The banking industry is facing a radical transformation. The emergence of digital and mobile as dominant delivery channels has given rise to challenger banks and alternative financial services institutions (AltFIs), expanding consumer choice and broadening the competitive landscape.
Some commentators have suggested it’s only a matter of time before traditional institutions take on the role of regulated infrastructure provider without direct access to customers, after being disintermediated by AltFIs.
But what is the reality? Are AltFIs already disintermediating the incumbents? What are the key drivers for consumers? And most importantly, what should the incumbents do to remain relevant to consumers?
To separate the hype from reality we surveyed 1,000 UK consumers about their attitudes towards traditional financial institutions and AltFIs.
The research “Banking Disintermediation – The Personalisation Imperative” revealed a steady shift from consumers towards AltFIs driven by a compelling customer experience. While the vast majority of the consumers surveyed still hold their current accounts with a traditional provider (bank or building society), there is a sizeable and growing minority who use AltFIs for other, high value financial services.
Traditional banks still dominate but AltFIs are closing in
Nearly all consumers still have their main banking relationship with traditional providers — 94% of the survey respondents hold their current account with a high street bank or building society. If the traditional players were to take this at face value, they would be missing one of the biggest shifts in consumer behaviour.
A deeper look into the survey results reveals that 30% of the respondents already have some sort of financial relationship with AltFIs other than a current account.
Savings account, credit cards and payment services are the main services of choice when using AltFIs, with customers preferring traditional institutions for services such as mortgages and loans. Clearly the revolution is not yet in full swing but the tell-tale signs of a loyalty shift are rather visible.
Of those who didn’t have an account with an AltFI, 45% would consider switching to one. In other words, traditional banks could lose almost half of their customer base to AltFIs.
Clearly AltFIs are doing something right; delving deeper into survey findings shines a light on a possible answer. Customers of AltFIs seem to be more satisfied with their service than customers of traditional banks. AltFIs’ customers see them as more convenient, easier to interact with, and faster than traditional banks — all without any percieved loss in security.
While in most areas AltFIs are preceived as good as, if not better than, traditional financial institutions there’s still work to be done; for example, value for money is a key concern.
Personalisation is a key differentiator for AltFIs
It is clear that AltFIs do a better job understanding customers and providing them with personalised services that help these customers better manage their finances.
When asked in detail, AltFI customers felt that they were better understood, provided with better guidance, and treated better personally than customers of traditional financial institutions.
66% of AltFI customers said that they helped them better manage their finances and 68% said that they provided personalised advice. This is opposed to 57% and 60% respectively for traditional financial institutions. 62% of AltFI customers felt that their bank understood their personal preference while only 52% of traditional financial institution customers felt the same way.
Tellingly, less than a third (31%) of AltFI customers felt that they were little more than an account number but 40% of traditional customers felt the same way.
The combination of ease of use and guidance has created offerings which, although not as trusted as traditional incumbents’, seem to be much more attractive and satisfying.
Banks must learn from the AltFIs on guidance
We set out to understand how real the threat of disintermediation is and what is driving it.
The answer is that the threat is real and growing. More than one-in-four respondents are using AltFIs for some form of financial service and AltFIs are being used for current accounts by approximately one in 20 customers, which is significantly ahead of expectations, . Critically, these customers are happier than traditionally banked ones.
Perhaps due to the fact that banking products are all relatively similar, product usage is comparable across AltFIs and traditional institutions. It is guidance and personalisation that make the difference.
Traditional institutions have access to an enormous amount of their customers’ data, but have been slow to make use of this data to better serve the customer. AltFIs have seized this opportunity, and the benefits are starting to become clear. With the imminent onset of PSD2 regulations in 2017, banks must act now to leverage their data assets, before they have to open up this gold mine to the competition.
Personalisation and guidance are essential. If banks can step up to the challenge, they can take away one of the primary advantages that AltFIs currently claim.