The Customer Retention Strategy
This segment of banks has an inherent advantage of technological agility, superior user interface (UI) and user experience (UX). They also have a pricing advantage where they cross-sell services and products via affiliations and pass on some of the commission earned in the form of rebates to consumers.
Challenger banks have used this advantage over traditional banks and have been able to rapidly acquire new customers and also to keep them engaged with innovative approaches. An example of this is the UK-based challenger bank, Monzo, which uses a unique approach focusing on transparent customer engagement to build customer loyalty and grow its market. Monzo involves its customers in almost every part of its operations, including asking customers for feedback on product launches and fees, allowing them to invest in the company through equity crowdfunding rounds, and even sends every customer a copy of its earnings report. It also holds community events across the UK.
The challenger bank has on-boarded more than 2 million users since it was established in 2015.
NPS is, again, the preferred measurement for customer retention. The other measure that challenger banks track regularly is the customer lifetime value and cross buying rates which gives them a customer-centric view of the rate of involvement with the bank.
That being said, even the in-vogue challenger banks and digital banks are facing their own set of challenges of retaining customers that they have rapidly on-boarded using aggressive viral marketing and referral marketing strategies.
The Lifetime Value (LTV) of a challenger bank’s customer is lower relative to that of a traditional bank because customers who typically sign up with challenger banks do not use the account as their primary salaried account. In addition, customers of challenger banks which are largely millennials, with their low earnings profile, limit the potential for up-selling or cross-selling of asset-based services that the larger banking counterparts are successful in achieving. It means that challenger banks have to take additional effort to ensure that customers transact through their platform. This could become difficult for challenger banks as traditional bank start to catch-up on their technology upgrades and also due to competition from large non-banks who, by virtue of the Open Banking regulation, have taken on the role of TPPs. These TPPs, such as online aggregators, e-commerce platforms, etc. have an equally competent UI and UX with a much larger customer base, ergo, more massive customer data sets.