Banks and neobanks: The two sides of reputation risk

According to Accenture’s Digital Banking Tracker, neobanks operating in the U.K. added more than 6 million new customers in the second half of 2019, ending the year with 19.6 million customers globally.[1]

They have nearly tripled their customer base in the past year, massively outpacing the 2% growth for traditional challenger banks and 1% for incumbents. According to a recent study from finder.com, a quarter of Brits will have a have a neobank account by 2024.[2]

There are a couple of societal factors that have resulted in banking no longer being the preserve of the establishment. Age is a significant demographic factor, with adoption highest amongst those aged 35-54, followed by the generation aged 18-34. Those with a neobank account cite the convenience of online banking as the biggest factor in their decision, closely followed by better rates and ease of transfers. Where the products offered suit consumer needs, the numbers evidence that customers aren’t invested in where the underlying banking technology comes from.

Tech has had a big hand in this shift: advances such as distributed ledger technology, big data and open banking have given customers new ways of accessing and managing their finances, thereby broadening acceptance of tech-based providers.

Reputation strengths can be weaknesses

The qualities which allow fintechs to disrupt the establishment have also been among the biggest sources of risk – while the new and comparatively leaner structures allow them to move nimbly to produce and launch innovative products more quickly, it has been said that these same systems lack robustness and are therefore too susceptible to fraud, money laundering and other breaches of security.

alva’s Banking Reputation Index shows that while these disruptors enjoy stretches of strong reputation, fuelled by recognition of their innovative products and excellent service, incidents such as a security breach or regulatory penalty can very quickly undermine this and bring scores tumbling down.

Take Monzo, which in March 2019, pipped long-time incumbent First Direct to lead Moneysaving Expert’s banking customer service poll in March 2019. These strong customer service credentials are among the contributing factors to Monzo’s top 3 place on alva’s Banking Reputation Index most months over the past year. This was not the case last August when the neobank was plunged as low as 12^th place during a security breach. They were forced to make nearly half a million customers change their PINs after it was found that the information had been left unprotected in their systems for six months.[3]

Revolut, valued at $5.5bn in its first funding round, [4] raised security concerns in July 2018 when it had to inform the National Crime Agency (NCA) and the FCA about suspected illicit activity on its platform. Later the same year, internal investigations found that Revolut wrongly turned off an automated system designed to stop dubious money transfers, which could have resulted in illegal transactions passing through the bank’s system.[5]

Similarly, in April last year Germany-based neobank unicorn N26 was under investigation from German banking regulator Bafin after reports emerged about potential fraudulent transactions and issues with the neobank’s customer service.[6]

As these new market entrants move to the next stage and continue to capture more market share, so too the need to demonstrate the stability and reliability of their infrastructure increases. With scaling up comes further pressure on their operations and on their reputations equally. Those with a clear view of the specific drivers of their reputation are in the best position to fully capitalise on the opportunity presented and ensure a strong and sustainable reputation to build on.

Challengers emerging from banking reputation risk

We know that disruption and increased competition drives industry to evolve and innovate, to the benefit of customers, and it has certainly been the case that the banking industry has evolved to give customers more and different choices since the onset of neobanks.

It can be argued that the adoption curve for these new market entries has been facilitated by a continued erosion of the reputation of the financial services establishment. Whereas entrusting one’s finances was traditionally the preserve of long-established institutions with large capital reserves and stable frameworks, events in recent history have undermined this foundation. Whether we look at the credit crunch/RBS bail-out, PPI mis-selling and protracted compensation timeline, or the substantial regulatory and criminal breaches of individual organisations, such as Wells Fargo’s recent $3B penalty paid to the U.S. Justice Department and Securities and Exchange Commission,[7] arguably this has made the choice to move one’s finances to a relative unknown a little easier than it once was.

However, despite the traction that neobanks are getting in terms of market share, the survey referenced earlier also found that 53% of UK consumers have no intention of switching at all, and of those consumers who didn’t wish to switch, the majority (61%) cited how well their bank has treated them as their core reason for staying, indicating that if they can keep pace with consumer needs, the incumbents are nevertheless in a position of strength.[8]

The rise of neobanks is a symptom of this wider fundamental issue within the sector and serves to highlight the range of competing forces acting on corporate reputation and how these manifest through to commercial operations. Companies that play close attention to the factors that really drive customer perception and their reputation are in the most favourable position to employ their corporate affairs strategy to proactively drive their corporate purpose.

[1] https://fortune.com/2020/02/25/fintech-revolut-valuation-billion-funding-round/
[2] https://www.businessinsider.com/revolut-security-concerns-2019-3?r=US&IR=T
[3] https://www.businessinsider.com/n26-under-regulatory-scrutiny-from-bafin-2019-4?r=US&IR=T
[4] https://www.reuters.com/article/us-wells-fargo-scandal-deal/u-s-authorities-to-announce-deal-over-wells-fargos-sales-practices-scandal-sources-idUSKBN20F2KN
[5] https://www.businessinsider.com/findercom-survey-uk-consumers-adopting-neobanks-2019-1?r=US&IR=T
[6] https://newsroom.accenture.com/news/uk-neobanks-near-20-million-customers-in-2019-but-customer-and-deposit-growth-rates-slow-according-to-research-from-accenture.htm
[7] https://www.businessinsider.com/findercom-survey-uk-consumers-adopting-neobanks-2019-1?r=US&IR=T
[8] https://www.theguardian.com/business/2019/aug/05/monzo-urges-480000-customers-to-change-their-pin-numbers