By Howard Pull, Head of Strategy at MullenLowe Profero (part of MullenLowe Group UK)

Unexpectedly, COVID stalled rather than accelerated challenger bank momentum.

Stock markets are riding high on brands that have had great Customer Experience (CX) and a digital-first agenda. Across industries we’ve seen traditional brands without a good answer for the digital channel fall by the wayside. Retailers like ASOS and Boohoo snap up legacy rivals like Topshop and Debenhams at a fraction of their pre pandemic value.

The trend of the digital upstart knocking over the legacy brand behemoth has been true across almost all categories, with one notable exception: banks.

The pandemic has unsettled the momentum of challenger banks like Monzo, Starling, and Revolt.

While the rapid shift to digital bolsters brands with outstanding digital experiences, it came at the worst developmental time for these brands.

While they were developing mainstream acceptance, the parts of their business that generate revenue were hit hard.

The discretionary weekly spend fell

People start out using challenger banks as their second bank, that you pay for your out and about expenses like a coffee and sandwich, and then grow to take on more of your financial life. That behaviour stalled in a working-from-home world.

Loans became a crowded market

Traditional banks had the monopoly of COVID rescue loans, driving a surge to become ‘existing customers’ to be eligible by a desperate customer base.

Subscription model perks felt irrelevant in lockdown

The standard route to profitability – a subscription model – meant challenger banks got hit when a lot of the perks didn’t make sense. No one needs worldwide travel insurance in lockdown and there are few people to show off a new shiny metal card to.

Savings weren’t attracting take-up

Easy access savings rates were at an all-time low of 0.19% in Dec 2020, and there were few reasons to put your savings into a challenger bank. Their audience were distracted with the bright lights of Gamestonking on Robinhood or a rush on Bitcoin.

The heat the legacy bank brands had felt at the start of 2020, where customer acquisition numbers were going to challenger brands in droves with a fraction of the ad spend, stabilised.

Challengers’ leadership felt the pressure: most notably, Monzo’s founder Tom Bloomfield stepped aside.

Banks have folded or wound down their digital bank offerings.

Great CX that dominates categories is often undervalued in the short term.

So a perfect storm has hit them, but should challenger brands just give up? No. Challenging times create the best challenger brands.

If we look at today’s stock market giants like Amazon, they took a similar hit in the dot com crash, where a good strategy and user experience was questioned when their revenue model hadn’t bore fruit (Amazon took seven years to make its first meagre profit).

Our recent survey found that digital experience is the top reason people consumers choose a bank.

Great CX is undervalued in the short term, but wins categories in the long term. Challenger banks’ NPS scores put some tech brands to shame. August’s CMA report has put Monzo and Starling as the best rated banks for service and digital experience – a fact every competitor bank has to put on its homepage.

There is strong evidence that traditional banks’ digital transformation has slowed down even further – a recent report highlighted 83% of UK banks leadership said their 2021 focus is on business continuity, cost saving and building resilience. Not innovation.

Challengers can get their groove back through pushing innovation and presence

So, challenger banks are onto a good thing with the quality of their CX, it’s just the market doesn’t see it right now.

To get their mojo back they need to capture revenue and momentum.

There are a number of opportunities to do this.

Be there for re-emerging retail moments

Societal habits around money have changed, accelerating cashless and integrating mobile into purchase experiences. The features we all found useful from challenger banks in the first place are even more vital post-lockdown.

Push the pace of innovation in new revenue opportunities

In 2021, the most interesting disruptors in money aren’t banks. We’ve seen Robinhood democratise access to the stock market, PayPal open up the use of Bitcoin, and Lemonade revolutionise the cost and speed of insurance. These are big categories ripe for challenger banks to innovate in, with a crossover with their younger audiences passion points.

Be the bank that cares and turn worry into positive money habits

With eight out of 10 people in the UK worried about their finances, there is an opportunity to help people turn concern into action. ‘Non bank’ brands like SoFi are actively rewarding customers who have a financial plan, offering more cashback when you work towards your saving and loan repayment goals. challenger banks’ engaging tone and style give them permission to play in these areas.

Think big and consolidate

I can’t think of a better time to buy a traditional bank.

ASOS and Boohoo have shaken up retail through this approach, and ‘Starling buys RBS’ would make an excellent headline…

As Coco Chanel once said, “In order to be irreplaceable, one must always be different.”

Great customer experience always stands out and wins.

Challenging times shouldn’t make challengers doubt their course.