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Challenger banks struggle to overcome customer apathy

The likes of Handelsbanken are ahead on customer satisfaction, but there's still reluctance to switch accounts.

by Rebecca Smith
Last Updated: 15 Feb 2016

Since 2012, the Bank of England has granted licences to 21 new providers aiming to rival the big four banks. That shows just how much things have changed since Metro Bank proudly declared its status as the first high-street bank to be granted a licence for over 150 years in 2010.

Some question whether they are really offering anything all that innovative, but a new survey of around 12,000 small and medium-sized businesses claims challenger banks are successfully punching above their weight against the industry stalwarts. 

The Business Banking Insight (BBI) research, carried out in September and November last year for the Treasury, revealed how businesses found the service of various lenders. Most big banks were rated below average (some of the lowest rated included Barclays, Lloyds and TSB), while challenger banks such as Handelsbanken and First Direct (HSBC's digital-only bank) sat at the top, with aggregate customer satisfaction ratings over 80%.

Perhaps most encouraging for the wave of challenger banks hoping to pinch customers from the established names, was the news that one in ten firms said they would consider moving their current account to a different bank within six months. This rose to 15% for new small businesses (created in the past five years), even though they said they were happier with their current account than others – 33% were satisfied compared to the national average of 30%.

There’s still a lingering perception for many that switching accounts is time-consuming and fiddly. This small signal that some will be willing to swap if they perceive a better option elsewhere could allow challengers to grow more quickly. It's small, but it's a start.

John Longworth, director general of the British Chambers of Commerce, which co-produced the research alongside the Federation of Small Businesses, said, ‘It is reassuring that there has been progress in improving customer satisfaction among businesses, but there is clearly more to be done.’

Lloyds, RBS, Barclays and HSBC currently have the lion's share of the small and medium-sized business market at 85%, but customer satisfaction is fairly low – around 60%. Which in itself reflects part of the problem – that firms are slow to switch banks, even when their current provider is mediocre. They may be unremarkable but not bad enough to prompt serious thought for change.

That hasn't stopped the challengers raising big wads of cash from investors, though. Starling, a new digital bank, has just announced a $70m funding round ahead of a move into the UK banking market. Led by the former chief operating officer of Allied Irish Bank, Anne Boden, Starling wants to tap into the growing trend of mobile-focused customers.

Sidestepping the legacy systems weighing down their larger competitors, digital banks like Mondo and Atom Bank (which received its licence in June 2015), hope to provide a superior current account service. Atom’s chairman Anthony Thompson said the bank only needed ‘a tiny proportion’ of the 64m current accounts in the UK to become very successful.

The latest BBI figures however, suggest that while these new upstarts are delivering when it comes to customer service, there’s a lot more convincing that needs to be done to prove challenger banks offer a considerably different – and better – option to the big names to prompt people and businesses to switch. 

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