From challenger to winner: how new entrant banks can succeed in the UK

Kevin Mountford, PBF Solutions: The UK banking sector is getting crowded. What does a start-up bank need to do to stand out?

Kevin Mountford, CEO of PBF Solutions, examines the key steps that new entrants to the UK banking sector need to take to attract customers and drive deposits.

Challenging is one thing, but gaining a firm foothold in the UK banking sector is another, especially as the number of new entrants grows. From 2013 to mid-2015, the Prudential Regulation Authority (PRA) granted 11 new banking licenses, which included several challenger banks. And many more license applications have been made and are pending approval over the coming months.

It’s easy to understand why the sector is booming. Challenger banks typically don’t have the fixed costs of maintaining a branch network; they can target a specific customer niche with more focused, attention-grabbing propositions which don’t necessarily demand having a high-street presence. This enables new entrants to be more agile than their established cousins, unencumbered by the unwieldy legacy IT systems or negative consumer perceptions over previous actions that can be attached to established lenders.

So as the sector becomes more crowded, how can a new entrant give itself the best chance of succeeding in the UK? I believe there are four key steps that they need to take, in order to differentiate themselves from other newcomers and succeed in getting customers to switch their allegiance and make deposits.

1. Choose the right strategic approach

Broadly speaking, there are two strategies that new entrant banks can follow. Some choose to attract retail and business deposits purely as a means of funding the lending side of the business. As such, building a long-term relationship with their customers is less important. They will tend to draw customers in with the promise of attractive headline rates, and avoiding allocating the time and resource to up-selling further down the line.

Alternatively, banks can focus on nurturing customer relationships, promoting their business on additional qualities such as their brand identity, the ease of the customer journey they offer (particularly important in an increasingly digitised world), on the product design, and distribution capability.

Clearly this approach offers more opportunities for differentiation and ultimately carving out a market niche – but it’s also more complex. Banks that choose this approach need to ensure that everything from price points to even product names has been carefully thought out – and, ultimately, that diversification is achieved in a cost-effective way.

2. Overcome customer apathy

Banking customers are notoriously reluctant to switch to a new supplier, even in the aftermath of the global financial crisis and rock-bottom faith in established bankers. Lloyds, Barclays, HSBC and RBS have 70% of the market, and while they might be losing customers in certain areas to new entrants, the number of people actually switching their account provider declined last year.

According to the Current Account Switching Service (CASS), which was designed to make it easier to change bank, 1.03 million current account switches were made in 2015, down from 1.15 million in 2014, and lower than the 1.2 million switches made in 2012 – before CASS was launched. So there’s a risk that a new bank simply won’t attract enough depositors – but there is equally a risk in attracting too many, particularly at the wrong price.

It’s therefore crucial that new banks have accurate market insights with which to shape their main proposition. Targeted marketing isn’t just a pre-launch necessity – it needs to be built into the very fabric of how new banks operate, enabling them to continually open up new routes to market in cost-efficient ways. New banks need to ensure that they’re continually aware of what customers want, and that they’re using those insights to shape their product offerings. This is a far more agile and responsive approach than that of most established players.

3. Selecting the right online platform

Given that most challenger banks are online-only anyway, the efficiency and reliability of their websites and online banking systems are absolutely critical. Customers may find it annoying when sites and services such as eBay, Amazon or Uber crash, but as high-street names including RBS, HSBC and Barclays found in 2015, outages and failures cause real distress to customers – and could be the death knell for an online bank.

So it’s clear that new banks must absolutely prioritise the reliability, security and efficiency of their IT systems. But there’s more to ‘the right online platform’ than this.

As targeted marketing to develop a differentiated proposition is crucial, elements like website look and feel, customer journey and website responsiveness are where new banks can really stand out. Can customers access the banking website smoothly from multiple devices? If the bank is focused on its mobile offering, does the mobile app offer a clean, quick – but absolutely secure – experience? Does the site design offer the right balance between corporate and consumer-focused?

4. Deliver on customers’ service expectations

These stages take us through the preparation of a new bank to the launch itself. But the story doesn’t end there. Delivering absolutely on customers’ service expectations is essential if a new bank is going to continue attracting new customers – and keep its existing ones – in a landscape in which swift online reputation damage can be done via social media.

The key is a flexible platform designed to capture new clients and provide a straightforward system for them to register with the bank. This system must be easily customisable and efficiently integrated into the bank’s website and back-end systems, allowing the bank to access depositors through its own networks or through external price-comparison websites and digital publishers. From easy-to-use account creation applications to the delivery of important company information, it needs to be easy to use across both conventional and mobile devices.

All of this can seem daunting to new players in the banking market. There’s a huge amount of intelligence to gather, strategy to decide on and IT to develop. As such, new banks need to partner with organisations that have both the broad market insight and technical capabilities to assist with each stage in the process, guiding them through spotting market niches, and helping to develop their offerings accordingly to target those market sectors.

Crucially, this partner should share both the risks and rewards of a brand new banking offering, to ensure that the new entrant achieves their customer acquisition and deposit targets. They should be able to offer diverse yet highly focused market insights, and to manage the pre-launch, launch and post-launch services to ensure that everything goes smoothly – and help the new entrant bank to rise above the mass of challengers.