Will branchless Challenger banks struggle to recruit customers given the concerns about banking technology?

banking technology in the Wild WestThe failure of banking technology has become a wearyingly familiar story with problems this year causing chaos for customers of TSB, Lloyds Bank, Halifax, NatWest and RBS successively and the Visa system in June.

Not only were customers, both individuals and SMEs, unable to access their money, use their debit cards or pay salaries, but in some cases, such as TSB during its system upgrade earlier this year, customers were made vulnerable to fraud.

While this has largely been a problem for the mainstream banks it has affected customer attitudes as a survey by data analysts Consumer Intelligence revealed (as reported by specialistbanking.co.uk).

Stand-out findings included that 25% of online banking customers had experienced banking systems failures in the past year and that 49% of UK adults claimed to have changed their behaviour with regards to online banking due to security concerns. Just over a quarter of respondents said they now carried more cash and 82% said they were more careful about their data, while 43% said they would be put off applying to a bank which had suffered technical issues.

According to Andy Buller, key account director at Consumer Intelligence, bank IT systems are feeling the pressure because of the expansion of digital banking and because “banks are having to work with and update old systems and while they are investing in new technology, there is often a race to be first, which can mean vital testing is not carried out.” He warns that more problems are likely.

Individuals and SMEs are constantly being pressured to use smart phone and internet banking technology as the High Street banks continue to close smaller, less cost-effective branches and even ATMs are disappearing in some locations.

But, leaving aside the preference of many customers to still be able to speak to an actual human being in a local branch, the fact is that internet and mobile phone connectivity in some rural locations is still often patchy or of insufficient strength.

Into this landscape have come the digital Challenger banks most of which do not have branches and are largely based on Fintech banking apps.

The branchless Challengers include Monzo, Starling, Atom, Tandem and Revolut. Their main selling points are that opening an account is quicker and easier, that their fees are lower, that they are able to introduce innovative features more quickly and that they can also be better at security and preventing fraudulent behaviour thanks to their more intelligent analytic capabilities.

Many are relying on the regulatory change introduced early this year introducing Open Banking, which is designed to increase competition and forces banks to share their customers’ data with third parties that can provide financial services if their customers request this.

To be fair the many breakdowns in banking technology also prompted the regulators, The BoE and the FCA (The Bank of England and the Financial Conduct Authority) to impose a deadline of October 5 this year, to detail how they would respond if their systems failed, suggesting that two days is an acceptable limit for disruption to service.

If the contingency plans put forward by banks and other financial institutions are judged to be unsuitable, they could be ordered to make their systems more resilient.

It is early days for the Challengers as they try build their customer base by offering cheaper fees but in many cases have not yet developed business models beyond grabbing market share.

However, they may struggle until customers are convinced that their money is safe and access to it is reliable.

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