Just been digging around inside a recent note – last week – from Joe Dickerson, UK banks analyst at Jefferies. I will not go into too much detail but the key passage for me is his analysis of the challenge form the neo banks or digital only banks.
For full disclosure, I am a big fan of these digital only challengers but I have long had my doubts about one key part of their product offer : cross selling and customer engagement
Put simply, can the digital only banks drive more and more customer engagement by for instance offering new products and sells? I think they can. To give one example. Starling, my personal favourite, has I think done a great job pushing their euro personal accounts and now their SME accounts to its customer base. But its less impressive when it comes to more ‘ancillary’ products such as wealth management. Lloyds by contrast seems to be making a real play for these ancillary products but in my experience most digitally savvy customers tend to compartmentalise their product mix and seek out specialist providers. Starling has tried to address this by building up a marketplace of products but this hasn’t been a huge success in my experience and is actually quite difficult to hunt down on their site (hidden in the main personal menu).
On a broader level, it’s also obvious that the digital banks have struggled to access the cheap lending lines available to more legacy institutions in the Covid crisis – thus Tide has stopped lending because its been over whelmed by demand for BounceBack loans.
It’s against this backdrop that I perused through Dickerson’s note, entitled “Will Corona Kill the Digital-Only Challenger?”.
I think it’s fair to say that the Jefferies analyst comes from a cynical point of view, arguing that few of the previous challengers “ have survived cycles and this time around may prove no different even if we could have never guessed that a potential trigger would be a global pandemic”.
To assess any such changes, the Jefferies analyst looked at SimilarWeb data which tracks mobile traffic across a variety of industries including banks. The base line for this study is that before Corona, digital-only offerings tended to be less engaged with those offering “multi-channel fulfilment”. There was, however, a trend toward digital offerings when Jefferies looked at areas such as install rates and share of app downloads – “in our view, such a trend suggested a potential behavioural change towards digital-only players with greater engagement with digital-only offerings more a matter of time”.
What’s happened after Corona? A fresh look at the latest SimilarWeb data (chart below 4) shows a reversal in these trends.
“Thus, the large incumbent banks have shown an improvement in install rates as well as share of app downloads since the onset of the coronavirus and the associated lockdown. The open rate (i.e., the percentage of the installed base opening the app daily) – our preferred yardstick for customer engagement – continues to indicate that digital only offerings have less engaged customers than those with multi-channel offerings. What is further worth noting is that multi-channel challenger offerings have eclipsed large incumbents in terms of engagement, even if the large banks’ engagement levels has remained relatively stable. We draw several conclusions:
- If customer engagement is foundering at digital-only banks, the competitive dynamic on pricing – particularly on the liability side of the balance sheet (remember the anchor product in the UK banking market is the current account) – should favour large incumbents and multi-channel challengers;
- The fact that digital engagement at multi-channel challengers (VMUK, TSB, MTRO) is now higher than for large incumbents suggests some longer run share erosion favouring these players;
- There is likely to be some transmission to pricing on the asset side (i.e., mortgage) for non broker originated products.
The bottom line is that we expect funding costs to remain low for the large incumbents with the digital-only operators remaining a pressure on fee income. Of course, all of this is precarious because we only have a few months’ worth of data and none of the major banks stand out with regard to innovation in customer interaction models either in digital or bricks and mortar.”