Challenger Banks Big Hurdle: Building Consumer Trust

It's hard to 'disrupt' an entrenched industry like financial services when you're barely denting the market. You must build trust first.

The scrappy outsiders who are challenging the traditional big bank brands face an enormous challenge if they are to (significantly) disrupt the banking market significantly: building trust with consumers. If they are going to drive significant numbers of customers to change banks, they must not only offer powerfully attractive alternatives and improvements, they must also convince consumers they can be trusted — to deliver on their promises and for security and privacy.

These challenger brands may be offering far better interest rates and lower bank charges, or easy to use online services, or better tech, or improved service, but the reality is that very few consumers switch providers despite widespread and often deep dissatisfaction and distrust with the financial industry’s established players.

Even though these new innovative providers have been “challenging the status quo” for a few years now, the net number of those switching accounts has barely changed. In the UK, for instance, one million people switched their primary financial institution last year — 11% less than the previous year, even though several banks have been offering generous cash incentives of up to £150 (roughly USD $200) to encourage switching.

Considering that there are more than 68 million active personal current accounts in the UK, one million people only accounts for 3% of the market, so a relatively small proportion are making the switch. Challenger banks are picking up a modest slice of that action.

In the UK, those who switch typically are moving from one of the megabanks — Barclays, NatWest/ RBS, Lloyds and HSBC — but they are choosing other traditional providers such as Santander, Nationwide and Halifax over other alternative providers. Innovative new brands such as Metro, Fidor, Atom, Starling, Monese, Mondo, Simple, Osper, Hello or Tesco are capturing some switchers, but not enough to scare the industry’s big gorillas.

Read More: New Challenger Banks Filling the ‘Digital Expectations Gap’

Can Challenger Banks Be Trusted?

Trust is a core issue in the banking sector. It’s both a potential threat and an opportunity for challenger banks. On one hand, two out of every three consumers don’t trust established retail institutions, according to a PwC survey. That’s the opportunity these new outsiders can exploit. However, the flip side of that same coin is that only 22% of consumers trust the new challenger banks — that’s a third less than traditional banking providers.

In study after study, consumers say they are willing to use digital-only banks and switch to innovators that hail from outside the industry. But when it comes time to pull the trigger, many revert to age-old criteria for selecting a banking provider (e.g., branch proximity).

Research from Fiserv shows that 80% of consumers would trust a new bank if it had “good technology,” and 56% said that a new bank would have an advantage over competitors if its IT was “very reliable.” Such numbers may sound encouraging to challenger banks, but the tech component only addresses the user experience and does little to engender trust.

Young people should be good prospects for challenger banks, but most Millennials (59%) still choose the same bank as their parents for their first account. Even though 78% of Millennials in a BancVue study say mobile-friendly tools and solutions are important to them when picking a bank and they are less likely to prioritize branches, it seems many Millennials opt for the relative safety of established institutions over new challenger banks.

What must change for new, innovative financial brands before they can take a big bite out of big bank’s market share?” Experts from around the financial industry advise that they must:

Maintain a clear, big difference. They must focus on offering significantly better interest rates, lower fees/charges, more personalized service, digital-centric technology, killer mobile-first experience.

Name awareness. Ensure that millions of consumers are aware of what they offer.

Build trust in their brands. This is especially true when it comes to security and technology.

Recommendations, Referrals & Testimonials. Challenger banks must generate extensive positive word-of-mouth endorsements to help them build trust. According to YouGov, 68% of consumers, positive comments from friends and colleagues were very effective in building trust, whereas only 17% were influenced by price comparison websites.

Innovate. Continue to innovate to make banking easier and more simple, and offer a much better, more interesting customer experience using techniques such as gamification. After all, innovation is the traditional banking industry’s Achilles Heel.

Stress Value. Highlight the cost/benefits of switching. With many new challenger banks, consumers could save an average of anywhere between $100 and $350 per year (£70 and £240 in the UK).

Keep the pressure on. Challenger banks need to stay ahead of traditional banks who, although beset with cumbersome legacy systems, can play catch-up quickly if/when they choose to.

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