Do people trust their banks again – and what does trust even mean in financial services?
This was the theme of a recent Financial Services Forum event, which brought together James Daley, Managing Director at research firm Fairer Finance, Mark Akerman, CTO at challenger Tandem Bank and Conrad Ford, Chief Product and Strategy Officer at SME-focused lender Allica Bank.
James started by noting that views of banks have improved since their nadir around the turn of the last decade, in the aftermath of the financial crisis. Over the last decade, James says, the proportion of people saying they trust their bank has risen from 40% to 60%.
The change, he says, owes to people moving on from the financial crisis, as well as banks becoming more customer-focused due to the disruption of challengers.
He notes that many challengers have suffered a similar fate, where they have entered the market with exceptionally high ratings driven by those who want to switch experiencing a degree of confirmation bias.
However, very few have actually maintained this level of performance, with James noting that Metro Bank and Monzo have both seen a decline. Even First Direct, which he notes has done better than most at maintaining its high customer ratings, is seeing a decline which he says may be due to greater interference from HSBC.
James argues that banks making promises and then breaking them, as in the case of the Fairer NatWest adverts, does a lot to erode trust. Really, what they need to do is “get out of the way and make things work every time they are needed.”
Conrad Ford of Allica Bank echoes this point around the importance of getting the basics right. He ascribes the trajectory described by James to the business models of the challengers.
“If you’re a big bank you’re judged on return on equity. In the long term the interests of customers and shareholders are aligned but in the short term the CEO gets fired if you don’t deliver return on equity.
“Going to the top of the table while losing money on every customer – it’s like winning the 100m sprint on a motorbike.”
Every feature can be copied. Conrad quotes Starling CEO Anne Boden saying “we are not in an innovation race with the big banks, we’re in a cost-income ratio race.”
Mark, who has previously worked at Nationwide, says that mutuals can struggle with the same slowness because they seek to fix for every single member and scenario.
“There’s a self-limiting challenge from this really good intent towards members.”
James adds that regulation has also eaten into profits. Overdraft charges used to be a high proportion of profits for First Direct but now this has been closed off as an avenue.
One way around this challenge is for banks to be laser-focused on a segment, argues Conrad.
“Something I see a lot of is challengers playing in commoditised areas of lending, going into areas where big banks are happy to play.”
Competing over large corporate customers or microbusinesses are “death zones” for challengers, he argues, saying that Allica Bank’s model has been to find a “significant but underserved segment.”
For Allica this is “established SMEs”, which he notes represents a quarter of the economy.
The reason banks don’t compete here is not that they are “lumbering dinosaurs”, Conrad says, but because they are good at two things: serving mass market customers (simple customers at high volume) and large corporate and public sector where everything is manual and bespoke but the value of each account is high.
“Our customer base is awkwardly stuck in the middle; they’re not simple customers. The operational infrastructure [of the big banks] is designed for those two extremes.”
Historically, Conrad says, this underserved segment has been dealt with by “throwing people at the problem”, but with the decimation of branches, these relationship managers are disappearing.
“We’re going to see more specialised challengers – you can’t be great at everything.”
He argues the big banks will remain big, but will increasingly focus on the highly commoditised mass market segments, where “everything is down to low funding costs and economies of scale.”
The mass closure of branches, coupled with the fact that they are still needed for certain things, serve as another example of how big banks have failed to innovate.
Conrad says that the inability to adapt to changes such as the decline of branches has been a “self-inflicted wound”.
“They had 10 years of fintech to work this out – what they did was set up incubators and fintech petting zoos”.
The middle management is the problem for these banks, he says. Despite the quick rolling out of new services during Covid showing that banks can move quickly if they choose to, Conrad argues that they have not learnt this lesson.
“Middle management is the problem of big banks, and they’ve been doing things a certain way for 30 years. The people who hold the banks back are the exact people who succeed there.
“The people who are willing to take risks get punished if things go wrong or they get frustrated and move to something more exciting like a fintech.”
Mark adds that the number of people who can stand around a whiteboard are most likely the right number of people to solve a business challenge.
So how can marketers translate the internal culture of their organisations into coherent marketing messages?
“You have to do what you say and not oversell,” says Mark. “Authentic, tangible actions that customers can verify for themselves drive Tandem’s focus and approach to our Fairer and Greener messaging.”
Conrad added: “For a big bank I’d try to work out what’s unique about your bank compared to others. Lloyds don’t talk about products, they talk about their heritage and unique DNA.”