There is a new form of bank client emerging - the "mobivore". The rise of digital challenger banks, and the technologies associated with them, raise new questions for existing banks - and wealth managers.

While the raft of new regulations after the 2008 market crash will have prompted worries that the banking industry in the West is arguably more concentrated and dominated by large players than before because of higher costs and barriers to entry, another very different story has been the rise of the so-called challenger banks. In the UK, for example, there has been the arrival of Metro Bank – which now has a wealth management offering. Some challenger banks are digital and harness technology to get around the legacy costs of older, labour-intensive banking models. In some respects the rise of such business channels finds an echo in the much-discussed “robo-advisor” phenomenon and the ascent of “non-bank” financing channels that use the Web, such as peer-to-peer lending. 

In such an environment it is necessary to strip away the marketing hype and work out what the issues are for clients and banking professionals. And while much of the activity will be around the retail mass market, the “robo advisor” issue highlights how wealth managers cannot afford to ignore such trends and potential challenges. 

This article below is by Tom Evans, head of user experience and design at Box UK, a consultancy and firm operating in areas such as web and mobile development, as well as strategy and planning. The editors of this publication are pleased to share these insights; they do not necessarily endorse all the views expressed. 

Headline-grabbing issues have seen the traditional British high street banks face an array of problems over the past few years. Couple this with the desire from financial services regulators to see new banks forming in the UK and this has created the perfect environment for digital challenger banks to disrupt the market. These new banks need to move above and beyond traditional online transactions (such as checking balances or making payments) to facilitate a comprehensive and fully digital banking service that is anticipated to firmly shift the emphasis away from physical branches and put the experience (quite literally) into the hands of the customer.

It’s a perfect storm, particularly when regulatory changes (for example, shortening the time it takes customers to change current account providers from 30 days to seven) are also facilitating competition within the industry. Of course challengers will seize this opportunity to look at how they can win not just customers’ savings but also their hearts and minds.

Attracting the millennials
Millennials (those aged between 18 and 33 years) are notorious “mobivores” estimated to check their smartphones 43 times a day. This is a huge opportunity for challenger banks – which are likely to take full advantage of their preference. Others such as Hip Money, Loot and Soon are quite clearly targeting this segment head-on in the battle to win their share of the next generation of banking customers.

According to the Millennials Disruption Index 2015, banks are at the highest risk of disruption from millennials. The report claims that 71 per cent would rather go to the dentist than listen to what banks are saying and that, when millennials do focus on banking, they are attracted specifically to digital banking experiences.

Millennials are also known for their fickle brand loyalty, switching brands and flitting from one company to another in order to obtain the best deals and customer experience. Strongly guided by the opinions of their friends or customer reviews, they are less impressed with a bank’s history or reputation than other generations. This is illustrated by a survey from Makovsky (June 2015) that stated 49 per cent of millennials would consider using financial services from companies such as Google and Apple compared to just 16 per cent of older consumers.

For the generation that lives and breathes mobile technology, following on the heels of leaders such as Simple these new challengers could seem far more attractive than their current banks - especially if they are able to put the “personal” (and personality) back into personal banking, by implementing best of breed user experiences and demonstrating innovative uses of technology (such as biometric authentication etc.).

Key to these challengers’ success will be not just how they can ensure retention by adding value through improved, timely and personalised insight for customers about their financial habits plus concepts such as “invisible banking”, but also how they can attract new customers by easing traditional points of friction in the customer experience. Consider the mobile-only bank Monese, which launched in the UK recently and allows customers to open an account via their mobile phone in a matter of minutes. This will become the minimum point of entry in order to attract the "always connected" generation, which expects immediacy as standard.

Could digital challenger banks, and millennials, put the nail in the coffin of the high street bank?

Each week, the media reports on potential bank branch closures due largely to the digital transformation of the banking sector. According to the latest report from McKinsey 2,400 bank branches in the UK could close over the next five years, leaving just 7,500 remaining.

Also when referring to how millennials view banking in branch, the financial services commentator Brett King makes the general opinion clear – saying that according to millennials “banking is not somewhere you go, but something you do”.

However, despite millennials preferring to bank online, there is also evidence to suggest some of the under 30s prefer opening an account in branch as experienced bank staff are on hand to help. Also, a number of millennials still see visiting a branch to open an account as a rite of passage.

Arguably then, even though an estimated 1 billion people will be using their device for banking purposes by 2017, and it is clear the future of banking includes a greater number of transactions taking place online instead of in branch, whether branches will disappear to the extent that some appear to predict remains to be seen.

A wider appeal
Amidst all this talk of challenger banks and millennials, what must not be overlooked is that one of the fastest growing online banking user groups is the over 60s. And they are a lucrative audience. Some have already acknowledged this and are addressing the preference for many in this group to see their bank manager instead of completing all transactions online. Take mBank in Poland as an example - thinking laterally and enabling customers to organise such conversations face-to-face through Skype. Kiwibank in New Zealand offer a similar video chat capability with banking advisors.

Traditionally, older consumers have been more cautious about their approach to financial services and have preferred the comfort of the more established banks, seeing them as more trustworthy and secure. However, digital challenger banks now offer the same cover through the Financial Conduct Authority so this no longer needs to be the case.

Also, although mobivores in the main tend to be millennials, they are also seen in older consumer groups. It’s therefore doubly important for digital challenger banks not to discount older audiences – not only are they a source of revenue but they are also embracing digital.
 
The future is….disruptive banking
Overall, digital challenger banks won’t just add competition into the marketplace but are instead likely to disrupt the entire sector, forcing change with their greater focus on customer experience and satisfaction.

So what innovation do we expect to see? Being arguably more nimble and agile than established institutions, it could be suggested that challengers will prioritise the removal of all points of friction in the existing experience and deliver increased convenience, insight and value to customers. The value will not necessarily just be fiscal, but it will be delivered through a more “humanised”, relevant, personalised experience for each customer. This approach would broaden the appeal to different target audiences, creating a number of exciting propositions. However, will challengers be able to retain their customers through just their innovation? This remains to be seen, although they must make this a top priority if they want to make ground over traditional banks.

There’s a storm building and it’s an exciting time for digital banking. Challenger banks seem to be here to stay but that doesn’t mean high street banks won’t fight back and there’s lots of investment happening there too to deliver improved experiences for customers. If challenger banks want to win the battle for consumers' hearts and minds they also need to ensure they have concrete plans in place to retain them.

The mobivores might be the next generation target audience, but with careful consideration, other demographics should hopefully stand to benefit.