Challenger banks have been steadily gaining in popularity over the past few years, with millions of people now choosing to bank with these digital disruptors. These new-age banks are not your traditional bricks and mortar institutions, but rather operate solely through online platforms and mobile apps, offering a wide range of banking services at a low cost. One of the biggest advantages of a challenger bank is speed – transactions are processed quickly and easily, without the usual hurdles that come with traditional banks.
The global coronavirus pandemic has impacted just about every aspect of life, including banking and payments. Challenger bank Monzo recently announced that it has started to furlough its employees, as relayed in TechCrunch:
“.. a limited number of Monzo’s U.K. employees are being offered voluntary furloughing for two months, as part of the scheme rolled out by the U.K. government to protect jobs during the coronavirus lockdown, which is already impacting many companies — not just Monzo — including several other fintechs I know of. Furlough ensures that employees still get paid even when work has decreased and that when things hopefully return to normal there is a job to come back to.”
This made me think about neobanks and challenger banks generally, and how they might weather this storm:
- Challenger banks that are considered auxiliary to a consumer’s primary bank account may experience a loss of clients. Consumers attracted to high savings rates or other perks will need the balances in those account to pay bills and other expenses if they are laid off from work or face a decline in wages.
- Some gig economy workers, like rideshare drivers who receive pay through a digital-only banking service, are also experiencing fewer payments. So while they may keep their account, balances may decline.
- Challenger banks that rely on interchange income from the debit or prepaid cards as a primary source of revenue will face a decline as consumer spending falls off a cliff.
- Consumers who feel traditional banks are safer in trying economic times may retreat back to where they feel their money is secure.
I don’t believe that challenger banks or neobanks are in danger of failing, but I think they are facing an uphill battle in the weeks and months to come.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group