Many of the new challenger banks and fintech companies boast that what differentiates them from the big incumbent lenders is that they are “customer obsessed”.
Their focus on providing a different kind of customer experience has led to snazzy digital and mobile interfaces, top-notch design, free giveaways and, in many cases, commission-free services for clients. But it is not yet clear whether this strategy will lead to profitability for the likes of Monzo and Revolut.
That’s because most banks are first and foremost in the business of lending, and only second in the business of helping people manage their money. Meanwhile, customers tend to see both services as utilities and use price as the primary comparison point. Additional bells and whistles may be appreciated, but customers won’t necessarily be prepared to pay more for them.
Indeed, despite huge regulatory efforts in the UK to make it easier to switch banks to take advantage of new competition, customers remain stubbornly attached to the accounts they opened as young adults. All the more so now that incumbents from NatWest to Barclays have raised their game when it comes to digital and mobile services, copying or buying start-ups that offer customer-oriented techniques.
The risk for challengers is that, having played their part in getting the industry to improve the customer experience and service, they might end up with very little to show for it. That, frankly, feels unfair.
I think what is really going on is a return to competition that differentiates on quality rather than just price. The reason it feels so new and cutting edge is that price has been the calling card of the challengers, not just in banking but in other retail markets, such as groceries and air travel, for many years.
In retail, the UK saw a decades long face-off between supermarket chains Tesco and J Sainsbury, in which the former relied on aggressive price-cutting techniques and free giveaways, and ultimately pulled ahead. A key starting point in the war was the great trading stamp controversy of 1963, which eventually led to the proposition of the Trading Stamps Bill in 1964.
Trading stamps, an American invention, were a form of loyalty coupon given to customers entitling them to heavily discounted or “free” products at participating retailers. Although trade associations objected to the stamps as a disguised form of deliberate undercutting on price, Tesco signed up to participate in the biggest scheme, run by the Green Shields Company.
Sainsbury’s responded by arguing that the stamps were only tricking customers into thinking they were getting something for free, because they were actually paying through poorer product quality and higher prices overall. It launched a high-profile advertising campaign emphasising its commitment to quality and value, using the slogan, “Honest to goodness”. Both the bill to regulate stamps, and a proposal for grocers to form a gentleman’s agreement to put a floor on undercutting via stamps, failed. They were perceived by customers and parliamentarians as incumbent protectionism.
While Sainsbury’s market share stayed close to Tesco’s into the mid-1990s, the pressure to respond swiftly with ongoing price-cutting campaigns became the norm across the industry from then on. That trend was only exacerbated by the UK arrival of the German discounters, Aldi and Lidl.
Consumers have clearly benefited from lower prices as a result. But sustainability campaigners might argue that the emphasis on price has debased the quality of goods and led to unethical production standards.
For many years, the view of banking as a utility has helped us overlook the way price competition, through services such as free current accounts, has affected the quality of customer service. We are also learning that ethics took a hit in this process. As one challenger bank executive told me last week, it’s the small things that matter in that regard. Like being fair with your customers when they are about to go overdrawn. Informing them is the ethical thing to do, and it might just lead to a lasting relationship that won’t be abandoned at the first sight of a cheaper deal.
The £50bn payment protection insurance scandal is another obvious example: banks competing for mortgage, credit card and current account business improperly tacked on PPI to boost their profits.
The question is, after decades of challengers winning ground by competing on price rather than quality, can the reverse strategy really succeed without pushing up prices eventually?