What can we expect from the challenger banks?

There’s been a lot of discussion recently in the UK about challenger banks. But what exactly constitutes a challenger bank? In the consumer space, for me it’s a bank that aims to take customers from the big names by doing something different around service delivery. That could be a digital focus enabling customers to do more via apps or a more personal focus with bank staff empowered to take decisions and resolve customer queries.

So who are the key challenger banks aiming to change retail banking in the UK?

Atom – Little has been mentioned by Atom so far but digital online and app delivery will be central to the way Atom engages with customers. Telephone support will be limited to technical issues. This approach will be unique and it will be interesting to see how customers engage with this model and whether it’s enough when things get tricky.

Verdict – With the right apps could appeal to technology aware customers, especially in younger demographics.

Hampden & Co – a new private bank, based in Charlotte Square in Edinburgh, will be opening its doors before the end of the year. This is an enterprise based on ‘old fashioned’ customer service. BillingViews had lunch with its Chairman, banking veteran Ray Entwistle, who emphasised that decisions will be made quickly and on an individual basis. Even before its launch, the bank has attracted a lot of support from Scots who see the need for a personalised service.

Verdict – the jury is still out, since the bank has yet to open its doors, but a small bank based on personal customer service seems to have a lot of support in the UK.

Handelsbanken – A large Swedish bank (Svenska Handelsbanken, to give it its full name) that now has around 180 branches in the UK. The bank does no marketing and relies for growth on recommendations and enquiries. Handelsbanken is unusual among the challengers in not being a mass-market bank and assessing all applications on their individual merits. Each branch is responsible for its own pricing and profit and loss account – a model successfully used in the Swedish operation. Handelsbanken also provides customers with good digital banking apps and online banking.

Verdict – Not suitable for everyone but has developed a good balance between personal service and digital delivery.

Metro Bank – Launched in 2010 and now up to 27 branches (or stores in Metro speak) in the South East. Early branches are profitable and Metro is now starting to see the importance of digital delivery alongside branches. A much-improved online banking presence is now live and mobile apps are imminent.

Verdict – Improved digital delivery will create a much better balance and ensure the bank doesn’t just appeal to people who want branches.

M&S Bank – Although using a long-standing retail brand, M&S Bank is actually part of HSBC. Branches are located inside M&S stores and the focus is very much around personal service.

Verdict – Will appeal to the loyal M&S customer base but is dependent on HSBC and M&S having an aligned view of where to take it.

Tesco Bank – Tesco’s long awaited current account finally arrived this year allowing the bank to position itself as a challenger bank. Whilst the Tesco brand is a powerful player in retail it remains to be seen whether consumers will use it as their primary bank, rather than somewhere to get competitive credit cards or savings accounts from. Online banking and mobile apps are at the heart of customer engagement backed up by telephone banking and very limited in-store facilities.

Verdict – Massive consumer customer base to tap into but needs to overcome the brand challenges and market positioning of the parent.

TSB – 631 branches spun out of the Lloyds monolith at the behest of the EU (a requirement to receive state aid). Many of the TSB branches were originally Cheltenham & Gloucester branches and as such have a strong bias towards consumer banking. This consumer / business imbalance is creating some challenges for the bank with a lack of businesses to lend money to. The heavy dependence on old Lloyds banking systems is another problem to be managed.

Verdict – The promotional video (with a very annoying soundtrack) for the new website suggests TSB doesn’t understand digital delivery and is still stuck in the past. Talking about local branches will not be a differentiator.

Virgin Money – Created out of the wreckage of Northern Rock, Virgin doesn’t yet qualify as a real challenger bank because it is yet to launch its current account. Like Tesco discovered, launching a current account has been a lot harder than originally envisaged. A dated online banking website and no mobile apps leave Virgin with a lot of catching up to do.

Verdict – No evidence yet that Virgin Money can do more than be a niche player in areas like savings accounts.

Williams & Glyn – 318 branches due to be spun out of RBS in the next year or so. It’s still unclear when the RBS and NatWest branches involved will start trading as Williams & Glyn although John Maltby, the new CEO, has been appointed. Williams & Glyn looks better placed than TSB to build a new bank because it has a better-balanced portfolio of consumer and business customers. Much has been made of resurrecting an old and trusted brand although as Williams & Glyn’s, the bank only existed for 15 years. The new bank will use RBS banking systems which given their performance over the last couple of years must be a worry. Plus, with their major focus on bank managers, there is a risk that the bank will not balance that with next generation digital banking apps.

WGVerdict – If Williams & Glyn fixes a lot of what’s broken with RBS NatWest then it will make a good start but it needs to to use the opportunity of being new to put digital at the heart of customer engagement. And it really needs to rethink the dismally dull logo it’s chosen for the new bank.

It’s early days for the challenger banks and given the size of the incumbents it will be difficult for them to make a significant impact. However the challengers are starting to add more choice in the market and it’s no longer the case to say that all retail banks are the same. Now consumers have more options it’s up to them to make the most of it.

Originally posted on Billing Views.