UK consumers drawn to neobanks during pandemic – but trust issues remain

British consumers are more inclined to use digital-only challenger banks as a result of the pandemic, but issues around trust and demand for in-person services remain obstacles for UK neobanks, as they look to shore up more market share and boost profitability, according to consumer research platform Attest.

One thousand consumers from across the UK were surveyed by Attest in early June exclusively for The Banker. More than three quarters (77%) of respondents said they banked with established high street names such as HSBC, NatWest, Barclays, Santander, RBS and Lloyds Bank, while another 40% used smaller banks or building societies such as Metro, Nationwide, Halifax and TSB.

Almost one quarter (23%) of respondents used digital-only neobanks banks, such as Monzo, Starling, Atom, Tandem and Revolut, attracted by competitive pricing and slick, user-friendly web and mobile apps. The Covid-19 pandemic’s well-documented impact on demand for digital services can be evidenced in the fact that 36% of neobank customers had signed up since March last year. Meanwhile, 41% of respondents said their use of digital-only banks increased as a result of the pandemic.

“More customers are [now] willing to use a neobank,” says Tom Merry, managing director of banking strategy at Accenture. “The advent of lockdowns and branch closures have supported the growth of this trend.”

Of those respondents not signed up to the neobanks, 15% said they were “seriously” considering opening a new account with a digital-only bank in the next six months, while 29% said they were “potentially” considering it.

“Ease of use” was cited by more than half of respondents (54%) as being a reason to sign up to a digital-only bank, along with “fast sign up” (30%), “help with budgeting” (24%) and “breadth of features/functionality” (18%).

Challenger banks such as Revolut have attracted scores of customers offering low fees on international money transfers, and “quick and cheap transfer of money” was cited by 36% of respondents as being a key attraction when banking with digital-only providers. However, offering such services can have drawbacks, Mr Merry argues.

“Some of the neobanks’ unique selling points ­– such as offering attractive pricing on foreign exchange or international transfers – were designed to encourage and acquire customers but they are drain on the bottom line,” he says. “Someone has to pay for that.”

Uncertainty and trust

Among the reasons cited for not banking with a digital-only provider, 41% of respondents said they liked having a branch to go, allowing them in-person interactions with staff.

“There is still a body of people for whom face-to-face relationships remain important, which puts them out of reach for digital-only neobanks,” Mr Merry says. “There's still a trust gap in terms of a human interaction over digital interaction, although it’s slowly closing.”

Wider concerns about trust can be evidenced in other reasons cited for not using a neobank: 28% said they did not trust them with their money, while 20% said they didn’t trust them with their personal data and information.

“There are material concerns around trust when it comes to digital-only banks,” Mr Merry adds. “I’m not quite sure why that persists because in our view, in terms of security, the technology underpinning the neobanks is as strong, if not more resilient, than the incumbents.”

Amid the economic fallout from Covid-19, the brick-and-mortar institutions clearly have benefited from a flight to safety. Gross total deposits at leading UK banks rose in 2020, according to The Banker Database.

More than a quarter (26%) of respondents said they worried some smaller banks might collapse. “There remains a pretty profound concern from people that these banks aren’t going to survive,” Mr Merry says.

And while use of digital-only banks is growing, almost one third (32%) of respondents said they prefer to pay in their salary or take out a mortgage with an incumbent high street bank.

“One of the things all the neobanks have been hugely successful at is attracting and onboarding customers. The challenge has been about revenue-per-customer and ultimately profitability,” Mr Merry says.

“On top of looking at whether a customer uses a neobank, it’s also interesting to look at how they use them. It’s when customers opt for primary usage – such as paying in a salary or taking out a mortgage – that drives higher balances as opposed to secondary usage [such as budgeting and small transfers],” he says

“You’d rather have half a million customers using a bank for primary usage than two million customers adopting a secondary use approach. When it comes to material holdings – mortgages and life savings – people still seem to trust the brick-and-mortar institutions. The challenge for the neobanks is to create the same level of trust with customers that the incumbents have developed over many decades on the high street.”

Continue reading: Incumbent banks square up to the challengers