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Banking

HOW TO COMPARE CHALLENGER BANKS

by Jason Tassie , Director – www.knowyourmoney.co.uk 

 

The banking landscape has transformed over the last few years with the emergence of new providers, largely thanks to the vast growth of technology. Even as little as 10 years ago, the ‘big four’ high street banks dominated the banking market and were the only real choice for people looking to open an account or use their other services.

Over the last few years, however, a range of ‘challenger banks’ have appeared that are changing the way we bank. As well as being new names, what separates these challengers from the traditional banking providers is their online and digital nature. Rather than having a physical branch that customers can visit, these challengers tend to operate solely online, particularly via mobile apps, although some do have premises customers can visit such as Metro Bank and Virgin Money. However, this article will be looking primarily at the digital-only banks that are growing increasingly popular, especially among the younger generations. The use of fintech by these banks makes them more efficient, adaptable, and responsive to change so they can cater for the specific financial needs of their customers.

Digital challenger banks come with a range of additional features that many traditional banks don’t provide, even if they too have a mobile app. Of course, as a standard, most banks would offer current accounts and enable customers to perform several basic services such as transferring money, receiving payments, and withdrawing money. However, mobile challenger banks also come with other features that can help customers to manage their finances and achieve their spending or saving goals.

Depending on how individuals plan to use a challenger bank account and what their priorities are, they will be looking at some of the following features.

 

Jason Tassie

Banking functions

Not every challenger bank offers the same services and functions, so it is worth double-checking what each one provides. Most will allow you to transfer money in and out of your account, but not all of them will enable you to set up direct debits or standing orders, and some may charge fees for cash withdrawals.

Many challenger banks also have real-time spending notifications so you can see immediately when money leaves your account. This is not only helpful to keep on top of how much you spend, but also to quickly identify if anyone uses your account fraudulently.

Although there are some exceptions, the majority of challenger banks offer a bank card alongside their digital service, which customers can freeze/unfreeze via their mobile if it gets lost or stolen. Customers should be aware that they may need to pay a small, one-off sum to receive their card.

 

Budgeting tools

A key attraction of mobile challenger banks is their ability to help customers control and manage their finances. For example, some may categorise your spending into eating out, leisure, bills, travel, and more, which enables you to identify where you could afford to cut down your expenditure. They may also offer a ‘spending report’ or ‘spending projection’ which further highlights how you could manage your money more effectively, whilst some may give you the option of setting spending limits.

If you’re looking to increase your savings, some challenger banks offer further tools that can help. For example, some have ‘savings pots’ where you can easily transfer money from your main account, schedule monthly deposits, and round up transactions to put any spare change into savings. These savings pots are not the same as a savings account.

 

Overdraft

Most traditional banks will offer an overdraft facility to its customers, but this is not necessarily something provided by all challengers. If an overdraft is something you think you need, then it is worth looking into whether you can get a prearranged overdraft with a challenger bank and what, if any, fees would apply.

 

Fees

Whilst many challenger bank accounts are free, customers should always look out for potential fees. As discussed above, getting a bank card or overdraft may incur fees, but some challengers may also charge for cash withdrawals and for any of their ‘premium’ accounts which offer additional features.

 

Overseas use

If you travel a lot, it is worth checking out what overseas functions the challenger bank can provide. For example, some banks may not place any fees on transactions or withdrawals made abroad, whilst some will.

 

Safety and protection

Particularly with new and unfamiliar names, it is important to do some research to make sure they are a legitimate bank. Every provider should be regulated by the Financial Conduct Authority (FCA), and many will also be part of the Financial Services Compensation Scheme (FSCS). This latter scheme protects the first £85,000 of your savings, ensuring you will receive compensation should anything happen to your provider.

 

In-app support

Unlike with a traditional bank, if you have a problem, you can’t just go into your local branch to resolve it. All queries and issues will be dealt with online through the app, and many will provide a 24/7 live chat service, which goes beyond what many high street banks can offer.

 

What else can challenger banks offer?

Originally, these challenger banks were primarily focused on providing current accounts and helping people manage their everyday banking needs. Now, however, many are expanding into other banking areas, such as savings accounts, mortgages, loans, and more. These extra functions are not offered by every challenger bank, so customers should consider exactly what they currently want from their bank, as well as their potential future needs, to help them decide which provider to choose.

 

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Banking

MORE THAN REGULATION – HOW PSD2 WILL BE A KEY DRIVING FORCE FOR AN OPEN BANKING FUTURE

Ralf Ohlhausen, Executive Advisor, at PPRO

 

Whilst initially seen as simply a regulation exercise, the second Payment Service Directive, also known as PSD2, has been a key driving force behind Open Banking, an initiative that presents a hopeful vision for the future of the financial services sector. Thanks to the advancement of technology, the payments industry is currently seeing disruption to legacy banking systems, and a move towards a world of Open Data. With Open Banking, third-party providers (TPPs) can offer customers a wealth of new and automated services beyond their standard bank offerings, such as what products to buy or even advice on who to bank with.

PSD2 has been created to ensure that banks create mechanisms to enable third-party providers (TPPs) to work securely, reliably and rapidly with the bank’s services and data on behalf of and with the consent of their customers. PSD2 requires EU member banks to give authorised, i.e. licensed TPPs, access to customers’ accounts either via Application Programme Interfaces (APIs) or their user interfaces. It also mandates the use of Strong Customer Authentication (SCA), which requires multiple factors of authentication from a customer to initiate electronic payments and grant access to transaction data.

Despite the progress of PSD2, however, there are still challenges to overcome to achieve widespread adoption and to meet Open Banking objectives. So, what are the current roadblocks that European banks and financial services need to overcome to make Open Banking a beneficial reality for all?

 

Ralf Ohlhausen

Delays to API development

A crucial factor standing in the way of the acceleration towards Open Banking has been the delay to API development. These APIs are the technology that TPPs rely on to migrate their services and customer base to remain PSD2 compliant.

One of the contributing factors was that the RTS, which apply to PSD2, left room for too many different interpretations. This ambiguity caused banks to slip behind and delay the creation of their APIs. This delay hindered European TPPs in migrating their services without losing their customer base, particularly outside the UK, where there has been no regulatory extension and where the API framework is the least advanced.

 

A lack of awareness

Levels of awareness of the new regulations and changes to how customers access bank accounts and make online payments are very low among consumers and merchants. This leads to confusion and distrust of the authentication process in advance of the SCA roll-out. Moreover, because the majority of customers don’t know about Open Banking yet, they aren’t aware of the benefits. Without customer awareness and demand it may be very hard for TPPs to generate interest and uptake for their products.

Recently some regulators and banks, such as the Central Bank of Ireland, have made decent efforts to raise awareness of the changes with PSD2 campaigns. But it isn’t reaching the general public. When it does, it’s often because of scaremongering or fear, uncertainty and doubts around data security fuelled by incumbents to protect their business. This also isn’t the right way to approach the issue as it will lead to people being more afraid, rather than aware. Instead, it is the role of payment service providers to educate their customers about Open Banking requests or opportunities, to ensure the public are aware of the changes to payment authentication procedures when SCA comes into play and are empowered to move their data.

TPPs have a real vested interest in getting customers on board with Open Banking. They should build on their customer relationships to grow trust and raise levels of education around the changes. When customers sign up for a new service, TPPs need to tell them explicitly what to expect before they have to do it, plus what explicit consent is required to access their account information in exchange for value-added services.

 

Outweighing the challenges with opportunities

Although the introduction of the PSD2 regulation hasn’t been seamless for the banking and fintech industry, it is set to offer many benefits and advantages for the end-customer, and the financial industry. In fact, the regulation will create an integrated and frictionless European payments system, that will provide the customer with more choice, control and security over their finances than ever before.

One of PSD2’s primary goals is to provide greater protection against fraud for banking customers, who may have previously been open to risk through weak authentication and unregulated data-sharing practices. The new rules insist on enhanced security requirements, including the use of Strong Customer Authentication (SCA) to protect customers while making electronic payments.

Furthermore, TPPs unencumbered by legacy technology have long been able to innovate faster than traditional banks. Now, this regulation will provide regulated and secure access to customer data, allowing them to develop products even more quickly. The new regulation also promotes technology on a European level and encourages fintechs to do what they do best: innovate.

It’s also important to not forget that PSD2 regulation increases market competition allowing customers to choose a wider range of suppliers for their banking and payment services without having to switch their bank for that. The decoupling of banking services from the underlying account infrastructure will make it easier for customers to opt for the banking services that best fit their needs. It also increases the number of financial providers, services and products which customers will be able to choose from.

 

The future of Open Banking

The financial services landscape is becoming a firmly consumer-centric environment. Across the UK and Europe, we’ll continue to see the rollout of technologies that put control in the hands of consumers. Open Banking will be pivotal in its role, opening up new avenues and opportunities for both banks and payment service providers (PSPs).

Thanks to Open Banking, the ability to share data securely in the retail banking sector has led to a sophisticated ecosystem where the customer is in charge of their payments and choice of banking services. Over the next decade, we should expect to see the same level of transformation in our digital services and data sharing, leading to a complete rebalance of services where customers will be able to actively own their data and use it the way they like.

Europe is currently leading the Open Banking race, so the successful implementation of PSD2 and SCA is extremely important to maintain the lead and build a future with Open Finance and Open Data as well.

 

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Banking

BANKING’S SECOND WAVE OF TRANSFORMATION: INTEGRATING THE CLOUD-ENABLED FUTURE BANK

Keith Pearson, Head of Financial Services EMEA, ServiceNow

 

The last six months have seen significant changes to the financial services landscape, with operational resilience, economic recovery, cost reduction and an acceleration of digital transformation key themes emerging from the industry.

At the start of this crisis, much of the banking industry was in a different position to many businesses. The 2008 recession spurred a need for improvements and combined with the emergence of tech-savvy fintechs, the industry has seen a major shift as customer expectations have adapted. The pandemic has forced organisations to accelerate innovation already part-underway in the banking industry.

As banking experienced its first wave of transformation, institutions focussed on customer engagement, uniting physical and digital channels for an improved customer experience. Banks invested heavily in front office digital technology, creating visually appealing mobile apps, engaging online banking experiences and technologies for bankers to personalise customer engagement.

However, this digital engagement layer is not enough. Regulations like PSD2 reinforce the necessity to remain compliant, adding additional pressure to the digital transformation process which in turn has been accelerated by COVID-19. Banking is therefore in the midst of its second wave of transformation, where financial institutions are creating and seeking out critical infrastructure to better connect underlying middle and back office operations with the front office, and ultimately, with customers.

 

Keith Pearson

A disconnected operation

Many financial organisations are still struggling because they have yet to streamline, automate and connect the underlying processes that are enabling customer experiences. Which poses the question: why is connecting operations so difficult?

In most cases, multiple systems are still glued together by email and spreadsheets to track end-to-end status. Around 80% of a middle office employee’s time is spent gathering data from systems to make a decision, with only 20% spent actually analysing and making the decision.

The disconnect negatively impacts customers. For many, experiences like opening a bank account or getting a mortgage involve clunky, manual processes riddled with paperwork and delays. When front and back office employees lack the ability to seamlessly work together, customers can be asked for the same data multiple times, elevating frustration.

Customers have little patience and can be inclined to publicly broadcast problems when left unresolved. In a world of social media and online reviews, this could be detrimental to a company’s reputation.

With digitally native, non-traditional financial services players gaining market traction by offering a seamless customer experience, maintaining satisfaction is crucial for traditional banks to ensure that customers don’t switch. Banks must focus on making it easy for customers to do business with them by offering faster cycle times with more streamlined operations.

 

The fintech effect

Fintechs and challenger banks like Starling have shown what connected operations can do, having been built with digitised processes from day one. Modern consumers expect round-the-clock service from their bank. As financial institutions look to the future, developing a model of operational resilience that is capable of withstanding unforeseen issues, like power outages or cyberattacks, is critical to minimising service disruption. Having connected internal communications between front and back office staff means customers can be notified about any problems, how they can be fixed and when they might be resolved, as well as receiving continuous progress updates instantaneously.

Automation can go a step beyond this. Today, customers expect companies to not only do more and do it faster but to prevent problems arising in the first place. With connected operations and Customer Service Management (CSM), banks can proactively fix things before they happen and resolve issues fast, enabling frictionless customer service and replicating the ‘fintech effect’.

 

What about compliance?

In the European Union and the UK, PSD2 and the Open Banking initiative are giving more control to the customer over personal account data. Digital banks such as Fidor and lenders like Klarna are seeking to reinvent banking by offering customer-centric services. But the process of streamlining underlying operations is not simply about providing customers with the fintech-esque experience. More than 50% of a financial institution’s business processes are also impacted by regulation.

Financial services leaders are focussing on streamlining and taking cost out of business operations while also placing importance on resilience. Regulators are pushing banks to have a firmwide view of the risk to delivering their critical business services.

Banks must invest in digitising processes to intuitively embed risk and compliance policies, which are generally managed separately and often manually from the business process, leading to excessive compliance costs and risk of non-compliance. With the right workflow tools for monitoring and business continuity management, banks can minimise disruption by gaining access to real-time, actionable information about non-compliance and high risk areas, encompassing cybersecurity, data privacy and audit management.

Increasing openness of financial institutions to regtech solutions, or managing regulatory processes in the industry through technology, will prove key during this second wave of transformation. Banks will increasingly move away from people and spreadsheets and toward regulatory solutions that provide a real-time view of compliance and provide an end-to-end audit trail for Heads of Compliance, Chief Risk Officers and regulators.

With a unified data environment aided by technology, financial institutions can drive a culture of risk management and compliance to improve business decisions.

 

Riding the wave

The banking industry is still in the midst of its second transformation, and the pandemic hasn’t made it any easier. But riding this wave and successfully digitising processes to connect back and front office employees will present a profound difference to customer service.

The bank of the future will be frictionless, digital, cloud-enabled, and efficient; interwoven into the fabric of people’s lives. It will continue to be compliant and controlled but will deliver those outcomes differently, with risk management digitally embedded within its operations.

Demonstrating the operational resilience of its key services will not only drive customer confidence but will also provide a greater indicator of control to regulators and the market, adjusting overall risk ratings and freeing up capital reserves to drive more revenue and increase profitability.

The institutions that will thrive in this increasingly digital and connected world are the ones that are actively transforming themselves and the way they do business now, by taking learnings from fintechs, following regulations and paving the way in defining the future of financial services.

 

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