CH-CH-CH-CH-CHANGES: CHALLENGING TIMES FOR CHALLENGER BANKS

“In uncertain times, it seems that consumers are choosing security, stability and brand recognition. This creates a competitive advantage for the more established banks,” - Alex Boorman, RFI Group head of payments consulting.

Recession. Uncertainty. Shaky times. As our economy contracts and Australians’ sense of security dwindles, financial institutions across the banking sector have responded to the impacts of COVID-19, providing economic relief and preparing for the new-normal that’s setting in across the country. Yet it’s only three years since Australia’s biggest shake up of the financial sector - the banking royal commission - the aftermath of which saw consumer trust in the big 4 banks plummet. With the big 4 in damage control, neobanks – the likes of Xinja, Up, Volt, Judo and 86 400 – were able to enter the market around 2017/18, looking to disrupt the category and drive transformation in the industry by focusing on outperforming the traditional banks.

Before Covid, it felt like the big banks had a long road ahead of them in terms of regaining trust and rebuilding their reputations in the consumer eye. So how has consumer confidence in the banking industry been affected and more importantly, where does our trust lie… with the big 4, or the neos?

Let’s start by looking at the way the neobanks tried to disrupt the category:

Price
As neobanks don’t have branches, their overhead costs are lower than traditional banks. This means they tend to offer low or no fees and offer highly competitive interest rates for savings products. For example, Xinja offers a standard interest rate of 2.25%, significantly higher than the traditional banks.

User experience
Unlike traditional banks, neobanks have had the opportunity to start from scratch in terms of tech. They have advanced apps with slick user experience. They also tend to have more advanced spending categorisation and the ability to source information about merchants to make it easy to understand where the money is going.

Customer relationships
Neobanks have leveraged customers’ lack of trust of the Big Four to their advantage by prioritising seamless customer experience, 24/7 help desk and technology support. Neobanks such as Douugh have tapped into the wellness space by offering ‘financial wellbeing’ features on their apps. Many others have incorporated savvy savings and categorisation features.

So far so good. But while the last few years has seen a surge of neobanks appearing on the scene, their influence to date has been fairly limited – their customer-base a mere drop in the ocean when compared to that of the Big Four. More than three-quarters of our savings are still with either Comm Bank, ANZ, Westpac, or NAB and their subsidiaries, and as trust for traditional financial institutions slowly improves, challenger banks look to be in for some challenging times.

So what can neobanks do to gain consumer favour, grow their market share and drive customer acquisition against this backdrop?

Don’t pit yourself against the big four.
In unstable times, people have a tendency to seek security and stick with what they know. While they may not particularly like the big banks, people think they’re safe and therefore opt to stay with them. Judo’s recent ad campaign ‘don’t let your big bank kill your business dreams’, targeted toward SME’s, directly pits itself against the big banks, which I’m not sure is the smartest move. Customers want to know how you can help solve their problems, reduce their anxieties, add value and provide stability and relief. So focus on communicating that and build consumer trust.

Don’t forget your audience and their needs.
While most neos are aimed at a younger more digitally savvy customer, their needs and financial priorities will have drastically changed in the last few months. So while Xinja’s ‘Ditch Dad Banking’ may have struck a chord with Gen Zers and Millennials at the start of the year, it might be time to rethink what advertising is put out and align this to real customer needs and pain points.

Keep innovating and expanding your digital offering.
While most neobanks have advanced tech and digital capabilities, the big banks are catching up and investing heavily in retail banking technology, to ensure they appeal to tech savvy Australians. Last year, Commbank launched its new app offering greater personalisation, with personal cash flow management and smart alerts. A few of the bigger banks have also looked into launching new digital bank brands to attract new, young, digital-savvy customers, so far only one of the big 4 seem to have actioned this, with NAB launching UBank ,a digital only bank, back in 2008 – although it’s definitely a ‘neobank 1.0’ compared to the new generation. So if neos want to remain relevant, they’ll need to continue setting the pace with their digital offering, or risk their point of difference quickly disappearing.

While it’s hard to predict what the future of Australian banking will hold, I think Andrew Murfett sums the situation up well in his recent LinkedIn article:

“While the big banks are now faced with having to regain the public’s trust after the royal commission’s revelations, challenger banks are tasked with potentially as significant a challenge — winning the public’s trust for the first time”.