With hefty injections of cash and ballooning customer numbers, challenger banks are gunning for a greater share of incumbent banks’ customers. They’re promoting customer growth as an indicator of ongoing success, but questions loom about whether these customers are using their challenger bank accounts as their primary account and whether customer acquisition gains are being matched with significant deposit volume.

The most recent customer acquisition milestone: 2 million customers for U.K-based Monzo, the company confirmed this week. That compares with 2.5 million claimed by Germany-based N26, 4.9 million by U.K.-based Revolut and more than 3 million by U.S.-based Chime.

These customer acquisition numbers, however, are the subject of debate among industry analysts. For example, a recent study from Cornerstone Advisors called “Fintech Adoption in the United States: The Opportunity for Banks and Credit Unions” demonstrates that seven of the top challenger banks (including Chime, BankMobile and Simple) totaled just $1.68 billion, or 0.014%, of deposits in the U.S. 

Ron Shevlin, director of research at Cornerstone, estimated that only 3% of millennials use a challenger bank as their primary bank account. He believes some of the numbers from challenger banks are overblown, and they might be counting app downloads, not people who actually deposit with them.

“When these challenger banks first started coming onto the scene 10 years ago, their premise was banks are evil, banks are dinosaurs, banks are slow, they don’t provide good service,” Shevlin said in an interview with Bank Innovation. Despite the promised revolution, he argued that most people use challenger banks to try out some of the perks without switching over entirely. “This isn’t about replacing the existing bank,” he said. “It’s about adding a new account to get something that you couldn’t get from your primary account. That’s why I call it accessorizing your bank account.”

The report examined different age groups and their involvement with different challenger banks. Older millennials (ages 30-38) and Gen Xers (ages 39-53) actually showed more interest and involvement with digital-only banks than younger millennials (ages 21-29).

Challenges facing the challengers

Part of the difficulty for challenger banks in gaining primary customers might have nothing to do with the nature of their bank. A 2017 study for Bankrate and MONEY found that the average American keeps the same checking account for 16 years. Some customers might be genuinely happy with their customer service, but often customers fear the hassle of switching their primary bank account. Even if challenger banks win over customers, this fear of switching bank accounts makes it hard for them to become the main option for people who already have a bank.

Carl Gish, chief marketing officer at Varo Money, cited two problems challenger banks face when trying to attract new primary customers. “The first is around inertia; it takes time and effort to make the move on any given day,” Gish said in an email to Bank Innovation. “The other challenge is around brand recognition. The biggest banks spend hundreds of millions of dollars on marketing each year so it can be harder for a new brand — which is putting its dollars into product development instead of mass marketing — to get in front of the same number of customers.”

Zachary Smith, the head of product at Chime, believes the pain associated with changing a bank account means challenger banks need a much better product in order to win over customers. “You’ve got to think about what kind of services and features you can offer that make it worth their while to deposit their paycheck,” he said. “I do think it’s going to take some time for people to get out of the mindset that you have to or should open a bank account with one of the big three banks, but I think that’s going to happen a lot faster than most people imagine.”

It’s also difficult for challenger banks to stand out when their establishment rivals begin to adopt their tactics. Indeed, many traditional banks are implementing the technology that made digital-only challenger banks so appealing. Bank of America, for example, has the virtual assistant Erica and automatic bill pay scheduling. Wells Fargo and JPMorgan Chase both created their own standalone banking apps to help customers manage their money.

Shevlin, for his part, thinks the standalone apps are a waste of effort and the banks should just focus on improving their normal apps. He also believes big banks still have a ways to go in terms of digital offerings.

Shevlin said he thinks the reason many millennials still value physical branch proximity is because they don’t fully trust the banks’ apps or call centers. “They want the security blanket of knowing that if they can’t get done what they want to get done with digital tools and channels, they can get off the couch, go down to the bank and talk to someone,” he added.

Gaining primary accounts might be difficult, but others argue that, over time, more customers will shift away from the incumbents. Emily Steele, president of Temenos North America, believes challenger banks will hold more sway as more customers get frustrated with their primary institutions. “They will probably start off because they are interested in a specific feature or frustrated with their current bank, but they won’t want to commit to making the new bank their primary until its proven itself,” she said in an email to Bank Innovation.

Being completely digital, Steele argued, allows challenger banks to provide better interest rates. “For the average consumer in a low interest rate environment, that may not be the make-or-break differentiator,” she said. “But combined with innovative products and services, integrations to popular or experience-driven third parties and design-led customer journeys, this approach puts these neo-banks in a competitive position and poises them for further growth.”