The digital banking revolution is here. So why are so few people putting their salaries into app-only bank accounts?

Despite a slew of digital-only banks exploding onto the scene, just one in 10 of us has switched all our banking services to one.

Just over one in 10 (12%) Brits have fully switched to a digital only bank, according to personal finance comparison site finder.com.

Furthermore, nearly half (47%) of those who do use them keep less than £1,000 in them.

Two-thirds of banking customers say they plan to convert fully to digital banks in the future, meaning having their salary paid in and direct debits paid out.

Laura Suter, personal finance analyst at investment platform AJ Bell, believes this is because many use these accounts for ‘shoeboxing.’

“Take-up of digital banks has been pretty impressive, but few people are making the full leap to have all of their finances with these app-only banks – users are held back by a mixture of mistrust, apathy and ‘shoeboxing,’ she says.

“People increasingly see bank accounts as a little pot for a certain area of their life. They will use the likes of Monzo or Starling for their everyday transactions, so they can use the apps to analyse their spending, but they want to keep this data separate from their salary or their council tax bill.

“This ‘shoebox mentality’ when it comes to accounts can be smart. You can have a savings account that you can forget about and aren’t in so much danger of accidentally spending, while you can use a digital bank for your everyday spending and to analyse where your money goes, and then use another account to meet the regular boring bills that come in each month.”

So why are people not switching?

The fact that finder.com found digital banking app users were keeping lower amounts of money in their accounts suggest most still use them as piggy banks for short-term spending, rather than for fully-fledged accounting that comes with direct debits and salary payments.

Separate research from ING Bank found that banking customers are still leery about adopting new technologies. Two in three (63%) have never used fingerprint or voice recognition to log into their banking app, for instance.

Jessica Exton, behavioural scientist in ING’s consumer economic team says: “Many people are now mobile bankers, using multiple devices to manage their money on the go and across different platforms.

“Yet while a large majority agree that the latest financial technologies should be available to them, when it comes to newer digital ways of managing money, we see some reluctance around adoption. Concerns about security, privacy and maintaining control of finances appear to be key barriers.”

Ms Exton adds that over time and if new digital approaches are shown to be reliable, useful and socially accepted, it is possible that the uptake of services such as automatically generated advice for budgeting and even investing could be rapid.

“That was the experience with the uptake of mobile banking. Consumers indicate that they want banks and other financial institutions to stay in the lead by developing new ways to help them manage their money despite any reluctance to accept them immediately” she says.

Banking industry being turned on its head

While such digital bank offerings explode onto the scene (let’s face it that Monzo ‘hot coral’ card is ubiquitous already) others appear to struggle and the industry itself is in flux.

Metro Bank, the original challenger, which popped up in the wake of the financial crisis as a ‘new kind of bank’ that was open on Sundays and dog-friendly, has been struggling in recent months.

The share price has taken a huge hit recently, and a swirling false social media rumour led to Northern Rock-esque queues outside branches with people trying to take money out of their accounts.

And just recently the Parliamentary Treasury Committee put out a report on access to financial services and excoriated the big high street banks for shutting branches and leaving the burden with the Post Office, effectively a taxpayer bailout of the branch network.

The committee said that such Post Office provision amounted to little more than human cash machine services. Meanwhile, free cash machines are also disappearing at a rate of knots, with 1,700 gone already in the first three months of 2019.

The report called for the creation of banking hubs, which would enable multiple banks to provide services with trained staff through Post Office branches.

With the growth of digital-only offerings that mean people never need set foot inside a branch, one would expect this kind of triaging of our retail banking system to be unnecessary.

But in reality, the big banks’ withdrawal from physical services has anticipated conversion to digital methods a little early. Many are still very uncertain of online-only provision.

Sarah Coles, personal finance analyst at Hargreaves Lansdown comments: “You only have to look at the TSB debacle last year to see that with technology things can go wrong. And while companies should have invested in robust back up plans for every eventuality, some people will feel much more comfortable if they have more than one way to operate an account.

“The more you restrict how you access any service, the more people will rule you out as not meeting their needs.”

Customer conversion

Getting customers to pay in their salaries is a crucial goal for digital banks such as Monzo, N26 and Starling.

Monzo for instance recently launched an energy switching service for customers.

Such a tool is great, especially if it helps people save money, but is essentially useless if the customer is using their Monzo account as a piggy bank while their bills are paid out from a high street account.

Convincing customers to switch is the only way that these challengers can truly ‘challenge’ as the amount of data insights and potential to earn commissions from third-party financial services providers is crucial if the firms plan on making any money.

Jon Ostler, chief executive at finder.com says: “Technology has enabled digital-only banks and personal finance apps to offer some amazing features like spending analytics, automatically investing your spare change and safety features such as being able to instantly freeze and unfreeze your card.

“However, consumers are still hesitant about putting significant amounts of money in these accounts, and making them their primary ones.

“Although there are signs that this scepticism will soften over time as the technology and brands becomes more well known, but it’s clear that fintech challengers also have a way to go in convincing consumers that they are a safe, long term option for their money.”

But Anthony Morrow, founder of  digital advice app OpenMoney, is unconvinced: “Challenger banks aren’t a new thing - Smile and First Direct evidence that. Both are subsidiaries of established banks created to meet the demand of a very early non-traditional customer. The problem has always been taking them from two million to 10 million customers. The cost is huge.

“The new challenger banks face this same problem in that you get the first wave of ultra-committed users, but the profit is in the second and third wave. These are the people who don’t really care about bank accounts beyond their utility value.”

Mr Morrow thinks this problem is compounded because incumbent banks are very quickly catching up.

“Brands such as B for Clydesdale/Yorkshire Banking Group has 2.5 million users who all have their salary paid into their accounts and use it as the primary account (the holy grail for Monzo and an increasingly mentioned problem). Lloyd’s has over nine million users of its digital banking app,” he says.

Protected from failure?

The finder.com data found that men on the whole were maintaining larger average balances (£3,649) in digital banks than women (£2,717). This might be reflective of different earnings levels, but could point to more cautious approaches from women to placing money with new providers.

The research also found that women were more likely overall to treat digital-only banks as secondary accounts than men.

Vicki Psarias, blogger and author at Honestmum.com likes the physical presence and interactions that come with traditional banking services: “I like knowing that I have access to managers and cashiers in person in the bank, particularly if there are any online issues or ambiguities there.

“I do use online banking and while it feels safe and is quick, I equally feel contact with someone in person has helped with setting up more accounts, obtaining a credit card, and to action responses more quickly when there have been issues,” she says.

“For example, I had issues where a bank card didn’t work in the ATM, bank statements went missing in the post. Staff also printed information my accountant required inside the bank and seemed to access phone support quicker too.”

Other considerations that might put people off include clarity over Financial Services Compensation Scheme (FSCS) protection.

Recently, Moneywise looked at six top digital banking apps. In looking at the apps it found only two had full FSCS protection while one had protection under the German equivalent and three were covered by different ‘e-money’ rules and regulations.

Moneywise also found it was difficult to ascertain quickly in some cases whether the provider had the protection in place.  Such confusion could leave consumers reluctant to put all their faith in new brands that are still untested, and in some cases, not making any profits.

Indeed, since Moneywise published its six recommended apps guide, one of those mentioned, Loot, has gone into administration.

In the event, the firm’s customers are all protected because cash deposits were in fact held with a third-party provider, Wirecard.

Loot failed because it was unprofitable, and after failed talks for more capital funding from investor RBS, couldn’t raise the cash to keep going.

Loot’s 250,000-odd customers’ money is thankfully safe. But the failure of the company is perhaps a bellwether of consumer reluctance to put more faith into unproven brands.