The challenger banks do not only have to stick to the old adage of hitting the ground running - they need to sprint. With incumbents increasingly pouring resources into innovation programmes, the challenger banks are in a race against time to offer their unique capabilities before others replicate them.
The ’small 4’ retail banking challengers - Atom, Monzo, Starling and Revolut – have leveraged a social endorsement strategy to attempt to drive customer acquisition. And it looks to be paying off: Monzo recently welcomed its one millionth customer.
“The challengers are quite open about the social aspects of their strategy. They build themselves on customer referrals and Monzo is no different, particularly with their golden ticket and early ‘coral card conversations’ referral campaigns around their prepaid card origins”, says Peter Heywood, leader of digital financial services at consultancy Genpact.
But on October 2, Monzo switched off its popular in-app top-ups, claiming it costs the banks around £4m annually. The first step in shedding its prepaid legacy, Monzo ended its prepaid beta and pushed customers to switch to current accounts in April this year. 362,000 customers made the upgrade, of a total of 568,000 (the rest were switched off or inactive). Speaking on the side lines of the AWS FS Insight conference, Monzo engineer Matt Heath was bullish.
“At the beginning,” said Heath, “users would top up their prepaid cards with £100 and you’d think that disabling that feature would mean no more money in the account.
“That way of doing things is not particularly user friendly, it would be much nicer if we could provide better ways of doing that and getting passed the old top-up system. That’s not how banking should be,” he said. “Since turning off the feature for new users we’ve found that disabling the feature hasn’t affected customer sign ups or customer behaviour.”
Monzo implored users to use alternative methods to fund their accounts.
The top-up disablement has been part of Monzo’s long term strategy, says Genpact’s Heywood, but it comes at a time that banks generally find themselves in a difficult environment.
“Monzo has been pretty open about this plan in its roadmap,” says Heywood. “You can literally see the Trello board [a visualised roadmap] - but in this hostile banking market, and particularly in the low interest rate environment that we’re currently in, it is costly across the board to operate a bank.”
“It’s also a really hostile environment that Monzo finds itself in: big banks have lots of sticky customers while there are five or six challengers acquiring customers at a rate of knots,” says Heywood.
The ‘big 4’ banks - Barclays, HSBC, RBS and Lloyd’s - benefit from historic customer aversion to switching banks, and that also included Monzo and the challengers’ prime demographic.
“We recently did a report (ibid) that found that even millennials who are digital natives and open to change still bank with their childhood tier 1 bank for security reasons,” says Heywood.
It is perhaps this aspect that made Monzo’s in-app debit top-up feature so popular, allowing users to bring money into the app from a primary account. This move will encourage users to find alternative avenues to bringing money into their Monzo account. The ultimate goal may be to get users to ‘add salary’ and begin using Monzo as their main account.
Given the social enterprise nature of the Monzo customer acquisition strategy, it remains to be seen whether this popular feature will affect social referrals or sustained customer use of the service, with the fate of many social media companies tied to the zero sum game of popular opinion; Facebook being the most recent example. But for Heywood, this shouldn’t be an issue.
“I wouldn’t say there’s going to be a social exodus. The challenger banks are leading the pack in terms of personalisation in banking, and that should win because no two people bank the same way. Monzo have also opened up their APIs and have done extremely well building a banking platform for scale, agility and flexibility.” He says.
“We obviously can’t rule out a social exodus” said Monzo’s Heath. “We’ve discussed with customers, we’ve discussed with our community and tested how the lack of that feature changes people’s behaviour, we’re confident that it won’t substantially affect our user base. Ultimately, this removes the users who are using Monzo for the wrong prepaid reasons.”