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How Challenger Banks are Coping with Crisis

I am secluded in a room as I write this. My two-year old daughter is loudly voicing her displeasure with confinement despite my wife’s attempts at entertainment. Her younger sister is also restless. It’s a Wednesday afternoon.

Ordinarily, I am not around for this noise on a weekday but the global pandemic has left me with no choice. As the office is on lockdown, my colleagues and I are participating in the largest work from home experiment ever. While many conversations take place by phone or email, we also make good use of Google Hangouts; I am admittedly curious of what’s in the video backgrounds and how my colleagues live.

As the world copes with the virus, companies everywhere are in survival mode. Self-quarantine, social distancing and travel bans have brought businesses to a halt. Though not as hard hit as other industries, challenger banks are nevertheless impacted as well. Here’s how some of them are managing.

Pressure on Rates

An attractive savings rate is a common market entry tactic for new banks. Predictably, the introductory offer garners strong interest from customers, driving up awareness in the young brand and account openings. As the coronavirus takes a toll on economies, central banks rush to cushion the downturn.

Their usual tool is to drop interest rates to promote lending and growth. The decision has an adverse impact on challenger banks. As rates drop, they come under cost pressure as the reserves held at the central bank earn less. As a result, the attractive rates they pay become a large cost burden. This is even truer for those that don’t lend.

Australia offers a great example of this. Xinja entered the market with its Stash account paying 2.25% on deposits, a market-leading rate. When the Reserve Bank of Australia cut interest rates, the challenger bank was forced to act. Instead of reducing the advertised rate for all, it stopped accepting new Stash clients. Peers followed: 86 400 and Up lowered their rates from 2.25 to 2% whereas Volt dropped from 2.15 to 1.90%.

Fake News

Misinformation campaigns relating to blame and miracle cures are running rampant. A sad side effect of the fear and uncertainty generated by the virus.

Challenger banks haven’t escaped nefarious claims. Two were the subject of rumours making the rounds of social media about their impending demise. Revolut refuted allegations by assuring customers that it’s on solid footing and reminding them of their recent fundraising round.

Monzo CEO Tom Blomfield, who took a 12-month pay cut, reassured customers with his personal insight of the situation:

Calm and Patience

As employers implement work from home policies, everything from videoconferencing to Netflix sees an uptick in usage. That’s also true of banks whose digital portals come under heavy load with all services moving online. This inevitably leads to more customer inquiries, whether from first time users or seasoned ones with poignant questions, putting additional pressure on support centers.

In response, UK business bank Tide called for patience, acknowledging potential delays in responding to everyone in light of higher than usual queries. Said the CEO:

“Please forgive us if at times we’re busy dealing with so many queries that there’s a delay in our response times. As you can understand, many members have questions or concerns and we’re helping everyone as swiftly as we can.”

To alleviate stress some might be feeling in unprecedented times, N26 has a unique solution. The German challenger bank is offering premium and Metal customers a free 3-month membership to Headspace, a popular mindfulness and meditation app.

Sometimes keeping the lines of communication open is the best way of reassuring customers. Though not a bank, Canadian robo-advisor Wealthsimple offers a good example. The company, which recently introduced a hybrid savings and spending account, wasted no time in reaching out when the market suffered heavy losses in the face of escalating bad news. Portfolio manager Michael Allen’s message preached calm and level-headedness: “Drown out the noise and stop reading the newspaper, or at least the investment section,” Allen said. “Especially during this time because that can lead to emotional reactions.”

What’s Next

Challenger banks are well positioned to weather this crisis. With no physical presence, they have escaped difficult logistical decisions like closing branches. And as digitally native institutions, moving their staff to home offices has likely required less planning and effort.

But as clients of financial institutions become better accustomed with the offerings of their current bank, will the incentive remain to consider challengers once the crisis subsides? After all, many have dedicated resources to upskill digital offerings. Data also shows that customers accessorize their main bank relationships with challengers. Customer behaviour developed during this pandemic will shape the course of banking for the coming years.

All thoughts are my own.

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