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Small is the New Big: HOW CHALLENGER BANKS ARE CAPTURING CUSTOMERS’ HEARTS (AND WALLETS)

Technology + Experience Gave Us The Challenger Bank Story In 2013, five years removed from the financial meltdown, YouGov ran a study on the banking profession. A tough 84% of respondents indicated that bankers were “greedy and get paid too much.” Public trust in United Kingdom banking was at an all-time low – and this was a half-decade after the crash. Change was afoot, however. That same year, the Bank of England unveiled a simple two-step process with lower initial capital requirements. In lowering the barrier to entry for banking and creating essentially digital-first establishments, the challenger bank was born. Challenger banks are beneficial in part because they enter the market with no established concepts around: • Their technology • Their reputation/brand In terms of technology, the core benefit lies in the fact that legacy banks are often saddled with legacy IT structures. Challenger banks can build their software infrastructure from the ground up. (They can also partner with platforms). Because the focus is typically digital-first, the construction and maintenance of brick and mortar locations isn’t necessary either. Oftentimes, the end result for the customer is an entirely mobile or digital banking experience. This creates real-time, wholly transparent results about where your money is and how it’s performing. As of late 2016, many challenger banks are scoring higher on trust and reputation surveys than conventional banks. It’s still a tough slog for these challenger banks, though. Not only do they need a suite of products, they need a suite of products that are significantly better than any established banks. When the cost of switching involves one’s finances, said switching costs can be a high bar for many.

Many challenger banks are scoring higher on trust and reputation surveys than conventional banks.

A challenger bank has the ability to experiment with different product road maps and to focus on a very niche offering.

To succeed as a challenger bank, then, a banking establishment or entrepreneurial venture needs: • Great products • Reliability in experience and service • An understanding of the customer proposition Let’s address each of these distinctly. The Need for Great Products This goes without saying to some extent, but operating as a primarily digital-first bank gives a challenger bank more options in the product suite space. This usually includes: • Instant digital lending • Real-time balance information • Simplified spending data • Open APIs • Biometrics, especially around security • Simplified money transfer • Multi-channel communication The rollout stages can often occur across a gradual period of time with challenger banks, bolstering their product arsenal as they scale the business. For example: Atom Bank began working on two-year, fixed-rate residential mortgages in December 2016. At the time, it had two Fixed Saver accounts and a SME lending product. A customer can receive a DIP (decision in principle) through the app and track mortgage process from there. It wasn’t until after these products were in the market that Atom chose to roll out products like debit cards, overdrafts, and instant access savings. Those are often considered the first products for a legacy bank to debut, but a challenger bank has the ability to experiment with different product road maps and to focus on a very niche offering. Oftentimes now, challenger banks are partnering with one or more platforms to help manage their product suite. Banking is a complex, highly regulated business – but with the increasing importance of customer experience (even to banking, and perhaps more so than other industries), banks need a way to simplify their processes for maximum customer capture. Platforms can be helpful in building out a product suite in this regard.

This move towards simplicity is sometimes best reflected in the credit application and approval process. Customers increasingly prefer this to be mobile-friendly and done quickly, and banks want as much of it automated as possible. Simplification involves removing the once 12-week process and making it almost instant, but aiming for improved compliance and risk models that can be operationalized in hours. For example, Instabank ASA is a Norwegian challenger bank (based in Oslo) that launched in September 2016. We partnered with them at Provenir as a platform provider. It made logical sense: “Our entire approach is built on simplifying banking. One of the ways we do this is by making the customer experience fast and effortless; from the initial on-boarding process through to every subsequent interaction,” says Robert Berg, CEO, Instabank. “The Provenir Platform gives us speed and flexibility in our lending operations, which enables a customer to apply for a loan at lunchtime, receive immediate approval, and have the money available in their account later that day.” Each platform-challenger bank relationship is different and often highly-customized, with visual integration or mapping tools, ability for rapid scale, high-growth options for lending, and the ability to operationalize various analytics. The point is: whatever your specific focus as a challenger bank is (lending programs are very popular presently), you need the right product suite and simplified platforms to make sure your potential customers are willing to navigate away from a pre-existing, potentially legacy option where the cost of that navigation might be high. It all begins with the quality of the products and the partners, which is going to drive the customer relationship. So far, it’s working: a J.D. Power survey showed challenger banks scoring 865 out of 1,000 on measures of customer experience/service, which is 49 points higher than traditional banks.

“The Provenir Platform gives us speed and flexibility in our lending operations, which enables a customer to apply for a loan at lunchtime, receive immediate approval, and have the money available in their account later that day.”

– ROBERT BERG, CEO, INSTABANK

CHALLENGER BANKS OUTSCORE TRADITIONAL BANKS ON CUSTOMER EXPERIENCE & SERVICE

points 49 +

865 1000

on customer experience/service

Challenger banks score

higher than traditional banks

source: J.D. Power Survey

Upstart challenger banks also need some degree of security that any platform partner has worked in similar capacities before, typically across large banks, credit/debit cards, auto financing, short- term, and retail financing. Colin Walsh, the CEO and co-founder of one such challenger bank, comes from a legacy banking background and has admitted the deficiencies of the old-school system as compared to a digital-first model: “I spent many years inside that [traditional banking] system. You are preaching to the choir here. The big banks are not innovating around customer problems. They are trapped in product silos. Specifically big banks. We are solving problems. Not pushing products. My measurement of success is to push out consumer expectations.”

Reliability in Experience and Service We briefly touched on platforms above, and it’s been argued that every business today must become a platform around ideas such as talent, technology, and information. The issue at the heart of developing and scaling challenger banks runs deeper, however. The first important idea is that of the on-demand economy. Once thought to be the purview of a younger, affluent middle class, it’s been shown to affect many more socioeconomic segments of the economy. The expectation is now, whether that’s ordering cars, food, or entertainment. 20-30 years ago, the idea of a loan being applied for and funded during an afternoon at work would be laughable. Now it’s normative, and that’s because of the on-demand economy’s increasing pressure for it. Challenger banks, keeping that in mind, need to operate on platforms and deliver in real-time, but they also need amazing customer experience. Because of choice overload and the reduced barriers to entry in establishing a challenger bank, there are dozens (hundreds) of options for a customer interested in working with a new kind of bank. A better, more reliable experience not only takes customers away from the established legacy banks, but it steals customers from the other upstarts. And again, to establish that reliable experience, you need the right partners and product suite.

That quote contains one major kernel of truth: the solving of problems is the reliability end customers want to see. Typically, the infighting silos are just for the relevancy of the employees, which a banking customer does not care about.

57% of millennials indicated they’d leave their current bank for one with better technological options.

Source: Strategy Desk

An Understanding of the Customer Proposition This is crucial, and being missed by some of the challenger bank entrants. The goal isn’t to create some cool technology that’s a digital-first bank. That might acquire you a few customers, but the true goal is to create a product that:

• Solves problems • Does so reliably • Does so quickly

Challenger banks have the opportunity to perfect their service around one specific problem and create a winning app experience. They can start from scratch (no legacy issues hanging over them) and become as specific, or as local, as they want. This combined degree of flexibility and specificity makes it a very attractive modern financial model. Take Monzo Bank, for example. Widely hailed as one of the foremost digital banking upstarts, Monzo is strong on the principle that “It’s time for a new kind of bank.” Now consider the fact that Monzo only opened Current Account options to a select group of beta testers in August, 2017. It has built an entire audience on the “actually easy to use” concept, leading with pre-paid cards and transfers, and have a pipeline of new users eagerly awaiting each roll out.

THE BOTTOM LINE 57% of millennials – already becoming the biggest spending section of the market – indicated they’d leave their current bank for one with better technological options. Any generations superseding the millennials will likely feel the same. Technology + experience will rule the day in banking, and that’s where challenger banks are initially carving out a place for themselves. Challenger banks are becoming profitable faster, and the space is ripe for quick revenue gains – if you understand exactly what steps, processes, and partners need to unfurl for success.

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