Perspectives

Winning full-service customers needs 10X bigger thinking from digital banks

Apocryphally, we are more loyal to our banks than we are to our spouses. While a dig through data shows the annual divorce rate hovering under 1 per cent and the current account switch rate around 1.5 per cent, we still undeniably move banks infrequently. However, it is unclear whether this is due to customer loyalty, or rather customer inertia.

Technically, moving banks has gotten far easier following the introduction of the UK’s Current Account Switch Service. That’s not to say switching isn’t perceived as a hassle, especially if the new product all too often looks and feels a lot like your old one.

Even when individual banks have caused major customer disruption through widespread problems, very few customers actually vote with their feet and switch.

This lack of switching poses a big challenge to start-up banks. In a world where customer acquisition is notoriously difficult, how can you win customers with limited marketing budgets and next-to-no brand recognition?

The release of Monzo’s 2018 financial results demonstrated the extent of this challenge. The figures show that 80 per cent of new customers do not deposit their salary with Monzo, and that the average account has less than £150 deposited. The company has done a phenomenal job in gaining 750,000 users, but the big challenge will be to win customers that ‘use’ the bank in its fullest sense.

So how can a new bank get customers to close their old accounts and bank fully with them?

Product verticals
In the UK and the US, brands like Monzo, Square, and Revolut have sought to win customers by offering steep discounts or new functionalities within specific product verticals.

In the UK, the focus has predominantly been on travel money, with start-ups offering commission and spread-free transactions on payments made when abroad. This is partly delivered through improved technology, but also as an investment in growth.

Investment of this kind makes sense in a market like the UK where lots of people travel internationally.
In the US, where the idea of a start-up bank is even more nascent, another product vertical is being used – that of peer-to-peer payments.

Whatever the vertical, capturing new customers with a great deal on a single product can be a smart first-step for growing an initial user-base, but it’s not clear this approach can convince customers to completely switch over their banking relationship.

Why not just use the new bank for the cheap product, and keep everything else as it is? Clearly, this is what a lot of Monzo customers are doing.

So what other routes can digital banks take to acquiring new customers?

Own the spending
If you ask the person on the street who they ‘bank with’, the name given in reply will almost always refer to the bank with which they manage the bulk of their everyday spending. This is usually also the bank an income is paid into. So when we talk about digital banks becoming a full-service bank for their customers, the clear starting point is to own spending.

In the US, Square Cash’s new ‘Boost’ functionality is aimed at exactly this. Customers can choose their favourite retail outlets (clothing, food etc.) from a selected list of Square partners, and receive instant cash back on their purchase.

A quick glance at the feature’s Product Hunt review page reveals that users not only like the feature but also that it is incentivising customers to use their Square Cash Card more like a bank card.

It is not too hard to imagine a digital bank taking this a step further by analysing customers’ individual spending patters and offering bespoke rewards based on this activity. If a digital bank, using Open Banking APIs, could review your spending habits and see you spend £2.50 in a coffee shop at 8am nearly every working day, and then send a push notification one day offering half price coffee if bought through the digital bank, they might start to take control of your spending.

Takeaway the friction
If getting customers to go through the administrative bureaucracy of switching had been a struggle for challenger banks for years, the good news could be that switching might not be necessary after all.

Through Open Banking it is possible for digital banks to act as the hub for a customer’s financial services without needing them to switch.

The digital bank can access, analyse and display customer data. That might be all they need to start offering other products that are more profitable than a current account.

For now, most digital banks seem intent on being fully-fledged banks, with all the regulation and capital requirements that follow. It’s not necessarily the only strategy available though.

10X better
So, if you’re not a bank but you want customers to manage their financial services from your hub, how good does your hub have to be in order to win a large volume of customers?

Famous technology entrepreneur and investor Peter Thiel has an equally famous rule that start-ups that want to make a real difference in the world need to create technology that is 10X better what the incumbents are offering. Thiel argues that trying to capture a share of the market with relatively competitive offerings is a waste of time.

The banking sector has plenty of ‘challengers’ already, but little switching. Clearly something more is needed.

In building their products, digital banks should bear the 10X rule in mind, especially when it comes to those daily banking activities such as checking a balance, or transferring money.

10X better might be a current account that manages your energy spending, or a current account that earns you rewards, or a current account that auto-invests spare savings. Ultimately, the sum of these features still might not get us there.

Digital banks need to think big, really big.

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