[!&…] finchat… can challengers break into the majority (innovation adoption cycle)?

I will be referencing the stages of the product / innovation adoption cycle, so here’s the graph for reference:

image: Sergei (me on medium) / @goforsergei (me on twitter)

Cliffnotes: there are five archetypes for adoption of new products or services, ranging from those who are the very first to use something because they don’t mind there being bugs and they love ‘being first’; all the way down to those who won’t adopt a new product or service until it’s been saturated in the mainstream and has potentially become obsolete (the stereotypical grandparents).


me: you should really check out [insert challenger / neo bank here], you can sign up within 5 minutes and have your card in a couple days
them: och that’s ok, I don’t mind waiting or going into branch — I’m not really good with ‘digital’

I’m not good with ‘digital’

This is a common theme when it comes to pushing digital on a predominantly non-digital population.

I say ‘non-digital’ purposefully. While digital ‘things’ are almost ubiquitous these days, computer literacy and our ability to interact with or understand these digital things are still rather low, and a byproduct of that is lower trust — trust in computing, in digital, in web, in mobile; people don’t trust what they don’t understand.

Many customers aren’t comfortable with digital, and many more have also been burned by the woeful state of digital capability and the subsequent service that legacy institutions had provided to them. I mean, if you had an account with Halifax or HSBC or TSB, you could completely understand why customers would believe that all banks were like that (awful digital services).

I don’t need that… I don’t know what that is

One of the challenges here is, because customer expectations are so low, they don’t demand more. Another challenge is ignorance — if customers don’t know what they can have, they also won’t demand it. And if the majority of the customer base don’t demand something, or even know it is possible, then businesses (generally) won’t do it.

The two strongest competing forces in business are supply and demand — and supply needs to meet demand. When it’s to do with tangible goods or products whose trends are reasonably predictable, that’s easier to understand — when the new iPhone comes out, Apple needs to make sure they are producing enough units to meet the demand of the people looking to get their hands on one, and they roughly know how many units will be bought.

It gets more tricky when you’re talking about the unknown, whether that’s a new brand entrant into the marketplace — think OnePlus’s invite-only initial releases — or a new product entrant — think Revolut’s innovative use of tech to become one of the first mobile-only neobanks.

The latter is probably best described by the old addage if you build it, they will come, which suggests that supply can create demand. It’s a risk and is very dependent on awareness — of the brand, the product, the tech, of its utility and its value. How people interact with and see the value of tech and mobile is a huge dependency on challengers banks’ potential success.

This is one reason why, although I believe in the potential of the challenger bank and fintech revolution, we still need to be sceptical about the long-term implications of the whole thing.

The ‘Big Four’ control such a huge proportion of our banking in the UK and numbers around switching banking providers are really low, bringing many commentators to suggest a switching ‘apathy’. (And, even when they do switch, many customers move between the big four!).

Combine a quadropoly with switching apathy, market ignorance, digital capability supply attempting to create demand, and digital (il)literacy, and what you get is the potential for a rather modest market cap on fintech challenger banks’ customer bases (the innovators, early adopters, and a proportion of the early majority).

The proof is in the pudding — legacy challengers have barely made a dent in the big four (so far), which is why the potential mergers are a big deal. But even combined, they will barely appear over the horizon of Lloyds or RBS UK customer base.

Innovation adoption cycle

Traditionally, there is a ‘chasm’ between the early adopters and the early majority, and the crossing of the chasm is one indicator of a successful product launch and its subsequent adoption — can your product enter the ‘mainstream’.

However, I’d suggest that there’s actually a chasm for challenger banks between the early and late majorities also, because that’s the sign of scale. The early majority will still be split between using challenger banks and fintechs as secondary products (such as holiday spending) rather than their primary daily spending service. This is because the early majority are a continuation of adopters but not necessarily the converted. When it comes to primary spending accounts, it’s not the same as mobile phones — when you get a new phone, you generally stop using your old one, but it takes more to close or stop using your old account than just signing up for a new one.

While the innovation adoption cycle follows a normal distribution, I’d also suggest, given my claim that the early majority are a continuation of adopters, the curve’s a misnomer and that the normal distribution is probably more relevant for everyday products or services. When it comes to driving innovation adoption, specifically with technological advancements, and also to do with people’s money (where trust is hard to buy in the first place), I’d suggest that the curve is actually skewed and that the early and late majorities are not evenly split.

image: Sergei (me on medium) / @goforsergei (me on twitter)

The key to the fintech revolution’s success is in breaking into the late majority, but in order to do that, these customers need to become more digitally-savvy, have more trust in digital and non-legacy banking institutions, and be rewarded for leaving their comfort zone.

That last part may be the most difficult — rewards. Challengers’ very existences are based on the assumption that people will care about the tech and the customer experience and that this is reward enough. Rewarding them, financially, is very costly, and their business model is based on a low customer acquisition cost!

If legacy banks continue to offer good interest rates and monthly rewards and also copy the tech (eventually), then the late majority (who have low expectations, low trust, and low knowledge of these products / services) don’t really have any reason to adopt or change.

Another challenge with breaking into the late majority for challenger banks is that it’s the technology that becomes mainstream, not necessarily the brand. So, while we could hypothesise that Revolut are currently attempting to bridge an initial chasm between the early adopters and the early majority, while Starling and Monzo are still in the early adopter stage (see image below); one could also take a look at the challenger bank tech and see that as having breached the early majority.

image: Sergei (me on medium) / @goforsergei (me on twitter)

With that initial breach into the early majority, we now see market imitation coming to realisation. HSBC’s Connected Money app is a great example of how legacy institutions can simply ‘copy’ challengers and almost immediately bring the tech into the early majority due to sheer size, scale, and reputation — challengers have to work for it.

In the immortal words of Glenn Frey, the heat really is on:-

Will challengers break into the majority and gain a significant number of primary-use customers to be able to really challenge incumbents?
Will legacy banks imitate all of the additional value created by challenger banks’ leveraging of new tech and customer experience propositions?