additional features are added.

Revolut offers edgy options for high-flying technophiles. Catering almost specifically for frequent travellers, subscription offers for Revolut include multiple personal IBANs for pound and euro accounts – which appeal to those accepting and making payments from traditional accounts. Other options include luggage service, travel insurance, medical insurance, and global delivery. Pushing boundaries, the card also allows trading in cyrptocurrencies with no limit.

Not only in the fast lane in terms of growth, the digital challenger bank has also made leaps and bounds in expanding across geographies. While competitor Monzo applied for a full bank charter with the UK authorities, Revolut has an e-money licence. Exploiting the time saved, Revolut is expanding its 600,000 user base even further by passporting into Europe.

Further crowding in the market place

Starling Bank, Monzo’s nearest competitor in terms of product offering and size was founded by Anne Boden, ex-COO of Irish Allied Bank. Starling offers business accounts and money transfers to bank accounts in 38 countries. The first to offer online business accounts, sole traders and small businesses can manage their finances quickly and cheaply with the digital challenger bank. The challenger has also cracked into banking as a service technology, allowing companies to brand accounts using Starling’s digital capabilities.

Pursuing a strategy mainly for businesses, the platform is compelling for secure transfers, since users can use the SWIFT network or local banks to accept and make payments. The digital challenger bank has brought more accessible technology to traditional banking products.

Monese, another UK challenger bank, also offers digital current accounts and contactless cards. With a pricing plan similar to Revolut, subscription prices range from free to around £15 per month.

Originally, Monese’s target market was completely different. Rather than go for millennials or early adopters of digital accounts, the challenger bank looked at large migrant groups. Totally ignored by high street banks, Monese allowed anyone to set up a bank account without an address – helpful for recent immigrants without a national track record.

Trust is front and centre

Making use of the internet and mobile phones is not without its perils. Important and thematic amongst the challenger banks is transparency. Breaking from the tradition of high street banks, fees are openly stated and noted. Of paramount importance is cybersecurity.

High profile customer data security breaches can mar or brighten a digital challenger bank’s profile.

“Brand differentiation and strength will be a critical component towards high levels of customer engagement to ensure survival,” wrote Richard Iferenta, head of challenger banking at KPMG, in the firm’s 2017 challenger banking report. Customer trust for digital challenger banks is particularly important, since they do not have a physical presence. Instead, building a brand and customer service is key – to their advantage, challenger banks are working with a clean slate, without any baggage from past wrong-doings.

PSD2 and Open Banking have enhanced competition in retail banking. For challenger banks, the reforms enable platforms to share applications and transaction data with third parties. They also mean customers will be able to share their own data with parties – a fundamental shift away from banks owning data. For digital challenger banks that have already embedded API technology and partnerships with other start-ups, new regulation will spur further collaboration.

Already ahead of the curve, Starling is looking at partnerships with Vitesse, Incuto and AccessPay, and has a number of strategic partnerships with companies such as Vocalink, CurrencyCloud, Form3, Railsbank, FIS Global and Bankable. Monzo is also looking at a potential partner – industry experts have picked up that an arrangement with TransferWise might be on the cards. TransferWise previously announced they would work with Starling, but dissolved for unknown reasons.

Consolidation on the high street

High street banks are sharpening their teeth and expertise across the digital space. While some try to roll out their own online banks, the potential for consolidation is obvious – using balance sheet, traditional banks can simply buy challengers. Equally, mid-sized banks are also getting in on the M&A activity. Last year’s acquisition of Aldermore by South Africa’s FirstRank bank has proved that consolidation can add to existing offerings.

Ultimately as digital challenger banks tap into customer deposits, high street banks have woken up and taken notice. With huge resources behind them, high street banks are well positioned for takeover bids, and equally, with high valuations, owners of digital challenger banks may look to sell out.

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