The battleground for current accounts
March 16, 2017
One of the more eagerly awaited sessions at this year’s Retail Banking Conference was the Challenger Bank review, with newcomers Starling, Tandem, Monzo and bsocial participating in a panel discussion.
This on the back of the Prudential Regulation Authority (PRA) authorising nine new entrants in 2016 – a bumper year – of which two were digital banks (Monzo and Starling). And not forgetting the history maker, ClearBank; the first clearing bank to enter the UK market in more than 250 years; on track to open its doors in Autumn 2017 to financial services providers, FCA-regulated businesses and Fintechs.
And how refreshing it was to hear about banks talking about their costs, revenues and margins.
The battle ground for challengers like Monzo, Tandem and Starling is the current account and providing a proposition that entices customers over from the big four in order for them to hit a critical mass of customers to run sustainably. A tall order, some might say, when just 3-4% are switching currently.
So how are they differentiating themselves and how do they make money?
Monzo is majoring on its transparency (you can see and comment on its roadmap on its website) and drilling into what it is that pushes customers away from the big four and ensuring they don’t suffer the same problems with Monzo. Examples given were penalty charges, cards not working abroad, non-transparent FX fees?
But Monzo won’t entice customers with cash incentives for switching – like the traditional retail banks –but will equip you with visibility and functionality to better manage your account and avoid penalty charges.
The market to provide more cost-effective credit, that can be better managed and communicated is ripe for reform; and it’s with little wonder that this is an area being targeted by challengers as a way of making money and providing a more cost-effective and visible service for consumers.
Typically consumers could have an overdraft, credit card and a loan all charged at different rates of interest with different provides. It’s estimated that more than £190 billion is now owed across these channels - 11 per cent more than only a year ago.
And with Open banking and PSD2, securely opening up customer accounts to third parties; this is a huge opportunity for challenges to entice customers. While banks view PSD2 as a compliance headache, challengers are at a stage where they don’t have legacy platforms and thousands of branches and can concentrate full throttle on innovation; thus are seeing PSD2 as an opportunity.
The other area where challengers are focused on is partnering with other financial providers. We heard this today with two disruptors, Starling Bank and TransferWise coming together. This gives Starling customers direct, in-app access to TransferWise’s services, who can provide cheaper and quicker international money transfers. As such, this avoids Starling having to develop this function within its App and gives its current account a real edge over other providers.
We heard yesterday at the conference that banks signposting/referring customers to enhanced financial products by other financial service providers can actually improve customer satisfaction NPS scores.
Megan Caywood, director of marketplace platform at Starling said today we want to offer the world’s best current account – but we can’t also offer the best mortgages, loans and FX products. In this respect, it’s adopting a ‘Marketplace' model, which will see the bank provide access to a range of third party financial products from innovative Fintech start-ups, all from within its app.
But what do the banks make from current accounts? It was highlighted in the discussion that the typical industry model was costs of £50 per annum, revenues of £120, with more than £50 of that through overdrafts per account. As such, there is the consensus that the margin could be squeezed with challengers still making money from offering accounts; with a referral-type arrangement with third-parties that integrate within the App like Starling and TransferWise.
In the same breath, it was mooted whether current accounts – which are still the battleground for banks (get the current account, then you can sell additional high-margin products around that) –will still be the battleground for customer in five years’ time?
Challenger, Tandem, made the point that with open banking and ubiquitous access to customer transactions – you won’t have to ‘win’ the current account to sell customers other financial products.
In short, expect similar commercial models from the challengers based on loan interest, interchange, but without a hefty branch network to maintain, a slim-lined staff roll, there’s margin to be made that still offers a lower cost to the consumer.
On the innovation front expect the below from the challengers:
• The ability to see all your accounts with the bank in one view
• More cost-effective lending and transparent charging structures, with less focus on fee-incurred models
• Smart solutions for low-cost lending products
• A marketplace for other innovative financial products such as money transfers
• User interfaces for sharing bills
The final presentation of the day was from TransferWise – who revealed that its integration with Berlin-based mobile bank N26, enabling its customers to make international money transfers from Euros into multiple currencies – took two months preparation work and six weeks development time, involving less than 10 staff. For some of the legacy banks, you wouldn’t be able to book a meeting room in that time.