Bank brands hold firm as rivals enter market

The banking sector has been having an annus horribilis. The industry, once the crowning glory of the British business world, is being attacked not only by a critical Chancellor but also by brands such as Tesco and more recently O2, which are setting their own sights on a piece of the financial action.

Yet research carried out for Marketing Week by YouGov reveals that although tarnished, long-established banking brands are far from crumbling and still enjoy a remarkable level of loyalty and trust from their customers. Despite brands often cited as consumer favourites in their fields of expertise entering the financial market, these new entrants will have to work very hard to wrench consumers from traditional brands.

Sixty-five per cent of consumers polled by YouGov last week claim they would not consider taking out a financial product (eg, credit card, savings account or current account) with a supermarket or a selection of other non-traditional brands (see box, right).

It seems that while marketers are always told that trust in brands equates to commercial success, the financial sector does not appear to follow this rule. In a Morgan Stanley survey published last week, consumers claim they trust Tesco more than the banks and believe it offers better value. But a third stated they “definitely wouldn’t” or were “very unlikely” to open a Tesco current account and this figure rose to half when it came to taking out a Tesco mortgage.

This gulf between trusting a brand and actually using its financial services is picked up in an in-depth study by consultancy Lippincott on the emotions that consumers display surrounding banking. Lippincott found that consumers are no longer as angry with banks as has been reported.

When looking at which words consumers associate with their main bank, “loyalty” and “acceptance” rate highly, while words like “anger” and “contempt” – despite cropping up in media headlines – receive just a fraction of responses in comparison.

It appears that the UK is undergoing a similar cultural shift to the US, where anger at the banks spiked during the heat of the financial crisis and government bail-outs (MW 2 April), but has since flattened. And, with evidence that consumers are not keen to switch suppliers, the new non-banking brands moving into financial services have their work cut out.

Not that banks should rest on their laurels. While consumers may not be jumping ship as might have been expected, they are saying they want more from their banks.

Lippincott senior partner Tom Farrand explains: “The battleground is being set with a customer-driven agenda at the heart of it. It’s harder for the supermarkets and other new entrants than they may be assuming but that doesn’t mean they can’t win, especially if banks are slow.”

As a result, Lippincott has proposed “eight concepts” for banking services innovation in order for the banks to beat off the advances of the supermarkets and telecoms brands. They asked consumers which ideas and services would most appeal to them (see box, right).

The eight proposals are derived from a mixture of bank account propositions that already exist and some hypothetical offers, based on the way the market might evolve.

When Lippincott put these concepts to a group of consumers, they discovered that while each proposition received a certain level of consumer interest, no single idea was overwhelmingly the most popular.

Farrand says: “It’s not one size fits all; different customer groups want different things. This picture says it’s fairly evenly spread and yet what we’ve actually got is a handful of institutions all offering banking in virtually the same way.”

Understanding customer needs is one thing at which Tesco excels. Often cited as an expert in mining customer data and producing targeted offers, the established banks are right to consider the supermarket’s aim to put “the Tesco into Tesco Personal Finance” a threat.

Although established banks also benefit from a high level of consumer inertia, if Tesco combines shopping benefits and rewards customer loyalty – something banks have historically been poor at – then it’s easy to see that becoming a very attractive proposition for consumers.

Tesco Personal Finance head of communications Matthew Dransfield reports: “We feel that there is a real opportunity to restore consumer confidence by being transparent, offering simplicity and rewarding loyalty.”

The company plans on wooing customers – even those not angry at banks – carefully. “Our customers have told us that they trust us with their money. Over the past six months, we have seen our savings business grow significantly. As we look to move towards a full service retail bank, we’ll listen to our customers,” says Dransfield.

The latest entrant into the sector, O2 – which, in partnership with NatWest is introducing prepaid Visa cards this month – says it is “putting its toe in the water”. O2 marketing director Alistair Johnston says: “We’re acutely aware the communications sector around just voice and text has reached its [full] size and if we’re going to grow the business then we have to find new areas.”

He sees the O2 brand as bringing innovation to the sector. It may not have the long history with finance of some bank brands but he thinks there is an opportunity to build up consumer trust through its mobile financial products and then introduce new concepts.

“We think we can offer new ways to manage money. In the future people will be walking around with their phones, they won’t have cards in wallets,” he predicts.

Johnston describes a world where consumers will pay via contactless mobile phones, which will have security features such as fingerprint scanners and will work across multiple products, giving real-time connectivity.

The telecoms business isn’t entering the sector without backup from a financial institution, however. Johnston admits that “O2 couldn’t really deliver financial services alone” – for the moment at least.

While consumers still see banks as their primary relationship in the world of finance, O2 sees a strategic sense in being allied to an established brand. Johnston says: “We’ve teamed up with NatWest because as much as the bankers have been through the wringer in the last couple of years, consumers still have trust in a banking brand.”

Another mobile business is also seeing the sense in extending into financial products; again, with a bank in tow for the time being. Phones4U, in partnership with Newcastle Building Society, is launching two prepaid MasterCards this week, one aimed at travellers and the other at teenagers.

Although partnerships such as this are currently enabling the telecoms companies to enter banking, should a new entrant establish sufficient gravitas in the sector, it may well go it alone. It’s notable that Tesco Personal Finance was a joint venture with RBS until the supermarket bought out its partner for £950m last year.

While they might be feeling more confident following the YouGov and Morgan Stanley research, banks should be aware that in partnering with a mobile brand to provide a better service to their customers, they are helping a future competitor establish itself.

But a bigger worry for banks than customers switching to non-banking names like O2 and Tesco is customers moving away from the bigger names in the sector to smaller companies. Co-operative Financial Services claims it has seen a “massive increase” in customers switching from the big names to smaller ones.

Specifically, in comparison to last year, there has been a 636% increase in RBS customers switching, 236% in HBOS and 165% in LloydsTSB.

While the Co-op has only a market share of 3-4% in current accounts, it believes this kind of movement is still unprecedented. Co-operative Financial Services head of corporate affairs Russ Brady says: “We’ve never seen anything like it.”

Brady believes the Co-op’s banking services have benefited greatly from an overarching Co-operative Group campaign that has helped demonstrate the underlying strength of the group in many areas, rather than just finance.

This taps into consumer demand for more transparency about who is behind their financial brands. The $65bn Bernie Madoff fraud, which greatly affected people in both the US and UK, demonstrated that there is too little clarity about where and how money is invested and by whom.

Spanish group Banco Santander is a major beneficiary of raised consumer awareness of the underlying strength of the business behind its brands. The group has advertised itself heavily as the safe hands behind many of the high street’s banking names; its profits jumped 30% for the first half of the year, beating the gloom elsewhere.

Santander avoided the worst of the sector’s excesses by maintaining conservative lending practices and as a result, it has been able to take advantage of Britain’s banking crisis by picking off a string of UK brands on the cheap. As well as Abbey, it also owns Alliance & Leicester and Bradford & Bingley and is currently rebranding them all under the Santander banner, removing all trace of any tarnished British names.

For NatWest – part of Royal Bank of Scotland Group, arguably the hardest hit UK banking group in terms of damaging publicity – the partnership with O2 is simply one example of several service-led ideas it is offering aimed at re-establishing its position in the minds of consumers.

NatWest brand director, marketing and innovation Richard Taylor says: “Our customers are looking for more support and assistance from their bank. In essence, they are looking for a more helpful bank. This is the thought that led us to the new Helpful Banking campaign that we launched in November last year, and it’s the thought that sits at the heart of everything we do.”

Barclays appears to following a similar tack. UK retail banking marketing director David Jeppesen says: “We know customers want good value, but value alone isn’t enough; they also want to be more in control of their finances. Barclays provides tangible ways in which customers can do that. At the same time, Barclays understands the importance of and continues to invest in technology – but not just for technology’s sake.”

The Lippincott survey appears to back up the view that while consumers are clearly demanding better tools and access to their money, there appears to be little appetite for banks to turn themselves into bits of application software. Consumers seem to still want someone they can talk to and they want their banks to take a constructive role, looking over their shoulder.

HSBC, the world’s largest bank, is aiming to capitalise on the residual reliance of consumers on their bank brands before it’s too late. Philip Mehl, head of marketing at HSBC UK, goes as far as to say he understands why consumers might feel negative towards the sector. “Some brands behave as if they are only there for the customers in the ‘thick’ times and when it gets a bit ‘thin’, as it has in the last two years, they have changed what they offer without engaging the customer. This can promote anger in the customer as they feel let down.”

Mehl says HSBC is very aware that the strength of the brand is tested and can be most quickly enhanced at these “key moments of truth”. 

Instead of reacting tactically during the height of the financial crisis, Mehl says HSBC has redoubled its efforts in executing the “same consistent, enduring” strategy – ensuring that it keeps to its commitments and HSBC customers get what they expect.

He explains: “The tendency in any recession is to go into ‘lock down’ mode and this is precisely not what we have done. First, if you don’t invest for growth, when it does arrive you’ll be slow to take advantage of it, and second, innovation can take time to come on-stream so it needs to be planned well ahead.”

While Lippincott’s proposals suggest banks need to innovate with their offerings to remain on top in the long term, Mehl is more cautious. “The wrong type of innovation is often tactical initiatives that take advantage of the current situation but arrive too late to be meaningful for the customer or fail to reinvigorate the brand’s positioning,” he warns.

Mehl says HSBC’s brand innovation is centred on improving customer experience; refurbishing branches, raising the standard of the advice it offers and other long-term strategies. It’s more about being really good at its core business than adding anything with frills for its own sake. “We are focusing on customers, not prospects,” he continues. “We are not about ‘selling’ any products to anyone; we are investing more through CRM and one-to-one permission-based marketing, as providing solutions to customer needs can be a positive experience for them and not just a ‘sale’. We are doing less campaigning and more sustaining.”

Mindful of the sensitive public mood, Mehl adds: “We have avoided jumping on to the bandwagon of telling customers how to run their lives better in a recession, as we have learned that customers want banks to run their own businesses better before we start throwing out unsolicited advice.”

Just how well the banks are running their businesses will become clearer over the next couple of weeks as we enter the reporting season, with all the major UK lenders due to report half-year results this week. Results will be closely scrutinised for signs of a recovery, especially by the Government, which is keen to offload its stakes in RBS and Lloyds.

Analysts claim that the banking sector is unlikely to rise to its former power any time soon with an increase in bad debts expected and mortgage defaults on the rise. But despite this, banking brands can perhaps take heart.

Bankers may never again be the princes of society, but the attack by new entrants is currently being repelled. For now, at least, it appears the finance sector still has loyal subjects.