First-e has shelved its advertising campaign.

How do you compete with wealthy established players when you don’t have a well-recognized brand? It’s the problem faced by every new Internet bank. The popular answer has been by hiking up savings rates, cutting borrowing rates and blitzing the media with high profile advertising campaigns: examples abound, including Cahoot, Egg and Smile. While such strategies are necessary to gain a foothold in the market, they cannot last forever.

First-e has opted to incur the charges associated with a last-minute cancellation rather than spend millions on a television advertising campaign. While due in part to increased competition within the sector, it also takes into account a probable company re-branding after regulators have formally approved its takeover by Spain’s Uno-e early next year. The company has bitten the bullet now rather than risk embroiling itself in a potentially embarrassing campaign extolling the virtues of a possibly doomed First-e brand.

Nevertheless, the industry as a whole is currently going through a painful period as companies sacrifice short-term gain in the quest for customers. Such strategies are understandable, and First-e must beware being left behind. Market imperfection in lending products, as measured by the willingness of customers to shop around for the lowest rates, is rife: customer inertia is strong within UK financial services. Evidence suggests that banks with the largest customer bases are also able to charge higher rates – hence the fight for a strong initial customer base.

But acquiring this base by getting people to switch provider is difficult and expensive. The youth market offers an alternative. Tapping into individuals early allows banks to avoid the need for costly undercutting measures, and enables them to focus on retention through more economical data mining techniques to directly target customers on a proactive basis. In an increasingly competitive banking arena, a rejuvenated drive to build loyalty in this segment of the market should be a more sustainable strategy.