Since roughly the mid-2000s, the nature of banking has been changing. Faith in the high street names certainly took a hit after the financial crisis of 2007-08 - so much so that the majority of customers distrust them over a decade later. So, when an alternative appeared in the form of neobanks, they very rapidly gained popularity.

The financial headlines have seen regular hype for these challengers since then, with statistical landmarks including record account opening rates and processed spending. There is even some evidence that this is not just the refuge of low-earning customers who were particularly hard-hit by the financial crisis. An Economist article noted that a third of accounts at Monzo - one of the UK’s leading neobanks - are gaining £1,000 or more per month in credit, suggesting that such challengers are becoming the primary account for their customers.

Is there a battle at all?

There is certainly no doubt that challenger banks are outstripping the incumbents when it comes to account opening - there is no shortage of proof to support that. Recent studies suggest that 44 per cent of Britons will have a digital-only account with the likes of Starling, Revolut and Monzo within five years. But is it genuinely true that these accounts are replacing the established retail banks as the primary account of their holders?

It is worth noting that, as impressive as that the Monzo statistic quoted by The Economist is, it does not compare that favourably to similar stats from incumbent retail banks. Indeed, Monzo’s definition of primacy - a monthly account credit of £1,000 or more - is only about half the UK average. There is even a noteworthy counter to the statistics around account opening. While it cannot be doubted that challenger banks are seeing a lot of new customers, incumbents have still been gaining a steady stream of new customers of their own. In other words, challengers have not completely pushed the incumbents out of the picture.

The battle for customer engagement

Given the conflict of statistics, it is hard to tell who exactly is winning the battle for account primacy, at least in the short term. For now, it seems that the incumbents have the scale and this history to keep attracting customers. However, few wars are won at the first encounter and the challengers are proving the dominant force in some of the small but significant engagements - especially those related to how they interact with customers.

The reputation that incumbents enjoy for size and stability has its second edge - they also have a long and colourful history for providing a dreadful user experience. While three quarters of the 50 largest global banks have pledged to some form of customer-experience transformation, they have a lot of ground to regain.

Challengers, being tech-led, often have a much fresher, more convenient and more user-friendly user experience. This headstart the challengers have over the incumbents will likely lead to them gaining the trust that they currently lack, particularly as incumbents lose customers to frustration at their inconvenient user experience. Admittedly, this shift is currently barely a trickle. The Current Account Switch Service’s usage figures for Q1 2019 suggest that the net gain of account primacy for Monzo and Starling combined was only around 10,000. However, gentle trickles can quickly become raging torrents and this small start could be the beginning of a trend.

The battle for savings accounts

Challenger banks are not only gaining ground when it comes to user experience. Recent research has found that they are making some significant headway against incumbents in the field of savings accounts in the UK. In fact, a fifth of British customers told the researchers that they were considering moving their savings account to a neobank. However, it is worth noting that the same study found that only 16 per cent said they would consider moving their current account.

The list of motivators behind these results makes for especially interesting reading. Understandably, the majority (63 per cent) said that challengers offering better interest rates was the main motivating factor. By contrast, the reputation of the bank was only the key factor for 13 per cent of respondents, suggesting that this hard-earned and much-flaunted advantage for mainstream banks may be losing its allure.

Additionally, only 35 per cent said that they would be more likely to buy financial services from their primary bank rather than looking elsewhere. This suggests that the simplicity of opening a new account at a challenger bank could be a factor in drawing customers away from incumbents.

The brutal reality

The simple fact is that challenger banks have a significant way to go before it can reasonably be said that they have taken a significant slice of the market away from the incumbents. Indeed, a relatively recent report from banking software company Temenos found that the battle continues to rage with no clear victor evident yet. Even the battle for user experience is becoming less one-sided, especially with incumbent banks reprioritising their digital offerings in response to COVID-19. Frankly, the incumbents have vastly superior resources, centuries of trust and world-spanning size on their side, which the challengers simply cannot compete with.

Yet.

However, what the challengers have achieved in barely 15 years, while relatively minor when compared to their competitors, is certainly not to be scoffed at. If they can continue to grow trust among customers and win the little battles at the periphery, the greater struggle for account primacy may yet swing in their favour. However, that assumes that they can maintain their momentum in challenging times - a feat that some commentators doubt will be possible.