PacMan onboarding: have challengers made an impact on UK banking?
Well, they may just have.
I started writing about what I called “volumetric competition” in banking about a year-and-a-half or so ago, back when Monzo was sitting at c.500,000 accounts and Starling at c.50,000. I never finished the story but I kept the discussion going wherever anyone would listen to me — Twitter, LinkedIn, work, the breakfast table! This is attempt #2.
One reason I didn’t complete the story back then was the lack of time-series evidence to back up claims — it was a hypothesis and there were many, many serial bankers who still had their heads in the dirt, forecasting that challengers were nothing more than a blip.
There’s most certainly still a reasonable possibility that challengers could fail — we’re only five-or-so years in for most of them and the proof of the pudding in this case is certainly in how they hold up over time.
Now that I’ve put across the obligatory pessimism for the hardened bankers and industry practitioners, for whom optimism seems to have been locked away with their ageing mainframes, let’s reverse the narrative and pose a question:
What if challengers really are a threat and you don’t do enough?
Over time, we’ve seen more people taking notice as Monzo and Revolut began onboarding customers like PacMan at the height of the game’s fame, while the incumbents continue to watch from the sidelines (see the dramatic reconstruction in the banner of this story).
Then we’ve seen the incumbents start to change their tactics, most blatantly by straight up going through challenger features and doing a giant copy and paste to their own propositions — you know what they say, imitation is the sincerest form of flattery.
Suddenly everyone is doing card controls and PIN reminders and everybody has a “pot” or “goal”. And that’s fine. In fact, that’s great! Because at the end of the day all I want is for customers to get the functionality, experience, and support they deserve but were denied for so long.
But what really bites the pickle is that some (not all) incumbents and some (not all) media have represented these as achievements and new-to-market initiatives — c’mon, if you’re going to launch a new Peri-Peri chicken restaurant, at least have the decency not to pretend you’ve invented it!
Secondly, I feel the burning hot rage every time an incumbent decrees that they did this for the customers. Now, I know, I might be the one being pessimistic here, or at the very least a giant cynic — you know what, I am a giant cynic of incumbents! I’ll admit it. But it’s because if they were truly serious about doing things for customers they would have done it years ago and not been pressured by market forces to offer bare-minimum experiences in retort to competition rather than for customers.
It’s a nonchalance that can only be born from lack of direct competition for so long and I absolutely won’t accept that adding (stealing) card controls is enough to make up for it!
Then incumbents started listening, and they even started talking about challengers. We had challengers hitting the 1m customers mark— heck, across Europe, Revolut was leading the way. We got new entrants (N26, Bunq), and we got fintechs and SME propositions growing and being noticed (Curve, Tail, Tide). But what did I really mean by “volumetric competition” in banking?
It’s a numbers game
One of the pieces of rhetoric that really let me down coming from industry and the media, and incumbent CXOs, was that challengers were so small and had so few customers, how could they really be a threat?
The short-sightedness disappointed me because these were leaders of industry who were unable to look past the end of their own noses — of course Starling was not mounting an explosive challenge and riding the shockwave on any given day! But what they, and other challengers, were doing was growing a base!
Changing an industry doesn’t happen overnight and it was blind arrogance (or ignorance) from those who couldn’t look five or 10 years into the future to see the potential for how the market could shift.
There’s two angles to the volume part — customers and competition.
The first is to do with how many users will on board and become profit-making customers for each platform (be it Monzo, Starling, or other players).
The second is to do with how may players are in the market itself.
At the time I began writing this story (the first time), challengers, cumulatively, had around two million customers — only slightly less than CYBG’s 2.7m and more than a third of the way toward TSB’s 5m (at the time).
Now? Oh my goodness! Monzo are about to hit 3.5 million customers! Starling have just hit a million! And Revolut may have around 2 million customers (in the UK)!
What does that make them? Well, combined, they’re a powerhouse mid-size challenger to the Big Four, and are nearly as big as the newly merged Virgin Money Group, but they did it off their own backs.
I want to re-iterate how important this is — in just about five years Monzo has grown to 3.5 million customers, which is more than Clydesdale and Yorkshire Banks managed together, even with a TWO HUNDRED YEAR head start!
[Note, I will not get into discussions about “active” users and profit-making customers this time — this is an high-level look into the market. But I will say one thing about it — every. single. bank. has profit-losing customers and every. single. bank. has non-active users and dormant accounts.]
The market
With all of that out of the way — apologies for the zealotry, but it is really exciting for a fintech nerd! — let’s look at how this has made an impact on the market.
Firstly, I’ve already spoken about feature imitation and this is a clear sign of a market taking notice of competition. This can only mean good things for customers, so I beg you, incumbent, copy everything you can, and maybe one day you’ll accidentally copy culture and motivation, too!
Secondly, let’s look at something more empirical — BACS switching figures.
There’s a lot of data here and this can be packaged up into information in many ways, but here’s my interpretation of the data to illustrate a story.
Firstly, we can see that there has actually been a lot of movement over the last four years, contrary to the commentary on the quarterly figures — the problem of looking at too constrained a dataset.
Secondly, since challengers Starling and Monzo started getting counted (Qs 1 and 2 2018, respectively), they have gained a cumulative 55,414 customers. This is still a drop in the water but does indicate that their propositions are not so weak that customers just sign up for secondary bank accounts, but that there is enough pull to make them switch — and switching is one of those indicators for “primary” customers (which I also won’t focus on for this story).
Next up, we can see that several incumbents have made large long-term losses. Now, with over 20 million customers, losing c.150,000 is probably not hurting Lloyds all that much, but the thing to remember here is that an avalanche starts with one snowball.
The c.215,000 loss for Barclays is staggering, but with a similar number of customers to Lloyds, they, too, won’t be pushing the button on their exit plans any time soon.
As an aside, it’s interesting to note that TSB’s net loss is so small given their IT failures last year. We talk a lot about switching apathy and this data gives contradictory market evidence — on the one hand there has been a lot of movement, but on the other, logically you’d have expected TSB to lose more.
Looking at the quarterly breakdown, it shows that customers did protest with their feet. TSB gained over 50,000 customers through switching from 2016–2017, but then from quarter one 2018 started the downward trend of net losses. Between quarter two 2018 and quarter one 2019, TSB lost around 15,000 customers per month!
Lastly, the big winner here is Nationwide, and this is really where our narrative begins.
Nationwide’s high switching gains, I believe, are a sign of a changing-but-not-yet-changed market, where customers are tiring of incumbents but may not be altogether ready for challengers.
This is pure theory, conjecture, interpretation, but that’s what you do when you forecast trends and are tying a narrative to data. So let’s take the data and see how we get here:
- Challengers are growing rapidly
- Switching to challengers is growing
- Active users and salary-depositing users are growing
- Customers realising that there are better offers away from incumbents
- Incumbents are those with highest net switching losses
- Many customers are still fearful of fully switching to challengers
- Customers worried about the security of digital-only banks
- Nationwide is not a traditional incumbent — building societies may generally have a better reputation than incumbents
- Nationwide shows largest gains
Note: Nationwide have had multiple switching offers (including cash and now an Amazon Echo), but so have most if not all other incumbents, so assuming this is a level playing field. Though worth pointing out that challenger incentives are negligible in comparison. Also, to qualify for the incentive, most incumbents require customers to move Direct Debits and CASS offers an easy way to do this, potentially inflating switching figures — speculative but interesting.
So, what?
Nationwide switches indicate a “step change” where customers want change but are still weary of challengers.
It shows that customers are indeed willing to leave-leave incumbents, not just signing up to challenges as a secondary account, and it’s potentially just a matter of time before they leave incumbents for challengers in larger numbers — this is a forecast, don’t @ me.
Looking forward, if we take the huge growth in the challenger user base and combine it with the already good switching figures for challengers (and Nationwide), and extrapolate across the next four years, then what could the future look like? Well, it certainly isn’t going to be boring!
[I may model some figures and post these later this week.]
