Eelco-Jan Boonstra, Managing Director EMEA at Mambu
Time is running out for traditional banks. Consumer behaviour is changing and the rising tide of digital challengers is serving and accelerating that change.
Demand is growing for utility-led banking services, flexible payment options and mobile-first banking: features that digital banks have made the core of their business, but which incumbent players are still struggling to provide.
If traditional banks want to drive post-pandemic growth and stop their customers jumping ship, then they need to act fast – and launch a speedboat.
The digital opportunity
Digital banks have swiftly changed the financial landscape. The Inside Financial Services report shows more than 250 challenger banks currently operate worldwide, with the likes of Monzo, N26 and Revolut joining Europe’s elite group of fintech unicorns.
According to Finder.com, over a quarter of UK adults have at least one account with a digital bank as of January, with this number expected to reach 23 million in just five years.
Convenience is the key driver of this growth, although better rates, real-time spending notifications and low transaction fees abroad are also attracting consumers – especially younger audiences. In the UK, almost half (46%) of Gen Z-ers, a demographic with growing purchasing power, have a digital bank account.
Of course, the pandemic has played a key role in setting these new tech expectations. With physical banks closed for safety, shopping moving online and a climate of economic instability leading to a desire for more control over personal finances, the use of digital banking services has grown exponentially.
According to Mastercard’s Global State of Pay report, over half (53%) of the world’s population now use banking apps more than before the pandemic and 64% say they will use cash less following COVID-19.
This increased demand for digital may be challengers’ gain, but it risks being incumbent banks’ loss. A Mambu report suggests that, over five years, a bank with a customer base of 5 million could see nearly one in three customers defect to a digital bank.
It’s clear incumbent players need to adapt to retain accounts. But digital transformation programmes can take years and, by the time they’re finished, a huge chunk of their customer base could have walked out the door.
The speedboat advantage
The solution? Launch a speedboat.
This doesn’t mean greater maritime investment: it involves incumbent banks creating a digital banking spinoff that operates like a fintech and mimics their digital challengers. Established banks are like cruise ships: large, expensive to operate and incredibly process-driven. This makes them slow to manoeuver and adapt to changing consumer needs.
But traditional banks can create their own cost-effective ‘speedboats’ which can be launched within months, remain unrestricted by geography and penetrate new markets. In doing so, speedboats enable incumbents to address current market demand, while retaining their core customer base for steady revenue.
There are many advantages to this approach, and speed to market is one of the biggest. A SaaS spinoff, powered by open APIs and an ecosystem of fintech partners, can be launched within just 8 to 10 months of inception, and then start competing directly with challenger rivals.
Their independent nature means they aren’t snarled up by the bureaucracy of traditional banks and don’t have to spend time wrestling with outdated legacy systems. This minimises the risk of customer attrition, while banks build the new solutions that consumers want to see.
Risk management
Launching a speedboat also helps banks manage the risk of digital transformation. Overhauling and updating IT systems inevitably leads to IT down-time and in today’s digital, always-on world, any lapse in service does great damage to a business’ reputation – and bottom line.
Take TSB in early 2018, when their brand new IT system went down and locked out 1.9 million customers, costing the bank £360 million (or €420 million) in fines and customer compensation. TSB’s reputation took a critical hit, with the bank subsequently losing 80,000 customers.
Speedboats sidestep the risk of outages by simplifying IT so it’s easy to update. By running SaaS for all functions and managing discrete functions separately, speedboats can quickly and seamlessly update their core infrastructure. Likewise, any issues that arise can be easily contained and the source instantly identified.
Running the technology on a modern, composable architecture allows for easy testing, greater flexibility and improved development speeds, so banks can give customers cutting-edge tools without cutting out service.
Embracing innovation
Finally, a digital banking spinoff allows traditional banks to move flexibly and embrace innovation. Speedboats give banks the freedom to pioneer new technology and push the boundaries of banking.
By prioritising APIs, cloud technologies and mobile-first thinking, speedboats can deliver results quickly for incumbent players and prove that digital challengers don’t have a monopoly on the new and exciting.
Speedboats don’t just sound great in theory, they work in practice. Mambu helped Dutch banking giant ABN AMRO launch New10, the firm’s digital lending spinoff, to keep pace with competitors and empower their SME customers with fast, transparent financial tools.
ABN AMRO used best-of-service cloud technologies to build their speedboat and create a spinoff that supported a transparent, 15-minute credit decision, fast onboarding and a seamless user experience – allowing funds to be made available within two working days.
Within six months of launching, New10 signed up more than 2,000 accounts, with over 65% of customers new to ABN AMRO, and increased its Net Promoter Score to 60+.
Turning the tide
In this digital-driven, post-pandemic world, consumers favour banks that make their lives easier, provide a smooth customer experience and offer them the best tools to manage their finances.
So far, digital challengers have been winning this battle for the customer, as traditional banks struggle to evolve to changing consumer needs and the growing threat to their business. But incumbent players don’t have to get left behind.
Launching digital banking ‘speedboats’ gives established financial institutions the opportunity to quickly embrace innovation, dynamically explore new markets and unlock additional revenue streams. The financial tide may be changing but traditional banks can still change their course.
