By Satrajit “Satty” Saha, CEO of TransUnion in the UK and regional president for TransUnion Europe

Even before the COVID-19 pandemic focused everything towards online, there was an abundance of finance providers already operating as online-only. Early technological adopters that embraced digital transformation and used it as a means of gaining competitive advantage are realising the exponential benefits. This is true across sectors, but for banking more than most.

When we look at the digital-led and digital-only challenger banks, we see agile data-driven companies focused on providing financial services in a new way. By harnessing the power of data and insights, digital finance providers are able to offer increased personalisation of experience and product offering. It is this that has ultimately led digital banks to be real ‘challengers’ to the established businesses in what is a highly-competitive and crowded market.

Digital challengers close the gap with the high street

Digital-led and digital-only platforms – including fintechs and solutions from big tech companies – have been successfully gaining on the big players in terms of market share, and they continue to secure their position in the finance and payments markets.

Indeed, TransUnion’s Consumer Credit 2020 report, with research undertaken in the UK immediately before the COVID-19 pandemic, revealed that digital-only banks were just 3% behind their high street counterparts when it came to consumer intent for current account applications. A tenth of consumers said they planned on applying for a current account with an online or app-only bank in 2020, compared to 13% who intended to apply to high street banks.

This proved particularly true for younger generations, where the intention to apply to a digital-only bank was almost three times greater for consumers aged 44 or younger, compared to those aged 45 and upwards. The COVID-19  pandemic has, of course, had a profound economic impact since then and TransUnion has been monitoring the impact in relation to consumer credit in its Financial Hardship Study; a global survey which has been carried out regularly since March. This has shown that the millennial generation across several countries are seeking new financial products to tide them over at a greater rate than others – 10% will seek a new credit card, 17% will seek a personal loan and 17% will seek a credit card balance transfer. This is in comparison to 5% of all other generations who will seek a new card and 13% each for all other generations who will seek a new loan or balance transfer. Based on our earlier findings, many will be looking to digital providers to deliver these.

When TransUnion’s credit research was conducted, traditional banks were still enjoying the highest level of trust in the market; a key driver when it comes to choosing a finance provider. According to the research, 81% of consumers trust high street banks, whilst online or app-only banks came in second at 57%.

On the surface, before the pandemic, challengers looked to be doing well at catching up and unsettling the traditional market. Indeed, at one-point McKinsey was predicting that disruptors could cause a 60% reduction in banks’ profits by 2025 in just the consumer loans market. Yet, even with the remarkable speed of change, our report data suggests that consumers primarily use the new fintechs to complement or augment the financial products they already have with traditional providers, particularly with the likes of loans and credit cards, where they now have more choice than ever before. With this new desire for products in the market from millennials there is a clear opportunity for digital providers.

Helping consumers navigate the ‘new norm’

The rise of online options offers customers more choice, creating greater need for better education and financial literacy. As we look to rebalance after the financial shock brought about by the pandemic, this is more important than ever. Our recent study has found that three out of five UK households have been experiencing a negative financial impact as a result of COVID-19 – in contrast to the sentiments expressed by consumers at the start of the year in the Consumer Credit 2020 report, where 60% of consumers had stated they had the ability to withstand a financial shock – highlighting how the pandemic is affecting even those that may have previously considered themselves to be protected from this kind of uncertainty.

So, as traditional providers seek to increase their online offering and adapt their ways of working, and consumers get to grips with new financial challenges, the demand for information is greater than ever before. Here, digital banks – with detailed prior knowledge of their customers and high levels of accessibility – have a distinct advantage.

Lenders across the market need to be making the most of the tools already available to them – such as TransUnion’s CreditView, a white-labelled, interactive solution that provides consumers with access to their credit report and score – to engage with and empower their customers. This will enable them to build trust in this difficult time, whilst also ensuring consumers have the information needed to make informed decisions. With a new credit score simulator tool recently introduced, the CreditView solution can also offer UK consumers the power to proactively test the impact of future financial decisions on their credit score and help enable more informed decision making.

Open Banking is another powerful tool that finance providers will be looking to as they adjust to the impact of COVID-19. TransUnion Open Banking offers a highly-detailed view of a person’s financial data, giving lenders a more comprehensive picture and greater confidence assessing creditworthiness as consumers adapt to rapidly-changing circumstances.  At the same time, it puts the consumer in the driving seat when it comes to sharing their financial information, making it quick and straightforward to apply for credit, since the finance provider has all the information needed.

Looking ahead

We already know that consumers are seeking to act responsibly and take control of their financial environment. TransUnion’s own recent research indicates that around half of the consumers impacted financially and concerned about their ability to pay bills have reached out to companies they have accounts with to discuss payment options. It’s good to note in the same research that rates of response from those companies have increased since we started looking into this in March.

Lenders must see the new opportunity to enhance their personalised digital banking offering as an opportunity to facilitate greater dialogue with their customers. With credit markets in flux, it is incumbent on lenders and those in positions of trust when it comes to finances to reach out and help customers understand their total credit commitments and broader financial position, offering advice and guidance where appropriate to help them get through this difficult time.

Ultimately this approach also makes business sense, as getting to know customers, building trust, increasing personalisation and delivering a seamless customer experience is a winning formula. Agility and personalisation will undoubtedly shape the future.