Taming the titans

How challenger banks are disrupting traditional players in EMEA

Banking has long been a sector where established players have held sway, where there has been little room for disruptive innovation. Each country has its heavyweights; from Deutsche Bank in Germany to Santander in Spain. In the United Kingdom, one of Europe’s most important financial centres, the banking landscape is again dominated by big names such as Royal Bank of Scotland, Barclays and Lloyds TSB.

Times they are a’changing

But recent years have brought major shakeups to the European banking industry, with a slew of new hi-tech providers making waves across the continent. In particular, startup banks such as Starling, Monzo, Atom, Revolut, and N26 are becoming increasingly popular among European consumers.

The rise of these challenger banks has been largely spurred on by a raft of regulatory changes that came into being in early 2018, including Open Banking in the UK and PSD2 in much of Europe. Under these new rules, banks have been compelled to share customer data with third party financial service providers, if requested to do so by their customers.

The key goal with all of this is to heighten competition and encourage innovation within the banking industry, while forcing the established banks to share their customers with newer players. Established banks, which have tended to be slow-moving and reluctant to adapt, have been compelled to move with the changing times.

Challenger banks not only have an edge in their ability to move fast and adapt, but they can also offer customers lower fees, thanks to their lean structure and lower operating costs.

They can also offer innovative services to make customers’ lives easier, such as currency exchange at market rates (Revolut), borderless payments (Transferwise) or the ability to have a new card instantly issued in branch (MetroBank).

Reputation is everything

But despite all these advantages of challenger banks, consumer opinion matters immensely in determining whether they will succeed or fail. With so many new banks taking aim at the industry leaders in their home countries, which ones have a real shot at making it in the industry?

Analysing consumer conversations offers a number of clues that can help in answering this question. As shown below, the challenger bank conversation has been flourishing for a number of years now, starting its upward climb in early 2015 has been skyrocketing for years, reaching a peak of over 80,000 posts per month in early 2018, likely related to the announcement of Open Banking and PSD2.

Importantly, how does this trend for challenger bank discussion compare to conversation levels related to the established banks? Data shows that challenger banks are especially popular in discussions from the United Kingdom and Germany.

In the UK, challenger bank share of voice levels have risen significantly from around 5% in October 2013 to around one-third of all banking conversation by August 2018.

Staying power in Germany

Meanwhile, in Germany, the picture looks quite different. As far back as 2013, German consumers were actively discussing challenger banks, to a greater level than in the UK. But conversations levels dropped dramatically at the beginning of 2014, to once again become dominated by established banks such as Deutsche Bank.

The discussion went on to experience a number of peaks and troughs over the following two years. In early 2017, the topic of challenger banks started to make headway in the discussion once again and ever since then has been chipping away at the share of discussion held by established banks. The trend now seems to have developed staying power and it looks like the picture may soon be reversed, with challenger banks dominating the banking discussion in Germany.

In both the UK and Germany, challenger banks attract more positive sentiment than established banks, as shown in the below chart. In Germany in particular, there exists strong negative sentiment towards established banks, representing a prime environment for newcomers to step up and fill some of the gaps that consumers are unhappy with. In fact, many challenger banks have been marketing their services by highlighting precisely how they differ from the industry leaders.

Fundamental concerns

A deeper analysis shows sobering news for the industry leading banks. When looking at the top reasons consumers love challenger banks, some pretty fundamental areas come up. ‘Great apps’ lead the way, accounting for almost 43,000 consumer posts, while ‘great products’ account for almost 30,000. Customer service and low fees also attract mentions. With key areas such as these at stake, established banks should pay attention carefully to addressing areas where consumers may jump ship for challenger banks.

Conclusion

Major changes in the banking regulatory environment in the EMEA region, plus technical advances, have opened up big opportunities for challenger banks to disrupt the industry.

Want to learn more about emerging trends in the financial services industry in Europe? Download our Consumer Trends for Financial Services report now!

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