By Tony Farnfield, Partner at BearingPoint
Challenger banks created the digital transformation in banking. Fact. They introduced a new school of thought, the one of “constant innovation”. Innovation not only instigated within the bank but looking outside to partner with fintech providers who can add products and services to your portfolio for a fraction of the cost. Banks like Revolut, Starling or N26 have taken advantage of APIs and enabled integrations with a range of fintechs as a cheaper and faster way to launch products and acquire customers.
Only a few names to mention: Starling Bank working in partnership with PensionBee, Yolt, Flux, Yoyo, Moneybox, Habito and Kasko (to name a few across pensions, mortgages and wealth management services). Whilst Revolut is another strong example – working with Bricklane.com, Lending Works, Simple or ETFmatic (across real estate investing, insurance, credit and wealth management services). Not only have these Challengers pioneered by introducing the partnership model, they have done so with great speed and agility enabled by the use of “plug-in” digital solutions.
In particular, cloud based systems have dominated the challenger bank market as they are cost effective, easy to adapt, change and configure, and they offer the much-needed agility that banks need in order to adapt to fast changing customer demands. A partnership with a technology provider that enables that agile working in the cloud once seemed simply a good idea, however, it is now becoming the norm.
Much of the digital solutions deployed offer a “modular” service, whereby you browse, choose and then deploy whichever service or module fits at that point in time to offer a tailored and personalised customer and consistent end-user experience. That is exactly how digital solutions of this sort have been undermining how traditional banks have been innovating so far, and especially the speed at which they do so.
It is easy to think short, innovate launch cycles are simple when most of the systems deployed are cloud-based, however, this is not entirely the case. For card production and payment processing cloud solutions are widely the norm, but when it comes to core banking, Challengers have either opted for traditional tech players (Infosys, Oracle FSS Flexcube, Temenos) or even built their own platform. For instance, Monzo has built their own platform (similar to Revolut), for its core banking operations, but the technology used is mainly open source: Linux and Apache Cassandra used as their database and Google’s golang as their programming language. Their infrastructure is hosted on Amazon Web Services (AWS) whilst for their payment production and personalisation services they use Thames Card Technology. N26 on the other hand uses Mambu’s core banking system on a hosted basis.
It would be very simplistic though to say that Challengers are leading the way in terms of agility in digital transformation, leaving all others behind. In fact, traditional players are catching up and it won’t be long before they’re on par with the Challengers. HSBC’s SmartSave app is a good example of how a big traditional player is keeping pace with its rivals. The app is an evolution to the previously launched Nudge, and it helps customers put money into savings based on a range of pre-set rules. Also, Lloyds banking customers can now combine all their accounts – irrespective of the banking provider – to view all their savings, current accounts and activity in the Lloyd’s banking app.
Looking further towards European counterparts, Danske bank has launched an app for its customers whereby prospective property buyers get tips and advice for every part of their buying journey based on behavioral patterns captured through the activity generated in their accounts.
But with traditional players catching up, where and how will challengers make the break-through to survive and thrive?
The real differentiator and survival test for Challengers will be on the customer acquisition side. What are the products on offer, how quickly can these be taken to market, what’s the value-add, how much are they tapping into the different customer segments through the range of products on offer (wealth, pensions, mortgages, lending etc.)? At the same time, they will also need to ensure that all that is offered is done in a consistent and personalised manner – providing a service and product portfolio that addresses the needs of the real customer holding the smartphone at the other end. Therefore, the product portfolio on offer not only has to be convenient but present an unbeatable value.
But the advantage that traditional banks have is access to data which can provide a wealth of customer insights. To break into new customer segments, Challengers will have to offer a product portfolio that might extend beyond the traditional banking products and services. Tapping into other markets such as the property or the retail market can present synergy opportunities that will offer avenues for reaching out to more clients and winning these segments by offering unified cross-industry and cross-product offerings.
The partnership model has allowed Challengers to offer unrivalled customer offerings; so why not extend this to become the lever for moving beyond industry boundaries and the catapult for customer acquisition?