Challenger banks tested by pandemic

By Emma Olsson | 8 April 2020

Initially posited as organisations with the upper hand in the coronavirus pandemic, challenger banks could face difficulties ahead with a decline in lending volumes and possible drop in customers, yet the crisis will yield “winners and losers on both sides” of challengers and incumbent banks says Simon Kent, global head of financial services at Kearney.

“The challenge I think we will see is whilst [challenger banks’] customer numbers have grown reasonably successfully over the last three to five years, the lending volumes have grown at a much slower rate,” he says. “Therefore in order for a bank to make money you need both the asset and the liability side, and that’s why I think the time for making a positive return for these organisations will move out as a delay in growing assets will occur.”

Kent also believes there could be a reduction in the number of people running accounts with both a traditional bank account and a supplementary one with challengers, who would otherwise be primed to cope well in the remote coronavirus landscape. “You can see a reduction in the activity of those secondary accounts, which means the neobanks are still carrying the cost of the account being opened but they’re not seeing any transaction volume through it,” he says.

The sheer number of challenger banks that have gained momentum in the past few years also presents problems.

“I would say that there are probably too many new banks coming into the market and there probably isn’t enough space for all of them, even in a normal scenario. A natural consolidation is likely to happen anyway in a pre-Covid environment,” says Kent.

TechCrunch reported last week that Monzo would accept up to 295 voluntary furloughs, with Starling Bank having furloughed 41 employees. Cashplus, the UK’s oldest neobank, has also furloughed staff, though “not on the same scale as others,” according to its corporate affairs director, Alex Moorhourse. About 60 percent of Cashplus’s customer base utilises the bank as its primary account. Tandem Bank, which offers a savings program but not current accounts, does not report the same concern as other challengers. The bank has not furloughed any staff, said a bank representative in an email.

Yet Kent still believes there is a push from governments to stoke competition in the banking industry, meaning it is unlikely that challenger banks will be discouraged from continuing operations.

“As to whether or not the post-coronavirus market is attractive and will we see a retrenchment in terms of people’s aspirations, will we see some capital flight from some economies? Yes, we will,” says Kent.

“And will that lead to a reduction in the number of people that are coming to market? Probably. And for those that are already in the market, will that be a greater focus either on a segment point of view or a geographical point of view – I think that is entirely expected. I think we’ll see that as people consolidate their position to shore up their own finances and ensure their own path.”

The fate of challengers will also depend on the performance of incumbent banks. Kent notes that incumbents are working hard to respond to the challenges of coronavirus with a renewed focus on digitisation.

“It’s probably fair to say that some of the features that the challengers have in that toolkit will be more advanced and the user interface may be better, but the gap between the incumbents’ user interface and the challengers’ user interface is definitely closing.

“This is a big test right now. This is where we see the kind of central thesis really is around trust, and this is an opportunity right now to demonstrate an ability to be able to deliver on your consumer promises. And those that can do it will win.”

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