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‘Banks are a flight to safety’: Challenger banks are struggling to gain trust during COVID-19

  • Challenger banks look for new ways to remain relevant and gain user trust during the pandemic.
  • With incumbents given time to improve their digitized services, challenger banks may become less of a rising threat to the traditional banking industry.
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‘Banks are a flight to safety’: Challenger banks are struggling to gain trust during COVID-19

Like other industries navigating their way through the pandemic, challenger banks have their own set of challenges to face.

As new competitors in the banking industry, challenger banks have more difficulty than traditional banks when it comes to gaining user trust. During times of economic downturn, this is vital, as customers equate trust with financial security. In this case, traditional banks have the advantage of perceived reliability that comes with being longstanding establishments.

“Part of the fintech challenge is that in times of uncertainty and stress, traditional banks are seen as a safe haven. This partly reflects a flight to safety, as people hew closer to institutions with long track records that they judge more likely to survive an economic downturn,” said Alan McIntyre, senior managing director and head of the global banking practice at Accenture.

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Traditional banks are now quickly advancing their technology to meet new demands for digitized services. As a result, challenger banks may become less of a rising threat than they were before. There is also anecdotal evidence that suggests that the market share for challenger banking apps is slightly decreasing.

Certain challenger banks have upped their emotional appeal through recent updates, which may be a way to gain user trust. In April, N26 announced that for a few weeks it would support local businesses by featuring them on its site. Revolut, meanwhile, began promoting its donation function as a way for its users to support COVID-19 charities.

Additionally, many challengers have partnered with other companies to provide special deals to their users with COVID-19 in mind. Monzo’s relaunch of Monzo Plus includes free access to Babylon Health’s COVID-19 Assistant, as well as 20% off an annual virtual GP subscription. Similarly, N26 has rolled out deals related to self-care, including 8ft, Skill Yoga, and Headspace, which may be a way to ease self-isolation during the pandemic.

But special deals like these may not be enough on their own. With incumbent banks given a chance to better digitize their services, challenger banks need to find ways to differentiate themselves in a market that values trust.

Meeting a greater variety of consumer demands and wants could be a way for challenger banks to carve out specific niches for themselves.

Revolut, for instance, is promoting its new cryptocurrency services. In July, the challenger bank announced its partnership with Paxos to allow U.S customers to trade Bitcoin and Ethereum.

Meanwhile, N26 recently released its “N26 Business Metal Account”. This new account is aimed at entrepreneurs and freelancers, offering 0.5% cashback on purchases made with the card.

But even with digital banking services working to counter COVID-19 obstacles, a number of challenger banks remain positive about their post-pandemic future.

"At Starling our account opening and customer engagement have remained very strong through the coronavirus emergency (...) We now have more than 1.5 million customers," said a Starling Bank spokesperson.

Another challenger bank which seems to be in safe waters is Chime, a San Francisco-based fintech which was recently valued at $5.8 billion. Chris Britt, CEO of the company, remains confident in the bank’s future.

“In financial services and banking what you've seen is a massive acceleration to a trend that already existed, which is that increasingly consumers are going to want to manage all of their finances through their phone (…) for so many consumers the need to go to a bank branch was already low. And if anything, it's decreased since this outbreak.” said Britt.

Regardless, Chime has made its own steps to counter the effects of COVID-19. The company recently provided 100,000 users an advance of 200 dollars on their $1,200 stimulus check, a decision the challenger bank itself admitted was risky.

“There is certainly some risk,” said Britt. “It’s a calculated risk we’ve decided to take.”

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