Centuries of history and decades on the high street mean that traditional banks, like the UK’s ‘big four’ of Barclays, Lloyds, HSBC, and Natwest, are often perceived by customers to be the most trustworthy, appealing option. However, since the UK began authorising the opening of new banks over a decade ago, numerous challengers have emerged. And many of these banks are using advanced technology to create innovative financial services that attract new customers.  

Theoretically, these ‘neobanks’ have enjoyed great success. In the UK, around 20 million consumers now use a challenger bank, while Starling Bank, First Direct, and Monzo occupy the top three spots in the UK’s customer satisfaction ratings. However, of these neobank customers, just one in five actually use it as their primary bank account. Do these rising stars still face issues around long-term customer trust when compared to incumbents? And can they ever overcome them? Let’s take a look.

Banking within the comfort zone

Indeed, the stats show that while neobanks have captured customers’ hearts, they haven’t quite conquered their minds. Over two-thirds (68%) of Britons say they trust their traditional bank, while less than a fifth (17%) agree that digital challenger banks are as reliable and trustworthy. Customers also said they’d rather bank with a traditional institution over a neobank (47% vs. 11%) and that if both parties brought out the same financial services product, they’d pick the one offered by the incumbent (45% vs. 7%). Why is this?

One theory is inertia. Many customers open their first bank account around the age of 18, on the recommendation of mentors like parents, grandparents, and elders. These ‘influencers’ tend to be more strongly affiliated with traditional banks and make recommendations accordingly. And once you start a relationship with a bank as a young adult, there is often little motivation to change.

Meanwhile, headline collapses of some of the world’s biggest contemporary banks may have damaged trust in digitals further. In the spring of 2023 alone, the US suffered three of its four largest banking failures in history as First Republic Bank, Silicon Valley Bank, and Signature Bank all failed with combined assets of $556 billion. If traditional banks can survive hundreds of years and numerous financial crashes, why trust anyone else?

This lack of trust is a huge issue for the UK’s challenger banks and will take time to overcome. So, how can digital banks build confidence and acceptance and become the number-one choice for customers? Let’s take a look.

1. Offer irresistible customer experiences

Today, many of our day-to-day purchase decisions often boil down to price, particularly in the age of comparison websites and Tesco Clubcard offers. But with most banking services free to anyone eligible, it can be difficult to persuade customers to switch from their familiar banking provider. Instead, digital banks can earn trust and stand out from incumbents through experiences. As mentioned, neobanks already lead legacy banks in terms of customer satisfaction. So, it’s all about extending that lead by adding more outstanding services until it becomes almost impossible for consumers to bank elsewhere.

In particular, agile challenger banks can grow their market share by pivoting faster than traditionals to meet customers’ new, urgent needs. For instance, many Britons are finding it tough to manage their finances in today’s cost-of-living crisis. By harnessing customer relationship management (CRM) technology, neobanks can quickly analyse their customers’ banking data and build a 360-profile of their individual situation.

Then, the bank can connect those finding it especially tough with free in-house advisors or money management tools, providing personalised support to help them safely navigate the volatile economy. It’s a simple way to secure long-term customer relationships, with research from J.D. Power showing “overall customer satisfaction with retail banks rises 155 points (on a 1,000-point scale) when customers cite that their bank supports them during challenging economic times.”

Meanwhile, neobanks must also remain at the forefront of technology. From advanced, AI-powered chatbots to automated online onboarding, hyper-personalisation to multichannel engagement, offering services that meet and even exceed the expectations of digitally native customers like Gen Z will mean challenger banks become the number-one choice for younger customers as they grow into the dominant purchasing power generation.

2. Ensure stability in turbulent times

Alongside outstanding experiences, challenger banks must also offer safety and stability—particularly in today’s unpredictable economy.

Traditional banks are well versed in this, having fought off financial crises and crimes for decades. And while we’d expect tech-savvy digitals to be at the cutting edge of online safety, a 2022 FCA review found weaknesses in some challenger banks’ financial crime controls, with certain instances even revealing that “challenger banks did not have financial crime risk assessments in place for their customers.”

Fundamentally, protecting customers against threats from fraudsters and cybercriminals must be the priority for any digital business. So, neobanks must maintain their trademark agility while upholding the same levels of security as their traditional competitors. As banking failures and record inflation hit the headlines, challengers need to invest in solid infrastructures underpinned by security and transparency. Not only will this reassure customers of the safety of their money, but also the longevity of their banking provider.

3. Ultimately, put principles over profits  

In the past, traditional banks have often failed to maintain a positive public image, in part due to oversights like the miss-selling of financial products to vulnerable consumers and the handing out of bonuses during wider economic crashes. As the UK teeters around a recession, it’s even more crucial that challenger banks work to earn and maintain customer trust by doing right.

To stand out, neobanks should only target customers with products that they genuinely need. Here, hyper-personalisation can play a key role. Along with providing impartial financial advice, challengers can also offer subtle new support mechanisms—for instance, a smartphone notification that reminds customers how they can avoid added fees when making a purchase online.

Ultimately, trust is earned by showing someone that you truly care, and banking is no different. It’s also perhaps the area in which neobanks can make the greatest headways against their ‘big four’ rivals. After all, competing on size and profits is futile at this current stage. Through a focus on earning trust and loyalty and creating meaningful customer experiences, challengers can begin to chip away at the incumbents, until the numbers finally follow.