Challenging the challenger: Why the digital transformation of traditional banking is key for competing with challenger banks

By Sam Schofield, Senior Vice President: Global Enterprise at Udacity

 

Monzo and Revolut are only seven years old. Starling, which is often thought of as one of the first challenger banks, is just eight years old. Much of what we consider the ‘challenger’ or ‘digital’ bank sector came into being in 2015/2016. It’s a brand new industry and yet it has had an outsize impact on how we all manage our finances.

Back then, the legacy banks looked vulnerable. Most were still reeling from the global financial crisis of 2008/2009, and the narrative was focused on the new banks potentially taking meaningful market share.

As a reaction, the legacy banks embarked on wide-ranging and often expensive digital transformation efforts to keep pace with the challengers. Fast forward to 2022, and much of the functionality pioneered by the challengers has been successfully implemented by the legacy brands. An instant phone notification when you make a transaction? It felt pioneering in 2016, now it feels ordinary and expected.

The challenge that neo-banks have is not around adding more and more features (arguably there are only so many different ways we want to interact with our bank), but that to become profitable and survive, they have to become the very thing they used to fight against – a financial services provider that offers profitable services like loans, overdrafts, and mortgages. This is a process that many have undertaken already, with some success.

So, the battle for market share can be summed up like this: either the challenger banks reorientate their business models to focus on profitability, or the legacy banks innovate them into irrelevance.

Legacy banks might feel dramatically unprepared for the fight. But that ignores their greatest strength: people.


The shift away from high-street banking presents opportunities

The legacy banks are still grappling with digital transformation, but this presents opportunities as well as potential threats. Last month, Santander Group became the latest retail bank to scale back its high-street customer-facing operations presence when it unveiled plans to shorten its branches’ opening hours.

The news came a month after Lloyds Banking Group also closed more than 60 UK-based branches. While the withdrawal of retail banking from the high street has not come without resistance from the public, both banks cited a decline in branch usage as the cause for the scale back.

As of January, more than a quarter of British adults had opened a digital-only bank account – three times more customers than in 2019 – and this rise doesn’t seem to be slowing down.

Ultimately this feels like the right approach, and traditional banks have some way to go before their digital offerings can keep pace with the challenger banks. In the same month that Santander announced it would be scaling back customer-facing operations, the Spanish bank also revealed that it had migrated 80% of its IT infrastructure to the cloud. Whilst clearly a positive step, it will come as a surprise to those not in financial IT that this is news in 2022 when most non-banking companies have a well-established cloud strategy.

Encumbered by ageing and creaking tech stacks, the legacy banks will struggle to keep pace unless they can speed their digital transformation efforts. All the while, the likes of Starling are doubling in valuation. In this case, the proceeds of a recent £130.5m funding round will provide “a war chest for acquisitions” as the challenger continues to scale.

Legacy banks have an enormous, diversified workforce, while challenger banks take pride in their ‘tech-first’ approach to hiring. Recently, the CEO of challenger bank Revolut stated that its “headcount is mostly genius data scientists, product and business people rather than bankers”.

Legacy banks can’t necessarily compete with that hiring strategy, which is no surprise given the findings of a recent Udacity study where 55% of UK businesses claimed they couldn’t hire the right job-ready talent, resulting in the slow down of digital transformation efforts.

However, the solution may be closer to home. Banks must look inwards and utilise the invaluable talent that they already possess. As the trend of branch closures continues, legacy banks should look to retain and retrain staff with digital skills via talent transformation initiatives. For instance, Lloyds recently stated that it would try to find new roles for the 124 staff that have been impacted by recent bank closures, recognising the “need to adapt to the significant growth in customers choosing to do most of their everyday banking online.”

With a range of talent transformation services already on the market that provide ready-made technical skills training, traditional banks such as Lloyds have the option to seamlessly retrain their branch staff into more digital-focused roles. For instance, an underwriter could utilise their existing industry knowledge to make better credit and lending decisions with the help of AI and data analytics. Equally, future-thinking banks are beginning to leverage data science to help their fraud departments improve customer security.

By enrolling existing employees on talent transformation initiatives in AI, ML, and data science, traditional banks can tap into a readily available talent pool that possesses invaluable industry knowledge that can then be combined with the technologies of the future.

It was once accepted that traditional and challenger banks have different offerings to serve different demographics, but this view has all but vanished. To keep on top, legacy banks must remind themselves of this fact, while also recognising that their people are their biggest asset. Amid a digital skills crisis and the Great Resignation, banks must equip their staff with the necessary skills to remain valuable as we journey into a new age of digital-first banking.

spot_img

Explore more