The biggest UK challenger bank yet: what does the Virgin-CYBG merger say about industry’s future?

Last Monday, 96% of CYBG shareholders voted to accept Virgin’s all-share offer to merge. It looks like the happy couple is set to create the biggest challenger bank ever in the UK. But  behind the headline numbers lies a key strategic reason - matching the personal feel of regional branches with the technological capabilities to answer the growing digital demands of modern consumers. Being able to offer at once the immediacy of digital with the human touch will separate the banks of the future from those destined for extinction. Building customer loyalty is therefore key in an increasingly competitive and globalised retail banking sector.

The large banks have both strengths and challenges with their own IT departments and legacy systems. Their huge customer databases and long-established reputations give them great influence. Yet some are still relying on a siloed business model that doesn’t allow the greatest value to be drawn from their data. Where these banks have merged and reformed over the years, there may be numerous profiles of one customer in the systems at any one time. As banks innovate and adapt, they often create a hybrid IT environment in which systems can’t or won’t ‘talk’ to each other. This leads to missed opportunities and the stilted customer journey that can’t identify the Joe Bloggs looking for a mortgage with the Joe Bloggs who just bought a house.

However, many of the UK’s high street banks are investing in digital transformation. A key example is HSBC, whose recent results reflect its policy of technological investment to grow customer engagement and future business. Through this innovation it is also bringing to life the concept of ‘open banking’. By allowing customers to view their accounts at all banks, whether HSBC or not, through the HSBC app, they become the first port of call for all financial product needs. The particular genius of this is that open banking is going to happen regardless – it’s inevitable. Therefore, rather than resist the change and find themselves on the back foot, banks need to find more boundary-pushing strategies to ensure they are innovating the customer journey at every level of the business.

Banks are also catching onto the features that, originally limited to hip fintech start-ups like Monzo, now typify the modern retail banking experience. For example, financial institutions are adding online and app-based features which break down spend sorted by vertical or brand. However, although these features do give customers what they want, banks are not leveraging this to improve their offerings for individual customers in the future. However as useful as these features may be, they don’t build long-term loyalty, because they do not generate the contextual offerings that demonstrate how the bank understands the customer on a one-to-one level.

Meanwhile, fintech start-ups that specialise in a digital-first approach to customer experience are growing rapidly but in constant need to finance their growth. Let’s take Monzo for example. We’re seeing more and more luminous orange cards dotted about the place, often accompanied by an ever-eager client base of young consumers demanding contextual services. They are capturing the next generation who will become a key profitable segment in the future as their financial product needs grow and become more complex. However, Monzo’s 2017 results show staggering losses. Ultimately, the demand is there, but start-ups are nervous to capitalise on their well-built customer loyalty through new services. However, features like account charges and optional overdrafts make banking one of the oldest ‘as-a-service’ industries. By expanding their offering to include products like the recently released ‘Revolut Metal’, the fintech movement can not only secure its existing customer base but also attract high net-worth customers looking for a digital-first customer experience.

However, the next hurdle may be regulation – it may be difficult for disruptive companies such as these to expand into long-life products like mortgages without the legacy systems, expensive permissions, and well-known brand name often found in older financial institutions. The fintech approach may be risky but there’s no doubt that it is shaking up consumer expectations significantly and catching the attention of the bigger, more ‘traditional’ financial organisations. Mid-sized banking institutions like the CYBG group are ideally placed to rapidly challenge the status quo without the funding risk. Building on a digital-first approach mixed with its regional/personal appeal uniquely places them to provide the seamless online and in branch experiences customers crave. By unifying these, staff can give a more human feel to banking and focus on the next best experience for the customer. 

As new regulations such as open banking and the switch guarantee ensure customers have more power to vote with their feet, banks need to be thinking not just digital-first, but experience-first. The attention and care that customers get from the in-branch experience may be just what the new challenger banks need to take on the incumbent banks. But the influence they gain through scaling up physical presence must be matched with maintaining their start-up style agility. The key will be providing the convenience of digital services and the familiarity of regional services, ensuring each strengthens the customer experience. Then they might be in with a chance of grasping the key to success for any financial institution – securing new customers for the long term.