Industry

Are challenger banks being tested by pandemic?

May 13, 2020

This article was published by Piotr Pietrzak on LinkedIn. We have permission from Piotr to publish this on our site

There is a growing number of articles on how coronavirus will impact business around the world. It is already known that there is no such sector in the economy that will not get affected. In moments of crisis it is difficult to avoid toxic thinking in zero-sum terms. My favourite fictional character once said “somebody wins, somebody loses”. The financial crisis of 2007-2009 saw trillions of dollars of wealth around the world erased. But savvy investors recognised a unique buying opportunity, with many companies’ shares for sale at deep discounts. These investors have realised tremendous gains while others lost jobs, and savings. And nobody says that was fair.

With a growing threat from the spread of coronavirus, countries around the world limit civil liberties, keeping their citizens at home. Worldwide lockdown is seen as an opportunity for online and remote services to grow. Now we depend on them to do our jobs, to go to school, and to keep in touch with our dearest ones. They are our primary source of entertainment but also provide a way to meet our basic needs to survive. Various online services reap a lockdown benefit, among others:

video conferencing apps such as Zoom, Google Hangouts, or Skype,
social media apps Instagram, Facebook, WhatsApp, and Twitter,
streaming services like Netflix or Amazon Prime,
many others, like e-learning platforms, e-grocery shops, fitness apps and many more.

High expectations towards digital newcomers

The same thing should happen to online financial services, especially challenger banks because these companies specialise in online banking. “Mobile” and “digital” are synonyms for N26, Revolut, Monzo or even Starling. Despite the speculation that they would draw in new customers during the lockdown, leading challenger banks have witnessed a significant drop in the number of new app downloads. That is not something that will dramatically change the market, but it should make us think.

According to an analysis by Priori Data, Europe’s top challenger banks saw a decrease in digital downloads by the end of March compared to February this year. You are right, in the midst of the coronavirus pandemic. Some commentators would say that such fluctuations are normal for digital disruptors, but if we compare the data for the same period of time in 2019, something calls for an additional analysis. Last year, the growth rate was positive across the board for all four big neobanks operating in the UK.

Many analysts’ expectations were that people will turn to digital banks in the course of the pandemic for transactions. But this is apparently not happening. Why? It is definitely too early to say, and drawing any farfetched conclusion is unfair. We may all suspect that traditional financial institutions are also facing a similar downturn, but the challenge for challenger banks may go deeper and be a bigger problem. Why?

Consumers may opt from challenger banks to consolidate their funds where they feel their money is most safe, that means traditional financial institutions like high street banks.
With lower balances on the challenger’s accounts there are fewer transactions on debit cards or prepaid debit cards that generate interchange income.
Growth of many challenger banks is fuelled by aggressive marketing campaigns that are now put on hold partially or in full to preserve their runways.

We all know that number of downloads do not directly translate into revenue. Many of us have a friend who installed N26 or Revolut to check how it works, or more probably, to collect free money from a recommendation link. However, for those start-ups who have monthly burn rates in the millions, growth is a key metric. That’s something that all challenger banks are so proud of. Isn’t? That translates into a worrying question, what happens next if the growth rate will continue to decline?

From a perspective of the secondary markets, not being a home for fintech unicorns, some people sees tough times ahead for challenger banks and a plateau in terms of new clients. Razvan Enache, Project Manager of Future Banking conference and Founder at EROA Investments, points out that the challengers that tapped the Romanian market could lose some fuel, considering they built their business cases on a few pain points that are no longer painful in the pandemic environment. Also, the growth hacking techniques used in Romanian market are no longer relevant:

The meet-ups or different kinds of events where free cards could be easily distributed and activated are banned due to coronavirus lockdown.
Traveling abroad is also restricted, so the need to better handle your money and the FX expenses associated is absent.
If we go further into the day to day behavioural changes, the people will no longer mingle at work, chit-chatting about holidays or splitting the bill over lunch. Thus, the word of mouth that acted as the main driver for reaching new clients for Revolut, Monese and the likes is now silenced.

The coronavirus crisis is fintech’s another test

During the conversation with editor of FinTech Futures, Sharon Kimathi, we both agreed that it is a saturated market and only the strongest can survive, which is a theme seen both before and during this coronavirus crisis. Those with a high marketing spend and equally high user-base, good customer satisfaction ratings, seamless UI, strong security and smooth UX, often remain in the market.

RBS shutting down its digital challenger bank, Bó, shows signs of things to come as incumbents are also suffering in their attempts to stay relevant in this digital age. It suffered from negative reviews on social media, low download rates and internal politics with senior executives leaving, which does not leave a customer with a lot of faith in the longevity of the platform.

But Bó is not alone as other challenger banks have closed down due to a lack of scalesuch as JP Morgan’s venture Finn last year, Denizen in the US around October, and N26 shut its UK operations in February which was rumoured to be down to a lack of a solid user base in the UK (unlike the reason it provided, which was Brexit).

Sharon highlights that we have also witnessed challengers shutting down due to operational issues that have arisen due to the coronavirus crisis such as Moven, which closed in April. Many of the mainstream challengers like Revolut and Monzo have had to furlough staff or have employees take salary cuts. Perhaps there will be room for more partnerships or mergers and acquisitions as means to save some of these challenger banks from having to close down in the near future.

Pivotal digital transformation moment for traditional banks

There is a hypothesis predicting how the current situation will prove to be difficult for both new and traditional financial institutions, which will benefit the latter. The lockdown could incentivise high street banks to catch up with the challengers, because they must embrace digital services or risk becoming irrelevant. In theory, retail banks should be leveraging their existing remote onboarding systems and seeing improved growth amid branch closures. Most of those banks are already in the process of closing their branches and focusing their efforts to move clients into digital channels.

The challengers will face a powerful retaliation from the incumbents and we’ve already seen more and more traditional banks pushing harder the throttle of digital transformation, leapfrogging in terms of CX and cancelling the edge the challengers used to have in addressing some pain points – Razvan Enache.

Several European banks have already narrowed the gap between the experiences delivered by their online and mobile banking platforms and the experiences provided by fintech and big tech competition. Many of them you can find, for example, in Poland. This digital transformation is not complete at any traditional bank, but the importance of the journey can no longer be disputed. For progressive incumbents, situations they face with corona virus might be an opportunity to move forward quicker on digital initiatives that were listed lower on the priority list until now.

The big ones are going to come out stronger than ever

Given the economic toll of the coronavirus outbreak and lockdown measures taken by the European governments to contain the disease, speculation about the staying power of the challenger bank sector will continue. Only the strongest ones will survive, and those ones will face incumbents prepared better than ever thanks to the accelerated digital transformation forced by the coronavirus pandemic.

Many initiatives steered by governments and regulators in various markets are taken to reduce physical engagement due to Covid-19. This might be an opportunity for challenger banks for smoother global expansion and sustain growth – Tal Sharon, Managing Partner at Equitech

As for the customers, this may be the year that a lot of them who probably would never have considered an online bank, seriously consider it. That is something that all financial institutions were struggling to achieve, and the current situation will make it happen sooner that they thought.