Changing the banking game: the new generation of challenger banks

Author: Grace Durie

One of the biggest disruptors to the banking sector is the steady growth of challenger banks, but can they ultimately win out against the Big Five?

Challengers are increasingly presenting themselves as more customer-focused, developing digital offerings to match consumer needs. This is welcome news, as one of the most exciting ways in which challenger banks have the potential to transform the financial services sector is with digital innovation. According to a recent survey by Interim Partners, more than three quarters of banking sector executives believe challenger banks have a significant technological edge over high-street rivals.

Challengers are uniquely able to innovate digitally since they do not have to work around the legacy systems prevalent in larger banks, and are more agile as a result. This has been highlighted with the rise of non-traditional methods of distribution among new players including online-only and mobile-first platforms like Atom, the UK’s first. Another challenger, Fidor, exploits its online-only presence through its pioneering use of social media. Its customers are financially rewarded for sharing financial advice and reviewing financial products, and it was recently reported that for every 2,000 “likes” the bank gets on Facebook, it reduces its loan interest rate by 0.1 per cent.

Despite the extent and quality of innovation in the challenger sector, there remain a few detractors. Andrew Bailey, chief executive of the Prudential Regulation Authority, said that he fears ‘institutions overreaching themselves with balance sheets that don’t necessarily support their growth’. There is an undeniable difference in balance sheets between the larger banks and challengers. Britain’s biggest banks typically have balance sheets of £500bn and above, whereas the biggest challenger has no more than £40bn. This pushes challengers’ abilities to compete into the realm of drawing customers in through innovative and disruptive products and services, convincing customers to switch from rivals.

On the other hand Anthony Thompson, the founder of Atom, is more hopeful. In a speech delivered ahead of the banks’ launch in December he argued that larger banks with their ‘ruinously expensive branches’ and ‘antiquated technology systems’ will be brushed aside by challengers. A strong contention, though it is fair to say challengers are not mired by legacy architecture which can both malfunction (as perhaps evinced by HSBC’s recent payday crash) and impede the progress of true digital innovation. Thompson further argued that larger banks’ attempts at building slick digital front ends is little more than window dressing – akin to ‘putting lipstick on a pig’.

It is also fair to say that mobile or digital-only solutions dispense with the need for costly bricks-and-mortar branches. However, research from U.S. Bank has found that nearly four in five American consumers value people more than technology, and place higher trust in human contact rather than its virtual equivalent, so it may be that challengers need to position their offerings differently in order to maximise that trust. The same report nonetheless found that nearly 70 per cent of American consumers across all generations believe banks that keep up with the times technologically speaking are more trustworthy than those that lag behind the curve. This latter point is promising for challengers such as Atom, and time will tell how UK consumers respond to as unique a proposition as Atom’s.

By focussing on the customer and their experience, digital-only offerings are sure to garner trust. The 2015 World Banking Report found that many traditional financial institutions are not meeting customers’ needs and expectations, and this is an area in which challengers must strive to excel. Generation Y customers in particular were found to register lower satisfaction than customers of other ages, evidencing the high expectations of Generation Y for digital banking capabilities and the significant role played by digital technology in that demographic’s lifestyle.

Additionally, the potential audience for challengers is sizeable. A significant proportion of UK society is already engaged with digital banking – the latest data from the ONS shows that 56 per cent of UK adults regularly use internet banking, and this trend is rising year on year. In addition, recent research by the BBA found UK customers will use mobile banking 895 million times this year, double the number of branch interactions.

Challengers still have a lot of work to do to establish their role in the market, and technology can enable this, with new banks built for the digital age. They are therefore likely to hold an advantage over the Big Five, whose innovations progress at a slower rate compared to the more agile challengers, and should be striving to innovate as far as possible. Digitisation is already disrupting traditional retail banking and the newly emergent digital-only players are set to radically influence the way we bank.

Banks that are willing to embrace customer-centric digital and mobile models will not only cut costs but offer engaging and relevant propositions to a group of customers which are largely unsatisfied by an industry that is not keeping up with the pace set by others around them. 

21 Dec 2015

Author: Grace Durie

One of the biggest disruptors to the banking sector is the steady growth of challenger banks, but can they ultimately win out against the Big Five?

Challengers are increasingly presenting themselves as more customer-focused, developing digital offerings to match consumer needs. This is welcome news, as one of the most exciting ways in which challenger banks have the potential to transform the financial services sector is with digital innovation. According to a recent survey by Interim Partners, more than three quarters of banking sector executives believe challenger banks have a significant technological edge over high-street rivals.

Challengers are uniquely able to innovate digitally since they do not have to work around the legacy systems prevalent in larger banks, and are more agile as a result. This has been highlighted with the rise of non-traditional methods of distribution among new players including online-only and mobile-first platforms like Atom, the UK’s first. Another challenger, Fidor, exploits its online-only presence through its pioneering use of social media. Its customers are financially rewarded for sharing financial advice and reviewing financial products, and it was recently reported that for every 2,000 “likes” the bank gets on Facebook, it reduces its loan interest rate by 0.1 per cent.

Despite the extent and quality of innovation in the challenger sector, there remain a few detractors. Andrew Bailey, chief executive of the Prudential Regulation Authority, said that he fears ‘institutions overreaching themselves with balance sheets that don’t necessarily support their growth’. There is an undeniable difference in balance sheets between the larger banks and challengers. Britain’s biggest banks typically have balance sheets of £500bn and above, whereas the biggest challenger has no more than £40bn. This pushes challengers’ abilities to compete into the realm of drawing customers in through innovative and disruptive products and services, convincing customers to switch from rivals.

On the other hand Anthony Thompson, the founder of Atom, is more hopeful. In a speech delivered ahead of the banks’ launch in December he argued that larger banks with their ‘ruinously expensive branches’ and ‘antiquated technology systems’ will be brushed aside by challengers. A strong contention, though it is fair to say challengers are not mired by legacy architecture which can both malfunction (as perhaps evinced by HSBC’s recent payday crash) and impede the progress of true digital innovation. Thompson further argued that larger banks’ attempts at building slick digital front ends is little more than window dressing – akin to ‘putting lipstick on a pig’.

It is also fair to say that mobile or digital-only solutions dispense with the need for costly bricks-and-mortar branches. However, research from U.S. Bank has found that nearly four in five American consumers value people more than technology, and place higher trust in human contact rather than its virtual equivalent, so it may be that challengers need to position their offerings differently in order to maximise that trust. The same report nonetheless found that nearly 70 per cent of American consumers across all generations believe banks that keep up with the times technologically speaking are more trustworthy than those that lag behind the curve. This latter point is promising for challengers such as Atom, and time will tell how UK consumers respond to as unique a proposition as Atom’s.

By focussing on the customer and their experience, digital-only offerings are sure to garner trust. The 2015 World Banking Report found that many traditional financial institutions are not meeting customers’ needs and expectations, and this is an area in which challengers must strive to excel. Generation Y customers in particular were found to register lower satisfaction than customers of other ages, evidencing the high expectations of Generation Y for digital banking capabilities and the significant role played by digital technology in that demographic’s lifestyle.

Additionally, the potential audience for challengers is sizeable. A significant proportion of UK society is already engaged with digital banking – the latest data from the ONS shows that 56 per cent of UK adults regularly use internet banking, and this trend is rising year on year. In addition, recent research by the BBA found UK customers will use mobile banking 895 million times this year, double the number of branch interactions.

Challengers still have a lot of work to do to establish their role in the market, and technology can enable this, with new banks built for the digital age. They are therefore likely to hold an advantage over the Big Five, whose innovations progress at a slower rate compared to the more agile challengers, and should be striving to innovate as far as possible. Digitisation is already disrupting traditional retail banking and the newly emergent digital-only players are set to radically influence the way we bank.

Banks that are willing to embrace customer-centric digital and mobile models will not only cut costs but offer engaging and relevant propositions to a group of customers which are largely unsatisfied by an industry that is not keeping up with the pace set by others around them.