The challengers
The universe likes action and transformation, nothing can stay inactive and saturated unless it dies, which again enters in the cycle of life. I love the challengers in that sense; they are universal forces, they poke the sluggish states and call for disruption and change.
The challenger banks aim to redesign the banking services by integrating wisely customer focus, technology and innovation. They are building the platforms that are ready to assess data, which are available and accessible more than ever, leverage machine learning, artificial intelligence and big data analytics to turn customer behaviour and emerging needs into innovative financial products and services. They are not aiming to become overloaded by doing everything per se but they prepare their business models and technology backbone to create platforms interlinked with other financial service providers, mainly Fintechs to guide their customers to the best-fitting solutions for their needs and to access underserved customers creating value out of financial inclusion.
The challenger banks are digital banks with no branches where the architecture of financial products and technology meet a competitive edge with low-cost, quick responsiveness, easy-to-use and highly personalized customer experience.
The executive team’s edge is highly critical and enabler for achievements of the banks innovative business model and customer relations. The teams are mainly built by experienced but highly motivated, curious and ambitious individuals who are willing to make a difference by shaking the status quo. The teams hold experienced executives coming from the incumbents especially to manage risk and regulation related activities.
The challenger banks are not only in competition with the incumbent banks and among themselves (in 2017, more than 50 challenger banks are active globally) but also by other Fintech companies mainly active in payments, lending and loans. However, they rarely go into a direct competition mood to differentiate themselves, they are more in a collaborative spirit looking for areas of co-creation in their ecosystem.
The key challenge for the challenger banks is to gain trust among their customers who are mainly the millennial population and tech-savy early adopters. Dealing with money, protecting personal data and shielding against cyber attacks in a highly regulated environment require robust systems in place. To assure, the challenger banks are exposed to the same licensing procedures and regulatory requirements as their incumbent competitors.
The challenger banks define their differentiating edge clearly in their product offer and customer experience. They are digital and mobile first, create and offer fast and engaging user experience on their integrated platforms where the tools are easy-to-use and connect within the network of diverse financial service operators.
The challengers are willing to be very good in specific services rather than “ok” on multiple services. That’s definitely a key competitive edge to attract and maintain customers, especially when they are working ambitiously to tailor their product and services to evolving customer needs ahead of time. They are also targeting underserved customers, pointing out their needs and enabling their financial power with innovative and cost-effective solutions, through simple technology enabled products, customer relation management and network effects.
The 2nd European payment services directive PSD2, which forces European banks to open up their systems to third party players will accelerate Fintechs to cluster around platforms and will pave the way for the challenger banks to challenge even more the financial arena.
One of the new digital banks in UK, Starling Bank, founded by Anne Boden in 2014, the former Allied Irish Banks COO, raised 70 m USD to spread its current account service, secured a banking license and launched at the beginning of 2017. Starling has built its own technology backbone and its partnerships with other Fintechs to expand its reach to customer, product and service offer. UK regulatory bodies are actively promoting Fintechs and the challenger banks to boost transparency in financial services, revive competition and lower cost for the end-users.
In Germany, N26 has been granted a full banking licence to expand its retail banking products and services across Europe. Also looking after smart partnerships with Fintechs to broaden the bank’s products and services geographically, the bank has been appealing to a wide range of demographics. Being in Berlin, in post Brexit era seems also be a winning strategy for N26, that has secured 53 m USD funding so far.
The scenery is not as bright in USA as in Europe. Simple and Moven, the early players in the challenger banking space had to partner with banks as getting similar licences as in EU is not easy in USA. Simple has been acquired by BBVA, following the fifth year of its foundation. The fact of being dependent on another bank for licencing issues and at an early stage of the foundation does not seem to increase the appetite of investors to invest in a challenger bank in USA.
Moreover, the US banks are mainly regional and small; having enough organisational agility to catch the technology wave and compete with Fintechs. This situation will ease the way to the European challengers towards a gateway into the US market with their “muscles made in Europe.”
The challenger banks will have to be agile and resilient to deal with the regulatory flow. They shall develop their customer base and positioning in order to resist in deep waters when the regulators and the incumbents start getting together to shake the ocean. They will have to come to a critical mass as soon as possible in order to raise their voice and not to have to fire the distress light during stormy weathers.
