Amount of savings needed to convince you to switch vs average savings with MoneySuperMarket

How will the rise of digital banks affect you?

As digital-only banks position themselves to challenge the monopoly of traditional high street banks, many Brits are jumping on the ‘challenger bank’ bandwagon. So, what are the attractions of digital-only banks, and what hurdles are preventing some customers switching to them?

Walking down the high street, you wouldn’t know that a banking revolution is in full swing. But a new wave of digital-only banks is unsettling the status quo and changing the face of banking.

These ‘challenger banks’ predominantly focus on a mobile app experience and have no physical branches.

UK's biggest challenger banks

We wanted to find out just what these banks offer that traditional banks don’t, to help Brits navigate the complicated world of digital-only banking.

Challengers, are you ready?

With one in five Brits holding accounts with three banks1, it seems that a good number of people are used to the idea of shopping around for their money needs. But despite customers being “increasingly willing to multi-bank”,2 two out of five report never having heard of any digital-only banks, meaning many could be missing out on the best accounts for them.

So, who are the movers and shakers of the digital-only banking world, and what are they offering their customers?

Atom, which specialises in savings accounts and mortgages, is the digital-only bank that the most British people have come into contact with. Although one in five Brits are aware of this banking platform, less than 10% of Brits said they would be willing to apply for a mortgage on its mobile app.

Next on the list is Monzo, which focuses on a millennial audience and is gearing up to take its app-only banking model to Ireland and other markets. Roughly one in 10 Brits know of Monzo.

Revolut, which has just landed in the US and which allows customers to exchange or transfer without fees in 26 countries, has big plans but our poll discovered that only 7% of Brits know anything about them.

British awareness of digital-only banks

Younger people are the least aware of digital-only banks - less than half (47%) of those aged 18 to 24 have heard of a challenger bank. With Loot specifically targeting students and Monzo having a clear millennial slant, it’s perhaps surprising that fewer young people are aware of these banks.

Of those who are perhaps more likely to explore their banking options, 68% of those aged 35 to 44 and 64% of those aged 25 to 34 are familiar with at least one digital-only bank.

Regionally, those who live in the capital are the most clued up on digital-only banks, with nearly three quarters of Londoners having heard of at least one of them. The next highest area is the North of England, where 62% know of at least one.

With increasing numbers of people becoming aware of digital-only banks and their range of services designed to make banking easier and more transparent, traditional banks are playing catch-up to replicate their offerings.

For example, last year HSBC relaunched its mobile app with a brand new design, showing information on all accounts – even those offered by its competitors – and with an emphasis on providing spending insights.

The other established high street banks either have or are developing their own apps in a bid to remain relevant and competitive.

Sally Francis-Miles, money expert at MoneySuperMarket, said: “Switching banks or opening a new account is perceived as a hassle, so the general public might be reluctant to open digital-only accounts.

“While this means traditional banks are still dominant with consumers for now, digital-only banks are constantly asking what features they can add, how they can push and innovate their products and services. I think we’ll see traditional banks standing up and taking notice, attempting to replicate some of the successes of the digital-only banks”.

Although some Brits may be apprehensive about leaving the high street banks and going digital, over three-quarters of Brits say they’d be comfortable choosing a digital-only bank for at least one financial product.

Do Brits trust mobile banking apps?

Despite feeling comfortable about choosing a digital-only bank to complement their existing bank, only one in 10 Brits would prefer to use a digital-only bank over a traditional one.

The main hurdle may be to do with trust. Nearly two in five Brits are wary that their financial data will be shared by digital banks with other providers under the new ‘open banking’ rules, which is the new legislation that will mean customers’ financial data is available to be shared with trusted partners.

One of the outcomes of this will be to allow developers to build on top of digital only banks’ core platforms, creating modular apps that allow customers more control of their finances. However, the idea of financial data being shared, even under strict security rules, appears to fill the British public with dread.

While Brits would rather check their balance, send money to friends and family, and clear their credit card balance via a mobile app than in-branch, our poll discovered that Brits prefer to visit their branch rather than to use an app for 55% of the most common banking services, such as setting up a standing order and applying for a credit card.

And although two out of five Brits would be comfortable taking out a current account with a digital bank, this might be because a current account is a service that Brits are familiar with – it’s not a new type of product from a digital-only bank.

In the future, Brits may become comfortable with obtaining other products via digital-only banks, but they would need to be tried and tested first.

However, many Brits see digital-only banks as a great method of saving money, with 49% saying they would deposit their savings in one.

British banking preferences

Do Brits really want digital banking?

From real-time spending notifications to 24/7 in-app support, the freedom to build a banking service from the ground-up has led to some great innovations from digital-only banks. But just how important are these to the average Brit?

When selecting a bank, over half of Brits consider digital services to be a major factor when opening an account.

And this number rises even more among millennials, with 71% of those aged 25 to 34 likely to choose a bank based on its digital services. This is in stark contrast to those over the age of 55, of whom less than a quarter consider the digital services of a bank to be important.

Dr Markos Zachariadis, associate professor of information systems & management at Warwick Business School, said: “In the digital age, the emphasis is on user experience, which is something digital-only banks are specialists in. Their ability to scale up their offerings at a much quicker pace than traditional banks, integrating external services and upping platforms in a modular style, means that they’re able to stay one step ahead.

“For Brits, it’s really a question of personal preference: stick with the more product-orientated high street banks, or enjoy the flexibility and innovation of the digital-only banks. While digital-only banks have certain advantages over incumbents they still need to expand their product range as it is currently limited and earn the trust of customers by building a good reputation.”

According to Brits, the most important banking feature is free cash withdrawals – 42% agree that this is a big factor in choosing a bank. Many digital-only banks offer free ATM cash withdrawals up to a certain limit: Curve, for example has a £200 daily limit.

Interestingly, FSCS protection – the legislation through which an individual’s money is safe-guarded should a bank fail – is the most important banking feature for only one in five Brits.

For more information on digital banks, their features and how they compare to traditional banks you can visit our guide here.

Sources

 

1 Consumer research carried out on behalf of MoneySuperMarket, between 14th February 2018 and 16th February 2018 with a sample comprised of 1,021 UK homeowners

2 Who are you calling a ‘challenger’? How competition is improving customer choice and driving innovation in the UK banking market – PWC: https://www.pwc.co.uk/challenger-banks

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