Economic volatility has ushered in a new wave of financial concern for the UK. Customers of banks who lack in-depth financial knowledge are now relying on banking providers to help inform them to make wiser financial decisions as inflation continues to surge. Guiding customers through the cost-of-living crisis is vital for the well-being of customers and the future market solidification of institutions.

To understand the dynamics at play in further detail, GFT’s second quarterly ‘Banking Disruption Index’ focuses on the continuing financial anxiety currently experienced in the UK. This research aims to provide an accurate illustration of the current economic landscape before illuminating how banks’ service offerings help alleviate financial anxiety.

Bank customers in the current economic landscape

In light of Brexit trade agreements, the Covid-19 epidemic and Russia’s invasion of Ukraine, the ONS stated a 40-year high in year-on-year inflation, rising 9.2% from December 2021 to December 2022. In 2023, fuel prices have softened but grocery prices continue to rise at the same time as the real value of pay has failed to keep pace and remains down by 2.5%, placing many individuals in challenging financial situations.

The impact of this on consumer wellbeing has been significant. Perhaps the most important insight from our latest Banking Disruption Index is that 77% of banking customers are experiencing anxiety when checking their mobile banking app. The figures are worse for the younger generation, rising to 86% of those aged 16-25 and 25-35 and 87% for 35-44-year-olds respectively.

There is a difficult balance to strike for consumers at the moment. On the one hand, the challenging financial climate and a drop in the real value of pay means diligence with money has never been more important. In fact, more than a third (37%) of customers check their banking app every day, whilst a further 27% check it every two to six days. Yet, in doing so, there is a very real impact on their mental wellbeing, which is indicative of how seriously the cost-of-living crisis is affecting consumers. It is clear that customers are attempting to understand their finances and find solutions to help them manage their money. Customers need banks to do the same.

How banks can support their customers

New banking services need to be geared toward transparency, increased control and real-time communications. Our Index explores this further.

Customers want banks to take a more proactive approach in communicating with them as the importance of incomes and outgoings increases. More than half (57%) of customers would like their bank to proactively contact them if their spending habits point towards financial difficulty. This indicates a desire for higher customer-bank collaboration. They understand that to make the best financial decisions they will need to leverage the expertise.

In particular demand right now are notifications around upcoming bills and whether they can be paid on time (26%), daily or weekly insights into expenditure (22%), and instant notifications after spending (21%). Banks possess the systems to roll out such technical innovations within their banking apps, but according to these statistics, either have not done so or have not done so effectively. The current economic challenges show no sign of disappearing, so banks should look to implement these innovations as soon as possible, adopting a ‘reactive’ approach to market challenges.

What is ‘reactive’ banking?

Banks' legacy systems, protocols and regulatory-compliant ways of working have long created an effective, yet ultimately rigid financial sector. Challenger and neobanks, such as Starling, Monzo and Tandem, have highlighted the benefits of a ‘reactive’ banking provider. By reactive, we refer to a service provider that can identify economic or market changes in line with customer demands, then produce rapid offerings that satisfy the need. Doing so fosters stronger customer-provider relationships.

GFT’s first Banking Disruption Index highlighted that 48% of people do not trust traditional banks to help them manage their finances during a recession. In contrast, reactive neobanks have surged when it comes to adoption; Statista figures indicate user penetration will be 27.8% in 2023 and is expected to hit 40.4% by 2027.

To remain competitive, the traditional banks that tend to have a slower offering innovation process need to adopt a more reactive approach to help their customers when it is most vital and also ensure their market position for the future. The question remains how banks can and should go about this in a way that benefits the resilience of customers and their market position.

Understanding customer demands

For banks to correctly realign to a more reactive approach, they must understand what they are reacting to. Fresh research, like our Banking Disruption Index and other authoritative reports, such as McKinsey’s contributions, can help the financial sector as a whole better understand the nuances of banking preferences, customer habits, and market changes. Equally, loyal customers will have a more intimate outlook on what their specific provider is doing well and where it can improve, thereby helping the bank decide where resources should be directed going forward. Within this, customers at competitor banks, as well as the unbanked population, can share crucial insights.

If not already in place, banks should implement systems  to analyse the demands of current customers on an ongoing basis. To optimise any new offerings, a speedy and robust rollout strategy needs to be implemented. Whilst customers displayed a healthy 79% satisfaction rate towards their current bank in the last quarter of 2022, it shows that with the current diligence and offerings rollout, customer satisfaction still has room for improvement.

The optimisation of banking apps

Mobile banking apps have changed the way we all manage our finances. In-branch visits have decreased as customers have grown accustomed to being serviced via API dashboards integrated into native or embedded finance platforms. However, it is clear that these apps are largely underperforming in terms of offering breadth and diversity of service. Barely half (52%) of 16-24-year-olds say that their banking provider is keeping up with technology.

Customer perception and the economic downturn are creating pressure for better banking apps. Banks need to start offering their expertise, produced alongside sophisticated yet easy-to-use analytics, to remove financial management burdens away from their customers. Bill payment is of key concern to customers. The rollout of software capable of understanding individual user cashflow, key payment dates, and the relationship between the two can provide impactful personalised insights. Neobanks and other budgeting apps do this already, so the rollout of similar functionality for the traditional banks must be fast, or else they risk a decline in customer retention.

With each transaction closely deliberated by the customer, banks need to increase the frequency of notification-based services. Demand for daily or weekly insights into expenditure and notifications every time a card is used is a significant, yet easily implemented change. Customers are seeking financial security, and knowing their bank can support them with increased transparency around cashflow is both useful and comforting. Whilst financial literacy is still relatively poor in the UK (at 67%), this provides an opportunity for the banks to do more to assist their customers. Failure to do so will result in increased adoption of neo and challenger banks who already provide granular insights and personalised dashboards to suit individual customer needs.

Increased communication

What customers are really seeking from their bank is increased communication about their finances and better tools to help them manage their money. Banks have seamlessly provided their services in the background, but now is the time for them to become more visible and proactive. Banks should increase all methods of communication in line with customer preferences. Communication should not end with the implementation of specific customer desires, but should proactively extend functionality to create additional supportive services as we proceed through the looming recession and beyond. A relatively low level of ‘hand-holding’ is required by customers in a healthy economy, but as the economic situation worsens, banks must do more to provide additional help; offering insights, advice, and a greater level of overall customer care.

Ultimately, banks must acknowledge changing customer dynamics in a more collaborative way and demonstrate to all stakeholders that they are willing to adapt and innovate their services to quash rising financial anxiety. Doing so will not only support their customers in these difficult times, but will also help combat the challenges of attrition to the new cloud-native neo and challenger banks who are successfully targeting those very same customers.