If the big, outdated firms offer rubbish deals, why aren't we all flocking to the faster, better, more generous challenger outfits?
All across our finances, from bank accounts to energy providers, we are increasingly being urged to ditch the big, familiar names and go with a ‘disruptor’.
The idea is that these old brands are too set in their ways, too weighed down by legacy technology and outdated attitudes, and it means we as customers end up paying too much for a mediocre service.
In contrast, every day there are new challenger firms launching, promising to make better use of cutting edge technology to help us save money and enjoy a better experience to boot.
But is it really such a great idea? There’s no question that the last year or so have seen a fair few bumps in the road for those advocating the challengers.
The banks that will pay you the most to switch to them
Energy providers going bust
In no area has the threat of challenger brands getting into trouble been clearer than in the energy market.
The last couple of years has seen a succession of small names going bust, including the likes of Iresa, Spark Energy, Economy Energy and Toto Energy.
Now, none of these were exactly rivalling the big six suppliers when it comes to sheer size, but nonetheless they all had thousands of customers when they collapsed.
And this understandably has an impact on people’s confidence about switching to a supplier that isn’t a household name.
A study by price comparison site CompareTheMarket at the tail end of last year found that one in five have been put off moving to a new supplier because of these failures.
It’s an understandable concern ‒ I know that when I have shopped around for deals over the last few years, I’ve paused before signing up with small suppliers, because I simply don’t know enough about the state of their business to be confident that they won’t hit trouble.
In contrast, I’m not exactly expecting British Gas to go bust any time soon.
What happens if your energy firm goes under?
The good news is that if your supplier does hit the skids, you won’t suddenly find that you’re unable to turn the lights on.
The energy sector’s regulator, Ofgem, has a ‘safety net’ in place, which means a new supplier will be appointed to take over your account should your supplier go out of business.
You’ll be moved onto a ‘deemed’ contract, which lasts for as long as you want it to.
This may work out more expensive than your old deal, so it’s a good idea to shop around and see what other deals might save you cash. What’s more, there won’t be any exit fees for getting out of a deemed contract.
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Getting someone else to handle your investments
Investing is another area where the challengers are not having an easy time of it.
I really like the idea of robo-advisers when it comes to investing. It’s not exactly the most straightforward area of finance, so having a firm handle it for me based on my risk profile is pretty appealing.
And recent years have seen loads of firms offering some version of the service launched.
The trouble is, they don’t seem to be winning over enough investors. For example, it was revealed this week that Moola had a turnover of an embarrassing £889 in its last year of business, losing a whopping £1.3m in the process.
It’s not alone either, with Investec and UBS closing their robo-advice brands, while reports have suggested that Nutmeg spends £3 for every £1 of revenue it brings in.
Part of the problem here is that the people who buy into the idea of robo-advice are young ‒ it’s those under 35 who are most likely to be won over by the potential of algorithms handling an investment portfolio for you.
And the reason this is a problem is that this age group doesn’t exactly have much spare cash to invest with ‒ it’s the odd £50 here and there, rather than thousands of pounds a year.
Older investors, who may have more significant sums to invest, clearly haven’t been won over by this new model as yet, whether that’s because they don’t trust the technology or they prefer to use a traditional financial adviser.
What happens if your firm goes under?
Of course, there is still some protection in place if you end up using a robo-adviser that goes out of business thanks to the Financial Services Compensation Scheme at up to £85,000.
That doesn’t guard against poor investment performance of course, but it should provide some reassurance for those wary about signing up.
What about bank accounts?
When it comes to current accounts, challenger banks are all the rage.
The latest current account switch figures, which track which banks people are leaving, and which they are opening new accounts with, showed that huge numbers of people are turning their backs on big names.
And increasingly they are instead choosing to bank with firms that are far from household names. For example, the bank with the second-largest net influx over the last quarter was Monzo Bank, while Starling Bank took fourth spot.
But things aren’t all rosy. There are big question marks about the future of Bó, a new challenger bank being launched by Royal Bank of Scotland, with its chief executive walking out just two months after launch, for example.
And while big-name banks are not exactly beloved, they do appear to retain some level of trust. A study last year from Fujitsu found that 40% of people don’t trust challenger banks at all, with the security of data a big concern for more than half.
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What happens if your bank goes under?
Again, there is protection in place should one of these challengers hit the wall, with the FSCS offering coverage of up to £85,000.
But until the challengers have a longer track record of delivering on their promises, and providing a better service than the high street names, that protection may not be sufficient to encourage more people to give them a try.