Can startups taking on big energy suppliers and banks be trusted to deliver?

Known as ‘challengers’, the underdogs taking on high street banks and other giants of the service sector can leave customers wanting

High street banks struggle to compete on value with their app rivals (PA)

This month Brilliant Energy became the latest in a series small UK energy suppliers to fold – eight went down last year, with two more, Economy Energy and Our Power, closing their doors in January.

Brilliant’s 17,000 customers now face a hike £400 on bills, raising questions about the sustainability of low pricing in other service sectors such as banking – and services such as paying bills or hiring a scooter to get to work.

Such customers place faith in a startup that ultimately delivers the same service as the big firms but differently, simply, cheaply and with a human touch.

At least, that’s what we’re asked to buy into.

But as cracks appear in more than one operation that sold itself on doing things differently, should consumers be worried that their faith has been misplaced?

Protections in place

Many new companies promise better ways of accessing old services such as banking or energy, as well as paying bills or hiring a scooter to get to work. Fintech and other exciting new technology means there are brand new ways of doing almost everything, enabled by clever algorithms and the internet of things.

They offer convenience and often charge much less than their established competitors.

But customers need to know if they will be safe if the new business fails. Many challenger firms still comply with certain rules, giving their customers the same protections as more established brands. However, it is essential to check exactly what protections are in place.

Customers depositing cash with challenger banks Monzo and Starling are protected by the Financial Services Compensation Scheme, which pays out up to £85,000 per person per banking licence if a provider goes under.

However, with global challenger bank Revolut, client funds are not covered by the official compensation scheme, although money is held as per Financial Conduct Authority regulations.

So it’s essential to check that you are happy with the protections you have and that you know what they are before signing up to any new service.

That said, sometimes customers may simply find that the new “improved” offering isn’t delivering what they had hoped for.

For example, online and do-it-yourself estate agents have rocketed in popularity as customers can save thousands of pounds with fixed-price deals compared to traditional high street agents.

Some, however, complain about paying the fixed fee when their property doesn’t sell – so again, it’s essential not to take anything for granted.

The business may be offering a new way to do things but that also means a new way of dealing with their customers. Spending time reading online reviews and experiences is key to staying safe with any provider but especially one that’s less established.

Of course, there are risks to sticking with established providers too.

In challenging times agile new startups know the way to attract typically lethargic customers away from bigger rivals is not just to offer the latest whizzy technology but also to compete furiously on value.

Look at banking. Savings rates have been low for a long time and fintech challengers have been mopping up dissatisfied savers with peer-to-peer lending opportunities offering much higher returns.

Banking apps were basic for a long time, while new tech firms were offering the chance to see all spending in one place, make incremental and so relatively painless savings, and even to separate up bill money from spending money.

Yes, the big banks are now catching up with that and innovating their own technology but the first round has definitely gone to the challengers. So while there may appear to be a risk switching to a relatively new provider, there are also risks inherent in remaining with an old, less competitive one.

After all, the latest analysis from Moneyfacts.co.uk shows that the best savings rates on the market are not found with the high street banks, many of

which are not even matching the Bank of England’s base rate with their easy access accounts.

Rachel Springall, finance spokesperson for the website, said: “Savers may well be storing up their savings in a flexible pot during times of economic uncertainty, but this shouldn’t mean leaving the money languishing in a poor-paying account.

“If savers were to instead move their cash to one of the ‘best buys’, they could earn 10 times more interest on the top deal versus the lowest on offer from a big high street bank.”

New horizons

Of course, the attraction of disruptive, tech-based challengers is that they offer a brand new way of doing things.

They provide convenience or cost savings or work better around customers’ lives. You may always be more worried that a newer business will go under and it’s important to understand what protections and options you would have if that were the case. But a number of established brands and businesses have gone under in recent years, some because they simply couldn’t keep up with disruptive online competitors.

So there’s also little point in clinging to established brands in the hope they will be a safer option. What this does highlight is that whether a company is young or old, knowing what safety net you have in place is essential.