Moderator: Phil Alcock - Raisin UK
Expert: Kevin Mountford - Raisin UK
- The Challenger banks don’t have the cumbersome legacy that the high street banks do. They are more nimble and able to access new technology. They are also able to employ savvy, tech friendly people keen to be part of something new and exciting. They don’t employ ‘lifers’ just working for their pension with no genuine desire for change. Does this give them the edge over the advantage that the incumbent banks have due to their brand strength?
- What is the level of take up by the challenger banks? How do they attract attention and new clients when they don’t have a physical infrastructure?
HEADLINE FINDINGS FROM THE SESSION:
The term ‘Challenger Banks’ is neither necessarily intuitive nor helpful.
Included within this are:
- Larger challengers eg Virgin, TSB
- Smaller challengers eg Shawbrook and Aldermore
- Retailers eg Sainsburys and Tesco
- Specialist lenders eg Masthaven and Oaknorth
- Digital-only platform banks e.g. Monzo and Starling
The focus of the session was on this latter segment.
Open Banking Ecosystem will be catalyst for structural change in the UK retail banking industry.
- As regulators such as FCA, PRA & BofE take action to further stimulate competition, the market in the near future will be increasingly varied and fractured, resulting in various different banking experiences for UK consumers.
- PSD2 is an opportunity for challenger banks to provide new innovative services e.g. developing apps that provide customers with enhanced insight into their spending habits and products; along with services that will allow them to manage their financial affairs and make decisions that fit their lifestyles.
- Feeling that PSD2 and Open Banking present both threats and opportunities. Banks are beginning to explore new opportunities to monetise APIs as well as develop new financial products and services through data analysis and insight.
- Open Banking will enable the evolution of new business models, with some challenger banks choosing to specialise in specific niches rather than offer a traditional suite of products or attempt to manage the customer’s end-to-end experience.
- Others will compete by making it possible to integrate products and services from various different manufacturers in a seamless way. Banks take the potential threat of technology-led companies such as Google, Amazon, Apple and Facebook very seriously.
- While it was agreed that there will be fall-out and consolidation within the challenger banks, it was felt there will be sufficient opportunity in the UK (and EU/WW) market for many different banks and non-banks to succeed.
Strengths of current crop of UK Challenger Banks:
- Technology and UX - Modern platforms and apps
- Seemingly adopted scalable business models
- Perhaps due to millennial take-up they tap into strong online communities
Future growth and success factors for UK Challenger Banks:
- Need to attract customers and build trust
- Differentiation / branding from other digital challengers
- Take advantage of Open Banking and innovate accordingly
- Grow with a short-term view to profitability
Collaboration between banks and fintechs
- Majority of larger UK incumbent banks have declared strategy to collaborate, formally partner or acquire fintechs over the next 3-5 years
- Realisation that banks are not as nimble in terms of tech nor do they focus specifically on customer requirements and user experience
- Fintech platforms and marketplaces can allow banks to provide market-leading services without having to relinquish customer ownership – the example of German Bank N26/Raisin and Metro Bank/Zopa were discussed
- Mainly via APIs, the integration of third-party product and services is likely to accelerate
Cultural Differences
- Typically challenger banks do not have legacy / historic issues with company culture unlike incumbent banks
- Culture in challengers is usually clearly defined and starts and ends with the customer – needs, requirements and delivery of experience
- Incumbent banks to focussed on conduct risk which distracts from nurturing and improving their culture
CONCLUSIONS
- Change will be slow and it is unlikely that the high street / incumbent banks are regarding the challenger bank sector as short-term competitive threats.
- It is much more likely that the traditional sector will seek to collaborate more proactively with fintechs and challengers. In time this will lead to acquisitions as the sector consolidates.
- With PSD2 and other regulatory initiatives leading the market towards a data-sharing economy, challenger banks in the UK and Europe are inevitably moving towards embracing a marketplace mentality that promotes all of a consumer’s money considerations in one central location.
- Several newly-launched challenger banks, such as Starling, Tandem, and Monzo, are already aiming to be the go-to place for a consumer to handle everything with their money.
- APIs are going to play a big role within the banking industry as PSD2 makes open banking mandatory.
- Consumers, and in particular Millennials, will embrace new platforms that are better at delivering specific services which resonate with them.
- 73% of Millennials have said that they would be more excited about a new offering in financial services from Google, Amazon, Apple, Paypal or Square, than from their own traditional bank.
