Kearney: Digital Banks Challenge Traditional Loyalty

Kearney's latest European Retail Banking Radar reveals a complex picture of customer loyalty in the face of rising competition from digital-only banks and fintechs. 

The comprehensive study, which surveyed over 6,600 customers across 13 European countries, sheds light on switching behaviour, the growing threat from digital challengers and strategies for traditional banks to maintain their market position.

“Most Europeans, about 55%, still bank with only one institution,” says Sarah Thompson, lead author of the Kearney report. “This loyalty is particularly strong in Austria, where 77% of bank clients hold all their financial products with a single provider.”

However, the landscape is shifting. Digital-only banks and fintechs are making significant inroads, particularly among younger demographics. The study found that 9% of Europeans now have their primary account with a digital bank or fintech, with penetration highest in Germany at 18%.

The digital banking revolution gathers pace

The rise of digital-only banks is reshaping the competitive landscape. Revolut, for instance, surpassed 45 million clients globally in June 2024, while Monzo boasts more than 9.3 million clients in the UK alone.

“Digital banks and fintechs have high penetration among the younger demographic,” Sarah notes. “Among clients who have their primary relationship with a digital bank or fintech, 35% are younger than 35, and 55% are younger than 45.”

This trend is further amplified by customers' increasing reliance on digital channels. Kearney's research indicates that almost 60% of Europeans now research and purchase new financial products remotely.

The study also reveals that digital banks are not just attracting customers for basic services. Sarah points out: “Around a quarter of the primary customers of digital banks and fintechs own an investment account with such institutions, which is more than the 15% average among the primary customers of traditional banks, indicating that revenue from investments might be an area for banks to watch.”

Traditional banks retain key advantages

Despite the digital onslaught, traditional banks still hold several trump cards. Customer satisfaction remains a significant barrier to switching, with 45% of respondents citing satisfaction with their existing bank as the primary reason for not considering a move to a digital-only provider.

“Safety and trust are especially relevant to customers' reluctance to switch to a fintech,” Sarah explains. “Many feel that their money is safer in a traditional bank, or they value the ability to speak to a person or visit a branch.”

The report also highlights the 'stickiness' of traditional banking relationships. A remarkable 73% of European bank clients have held their primary current account at the same institution for five or more years. Dutch customers prove the most loyal, with 73% maintaining their primary banking relationship for a decade or more.

Strategies for traditional banks to defend market share

To maintain their edge, Kearney's report suggests several strategies for traditional banks. 

Firstly, as customer preferences continue to shift towards digital channels, state-of-the-art digital banking is now a necessity rather than a differentiator. Banks must continue investing in their digital capabilities to meet evolving customer expectations.

Secondly, the report emphasises the importance of customer experience. Poor customer experience is a top reason for switching, while satisfaction is the primary factor in retention. Banks that can consistently deliver superior experiences across all touchpoints are likely to maintain stronger customer loyalty.

Financial incentives and word-of-mouth recommendations also play a crucial role. Sarah notes: “A combination of new customer bonuses and bonuses for existing clients who help recruit new clients have proven successful across multiple markets, including France, Germany and the Czech Republic.”

Lastly, the report suggests that traditional banks should focus on high-value products where they retain a competitive advantage. 

Sarah adds: “Although decisions about how to pay for day-to-day purchases might be spontaneous, buying the next home or planning for retirement are major life decisions where trust, personal interactions with understandable explanations and tailored solutions play in favour of traditional banks.

“The competition continues to evolve their offerings and propositions. Some digital banks and fintechs are no longer small institutions operating in an experimental mode. They've rapidly gained scale, becoming the provider of choice for millions of Europeans and rivalling some of their traditional peers in size.”

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