Digital upstarts are winning banking customers’ hearts, says Chris Middleton, but that does not guarantee viable businesses.

The rise of online, mobile, and challenger banks in the UK has been confirmed by the latest customer satisfaction survey from the Competition and Markets Authority (CMA).

In overall service quality – measured by how likely customers would be to recommend their personal current account provider to friends and family – the top five are loss-making Monzo (86 percent), loss-making Starling Bank (84 percent), First Direct (83 percent), loss-making Metro Bank (81 percent), and Nationwide (71 percent).

Barclays and Halifax (both on 62 percent), Santander (61 percent), Lloyds Bank, and Virgin Money (both on 60 percent) round out the top 10 out of 19 providers in total.

The survey was carried out by Ipsos MORI among over 19,000 customers – 1,000 from each brand – and is the first to include Monzo, Starling Bank, and Virgin Money in the rankings.

Tesco Bank (44 percent) and Royal Bank of Scotland (46 percent) are the least popular overall and the only two banks to achieve less than 50 percent support from their customers.

In online and mobile banking, Monzo again grabbed the top spot with 89 percent customer approval, followed by Starling Bank (88 percent), Metro Bank (85 percent), First Direct (83 percent), and Nationwide (81 percent).

The results are encouraging for Nationwide, whose mobile and online services have proven to be even more popular than its overall offering, demonstrating the importance of digital services to customers of traditional providers.

Nationwide is also rated highly for its in-branch service (77 percent), behind only Metro Bank (84 percent). Virgin Money (74 percent), Halifax, and Lloyds Bank (both on 69 percent) are the other most popular names among High Street customers.

Monzo, First Direct, Starling Bank, and Tesco Bank do not operate a branch network, while First Direct is refocusing its business on customers’ financial well-being.

Challengers and digital banks also dominate the overdraft services market in terms of happy customers, found the CMA: Starling Bank (with 74 percent satisfaction), First Direct (73 percent), Metro Bank (71 percent), Monzo (69 percent), and Halifax (62 percent) are the top five.

In every category, most traditional High Street names such as NatWest, RBS, Bank of Scotland, HSBC (which owns First Direct, but does not break out separate results), TSB, Barclays, Clydesdale Bank, and Santander fare either poorly or have middling support among customers.

The survey was carried out from July 2019 to June 2020, so the results cannot be interpreted as a ‘COVID bounce’ for online or mobile services. It is the fifth such research exercise following the CMA’s 2016 investigation of the retail banking market.

Adam Land, Senior Director at the Authority, said, “These league tables are an invaluable resource for customers to find the best service on offer to suit their needs.

“By being able to access data on the best- and worst-performing banks and building societies, people can easily compare providers, driving more competition to improve the overall quality of service.”

Future surveys will better reveal the impacts of lockdown, during which many customers would have been pushed towards digital offerings. However, the results of this one certainly reveal the stresses and strains on a market that is being transformed by technology-focused startups and challengers.

Yet while it is clear that customers enjoy the speed and convenience of low-friction digital services – a message that the banking sector must heed – popularity alone does not guarantee a viable business.

For example, Monzo recently reported a post-tax loss of £113.8 million, more than double that of the year before.

Four million people now have a Monzo account, giving it the highest net switching gains of any provider in the UK, so its deepening losses are a major concern for the industry and its customers. In May, founder and CEO Tom Blomfield stepped back from active management to become President.

Meanwhile, decade-old challenger Metro Bank reported pre-tax losses of £240.6 million for the first six months of the year, £109 million of which it blamed on the coronavirus. However, customer deposits grew 14 percent year on year to £15.6 billion.

By contrast, Starling Bank CEO Anne Boden claimed in a trading note earlier this year that her company is on course to break even by the end of 2020, despite the stresses caused by the pandemic.

Overall, the banking sector can be characterised by high-risk innovation that is popular with customers versus the predictability of more established names that customers either dislike or have no strong feelings about.

Either way, it is clear that traditional providers need to innovate to hang onto their customers or win them back from the upstarts – a lesson that some, such as Nationwide, appear to have learned.

With first-time banking customers favouring digital and mobile services over those offered on the High Street, the industry has no choice but to think ahead.

That said, the next bank to collapse in any prolonged recession may be a challenger. While we hope that does not happen, any such outcome would be likely to push customers back towards businesses that are less at risk from the high cost of innovation.

  • The CMA requires banks and buildings societies to display the results prominently online and in branches so that customers can see whether they might get a better deal elsewhere. Nevertheless, the survey does not constitute advice from the Authority to potential customers.

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