ARE THERE ANY LESSONS YOU CAN LEARN FROM THE CHALLENGER BANKS?

Headlines:

• The wealth industry is slowly coming around to understanding that digitisation is a hygiene factor for businesses rather than a ‘nice to have’.
•  While the challenger banks have disrupted the lower end of the market, they have their own issues in terms of maintaining growth rates and continuing to attract clients.
• here is evidence that the challenger banks are moving on from purely focussing on a single service and are starting to push into the advice space.

Key issues and challenges:

• Participants of the session acknowledge that digitalisation is on their agenda. Some came to understand how worried they should be about digital disruption. Others were interested to see how they can be inspired by the digital banks. “Challenger banks have massively disrupted high street banks.”
• The discussion started with a scene setting from the experts: “The paradigm has changed to working with customer needs first, and build the service based on that.”
• Challenger banks identified early that mobile is going to be the main channel of interaction between client and service and focused on delivering this experience.
• However, the issues are coming up with building a financially viable business model while being a digital disruptor.
• There is an example in the Netherlands where a challenger bank came up with a lot of free services available to customers. However, within a year they became the most expensive bank among ING, ABN Amro and other major banks in that market. “It's all about Next Gen, the clients of tomorrow.”
• Digital is something that younger clients are looking for/used to. Despite the fact that digital is discussed as a standalone topic, it is not a substitute, it's a complimentary service. It becomes a hygiene factor.
• Digital disruptors are starting to break into the advisory sphere and this is illustrated via a case study of a digital firm that transformed into a real bank. However, they started by offering a digital investment portfolio service.
• Digital disruptors are breaking into the advisory business via robo-advice. “Digital disruptors are taking over the lower wealth client segments, pushing firms to shift their proposition to higher wealth clients.”
• However, some participants believe that while digital engagement works for lower wealth clients, the business model starts to break down at higher wealth levels.
• Disruptor banks have forced the retail banks to step up their game but they have not had as much impact on the wealth industry. There is little uptake from the ultra-high-net-worth clients, but there's also a generational factor at play. However younger clients like security, and arguably prefer more of it as wealth can be a burden for them.
• The industry observation from the experts was that some firms in the financial space prefer to focus on financial products, become a warehouse, and then another firm can perfect the client experience and add value that way.
• Financial firms are looking to improve the on-boarding process through a digital service, and the second big area is advisory. Developments in advisory services are focussing on suggestions/recommendation features, which need to be powered up by a good “engine”.
• The financial viability of digital disruptors is a challenge due to the need to maintain revenue growth rates, but for the wealth industry it is the actual costs of digitalisation that are more challenging. “What's holding us back is the perceived cost of digitalization.”
• While the digital banks are focused on maintaining and perfecting the customer experience, other firms are faced with the challenge of having a branch network and supporting the network through digital developments. “The joy of the challenger banks is that they have no legacy infrastructure, but their issue is that they have no client base and need to build up their revenue stream.”
• It was suggested that the question should be reversed – what can challenger banks learn from the traditional industry? Customer acquisition is expensive.
• From the regulatory perspective, however, challenger banks are punching above their weight. As one of the participants put it: “There is a trade-off between usability and hackability.”
• Data protection is high on the list of most important considerations. Data protection is a highly sensitive subject in the wealth industry, and the disruptors need to keep up with these high standards. There is also an issue of counterparty risk as wealth grows.

Conclusions and solutions:

While the wealth industry as a whole may not have been disrupted, they have certainly impacted the lower end of the market and the challenger banks are giving considerable pause for thought. Much can be learnt by the wealth industry from their approach, but the challengers will also need to be aware of the barriers they face to continued growth that private banks and wealth managers are very aware of. The biggest threat to firms is complacency.

“As an industry we are very complacent. We will probably look how things develop.”

 

Expert: Philip Nordenfeld, Backbase
Facilitator : Annie Catchpole