Digital challenger banks and Covid-19 – chance or challenge?

The Covid-19 pandemic has forced even the most reluctant customers to start using digital banking applications. Once these customers grow accustomed to the convenience of online banking, they may not feel the need to frequent physical branches as often, an important consideration given traditional banks’ recent cost-cutting drive.

While this change in the habits of banking customers should be positive news for online challenger banks, the story is not so simple. According to research by Jeffries, digital-only challenger banks have been losing market share of app downloads to traditional banks since the onset of the pandemic. Even before the pandemic, the majority of UK customers were not using digital challenger banks for their primary accounts, with customers preferring the perceived safety of traditional banks and the option of physical branches. In addition, challenger banks have seen key revenues from exchange fees drop during the pandemic. For instance, Monzo has reported that the drop in overseas travel has caused a sharp decline in its primary source of revenues — the transaction fees generated whenever a customer pays with a Monzo card. 

The results of the Digital Finance Forum (DFF) survey show that the majority of UK FinTechs, including digital challenger banks, do not believe that the government has sufficiently supported the sector during the Covid crisis. It reports that many FinTech businesses feel that the government response is favourable to traditional banks. The DFF also reported that many FinTech businesses complained about delays in obtaining regulatory authorisations and that changes are needed to ensure that challenger banks are on a more equal competitive footing to traditional banks.  

In order to survive and grow their businesses, digital challenger banks and FinTechs should focus on consumer needs, including improving their regulatory status and the development of new products. One of the most prominent examples of FinTech businesses finding new opportunities is Covid Credit, an online tool allowing the self-employed to certify their past income by sharing banking data. Monzo, on the other hand, is relying on new product offerings, such as business and premium accounts to offset some of the declines it has experienced over the course of the pandemic. Starling has been successful due to its efforts to expand its business offerings amid the crisis, along with its participation in UK government-backed loan schemes, through which it lent £903million by the end of July. 

Our Financial Services Regulation & Funds team advise on all legal and regulatory aspects in respect of FinTech (including communicating with the FCA and PRA and advising on the development of new financial products). We operate in conjunction with our Commercial team, who can advise you on the contractual, licensing and ownership aspects of FinTech services. Please do get in touch if you have any questions.