What makes a challenger bank a digital challenger bank?
face it challenger banks are nothing new they have been around for a long time.
In the UK there has always been a large number of challenger banks – the Co-op,
Yorkshire Bank, Clydesdale Bank, Alliance & Leicester, Bradford &
Bingley, Abbey National, Nationwide Building Society to name just a few past
and present challengers. In Australia you would look at the likes of Bendigo,
Bank West, BoQ as examples. However despite there being the challengers in the
market, the share that the Big Four (in the UK) or the Four Pillars (in
Australia) have not fundamentally been impacted by the presence of the
the last few weeks in the UK a number of the new challenger banks have been
reporting their results. The UK’s Sunday Times produced the chart below:
shows just how the share price of some of the challenger banks has risen
despite the stormy market conditions due to delivering a good set of results.
Whilst the market share all three of these banks have picked up is good
considering where they have started from, it is still tiny in comparison to the
share of the Big Four banks. Even if they continued at the rate that they are
growing at it would take years for them to have a significant share.
each of these challenger banks have in common is that there basis for
competition is entirely traditional and they are competing in exactly the same
way, albeit providing a marginally better service, that the Big Four banks go
to market, so why is there any surprise that their impact is so little?
of the other challengers will argue that they are providing customers with a
better experience by providing customer lounges, opening longer hours,
providing a debit card immediately in branch on opening an accout, offering
drive through services or putting edgy images on credit cards. However these
are cosmetic changes and are not fundamentally challenging the way that banking
services have been procured for the last two hundred years.
the challenger banks to make any significant impact on the incumbent players
they need to become digital challenger banks.
terms ‘challenger bank’ and ‘digital’ are continually bandied around with
little common agreement as to what they mean.
the purpose of this argument a digital challenger bank is one that fundamentally changes the way that
customers experience and procure banking services, that acts in real time based on customer insight and demand, is available
24×7 and is accessible across any
channel and most importantly is agile
being able to rapidly adapt to changes in the way that the customer wants and
needs to do business.
each of these parts of the definition what does that mean for a bank wanting to
become a challenger bank?
too long banking has been operating on a push model where the bank is in the
driving seat pushing its products, operating its processes. While many banks
talk about being customer centric they still take an inside out view of
customers that asks the question what can the bank sell/do for a customer
rather than an outside in view which is answering the question what does the
customer want of its financial services providers. Without this fundamental
change in thinking it will not be possible to be successful in the long term.
whole banking system is still upon a branch based architecture, even those without
branches. The fundamental philospohy is that branches hold accounts (hence the
sort code that each account has), that at the end of the day branches tally up
their accounts (which is why they traditionally closed at 3pm so the branch
staff could do this before going home) and then post those accounts to Head
Office. Overnight the transactions between branches and other banks are
reconciled and at the beginning of the day the cycle all starts again. However
in the digital ages consumers expect their service provider to not only to be
available 24×7 but also the information that they share to be absolutely
current and accurate. While most banks simulate real time to more or less an
extent their IT architectures are batch-based and historical. Hours of every
night are spent reconciling accounts and establishing at one moment of time the
financial position of the bank.
the arrival of mature real time, high performance supercomputing platforms true
real time banking has finally arrived. This means that it is possible at any time to
have a real time financial position.
have grown used to expecting real time. When they search Google they don’t
expect to see only search results as of last night. When they go on Facebook
they expect to see their friends’ latest updates not as of two hours ago. They
expect the same from their banks.
using supercomputing realtime platforms the digital challenger bank will not be
able to deliver the experience that customers are demanding.
do not expect to have to repeat the information that their banks should already
know about them every time they interact with their bank. When they go onto
Amazon, Spotify or any other digital native business they expect tailored
recommendations and therefore they should be able to expect the same from their
bank. Underpinning the recommendations that these digital native organisations
make is real time analytics.
banks have large and sophisticated analytics teams, however they are almost
exclusively working offline i.e. not based on current, real time transactional
data let alone the masses of amount of data that customers generate from their
use of social media.
digital challenger bank will be driven by real-time customer insight and predictive
analytics that has drawn on structured and unstructured, internal and external,
transactional and social data. This will allow them to provide a far better
service than the incumbent banks can.
days a year
do not want to do their banking when the bank says they can. They want to be
able to do it whenever they want to do it from wherever they are in the world.
This means that banks need highly resilient, high performance IT
costs to own, manage and run such an IT infrastructure is likely to be
prohibitive for almost all challenger banks except for those with the deepest
pockets. However the smart challenger will not look to own this, but rather
give responsibility for delivering this to organisations whose core competence
is delivering this type of service.
only have to look at the hundreds and thousands of small businesses that rely
on Amazon Web Services to host and manage their websites allowing the SME to
focus on their customers to realise that ownership of IT is no longer an
essential part of running a successful business.
ugly word and one that doesn’t encapsulate the full meaning of what customers
want, however as it is in common usage the one that is used here. Customers
wants to be able carry out their financial services transactions using any
channel whether it be in a branch (yes some customers still want to use them
despite what every Fintech evangelist says), Apple Watch, mobile or tablet. Not
only that they want to be able to move around channels during a financial
transaction seamlessly without having to re-enter data or waiting for one channel
to catch up with another. The way that the experience of interacting on the
channel is presented must be in the context of that channel. Too often banks
believe they have achieved this when they have simply automated a form on a
offering a functionally rich mobile experience a bank cannot be a digital
digital challenger bank should have a contextual presence on all the channels
that their customers want. However some digital challenger banks, for instance
Atom (mobile banking), will choose to support only some channels and so will dictate the customers that they
one certainty in banking is that there is no certainty. Who could have
predicted five years ago that largest taxi company in the world would own no
taxis? The pace of change means that no one can predict how financial services
will be delivered in five years let alone any longer than that. This means that
for the digital challenger bank the most important competence is agility.
Agility is a core weapon that a digital challenger bank needs to have to
overcome the incumbent banks many of whom are saddled with legacy processes
enforced by legacy IT.
significant way of addressing agility is by the use of standardised software operating
in the cloud. The reason that this aids agility is that whereas typically on
premise software is updated once very eighteen months by half of customers, cloud
software providers are able to automatically update the software as frequently
as once a quarter or whenever needed. This means that a challenger banks that
uses standardised software can adapt its customer proposition far faster than a
similar organisation with an on premise solution.
need for agility has a fundamental impact both the way that the business is run
and how it is supported by IT. A unified, simplified business and IT
architecture provides an advantage for a digital challenger bank. Picking best
of breed solutions without the context of an overall architecture brings the
danger of building a new inflexible legacy. Even with the benefits of an
overall architectural framework it still means that there will be high amounts
of integration effort.
IT and consultancy industries are full of acronyms, but for a digital
challenger bank to be more than a nuisance to the incumbent banks then it
really needs to adopt Cloud, Real time, Analytics, Mobile and Social
While the incumbents can also adopt these for
the digital challenger bank to succeed it must be a master of agility.