The rise of challenger banks has been a particular hallmark of the fintech industry over the last decade. Created to disrupt the traditional banking sector, challengers are full to the brim with innovative, often digital offerings aiming to serve customers in a variety of ways. With the customer taking centre stage and new found co-operation with incumbents,this month we explore some of the classic attributes of challenger banks and their efforts to stay one step ahead of the industry.
The rise of challenger banks has been nothing short of meteoric, with 17 institutions having already reached unicorn status. However, as challengers continue to thrive, some have already begun to question if they are already on their way out as the initial hype wears off and incumbents start to catch up with their digital offerings.
We spoke to various experts across the fintech industry to gauge the consensus toward challenger banks and their relevance, posing the question, ‘are challenger banks already old news?’
Imitation is the sincerest form of flattery
Jehan Sherjan, insights director at SRM Europe, responded to the question we posed saying, “Far from it. They are no longer new news to those closely associated to the banking sector, but continue to build awareness, consideration, and engagement with new audiences. They are becoming maturing organisations themselves who are dealing with their growing pains but continue to develop their service offering to meet a broader array of customer needs and wants. The pandemic will have influenced their rate of development, though this is not unique to the challenger banks.
“Challenger banks continue to remain relevant in terms of the service they provide and the services they are developing. Perhaps a more significant challenge has been the response from traditional banks, who have invested significantly to improve their own offerings. If imitation is the sincerest form of flattery, then the challenger banks should take comfort from the sector’s response – but remain focused on their own journey.”
Still scratching the surface
Mike Kraus, principal at CMFG Ventures looked at the bigger picture of challenger banks’ impact across the world, “In the US, challenger banks really haven’t scratched the surface of opportunity yet. Only 7.7 per cent of Americans had a neobank account in 2021 which is fewer customers than Nubank has in Brazil alone. In 2021, 65 per cent of all new bank accounts opened were with neobanks showing they remain very relevant, especially with younger consumers.”
An old concept
Philipp Buschmann, CEO and co-founder of AAZZUR, gave a personal example of how the challengers concept is old but the companies continue to bring something new, “The concept of challenger banks is old news, but new challengers are new news. They target very specific customers and target those customers with very specific products. We will see niche banks arise, with a bank for families, bank for SME business, etc. If there are a set of circumstances that make cohesive products for specified groups of people there is more likely to be uptake from that group. For example, in Germany we have the Vivid card, which gives discounts with shops, and I use this whenever I shop, I use my credit card for travelling as it is designed for travellers. I also have six challenger bank products and two regular products and each challenger product is for a specific purpose.”
Becoming the norm
Joanne Dewar, CEO of Global Processing Services, responded to the question of if challengers were old news with, “Absolutely not, but they are quickly becoming the norm and a fundamental pillar of the retail banking landscape. The rapid transformation of the consumer and SME banking space has shaken long-standing banking business models to their foundations. As customers shun traditional bank branches to conduct banking from the palm of their hand, many large traditional banks are now launching their own digital-only banks in an effort to compete with challengers. There are now second and third generation challengers which are further disrupting the landscape.”
Innovation stops challengers from becoming old news
James Butland, VP of financial partnerships, EMEA at Airwallex, said, “Challenger banks are not old news. They’ve already built the financial infrastructure, which allows them to easily innovate and build new services. This is contrary to traditional banks that have legacy systems and are unable to keep up the pace.”
Segment focus is the key to long term success
To avoid becoming old news, Lee Wetherington, senior director of corporate strategy at Jack Henry, said this about challengers, “Challenger banks that focus deeply on narrow segments will enjoy more success and long-term viability than those who remain shallow and generic in their offerings. That said, the abstraction of the tech stack that underpins banking will continue to make it cheaper and faster to launch challengers and direct-to-consumer fintechs. That proliferation will worsen the financial fragmentation consumers continue to experience but also create opportunities for incumbents to solve for that fragmentation using open banking rails and tokenised API aggregation.
“We can expect challenger banks and fintechs with related services to continue to arise and serve as laboratories for creative go-to-market strategies. Community financial institutions can learn from challengers’ successes and failures, then quickly improve upon them while also differentiating on personal service at the moment of need inside digital contexts—something most challengers can’t offer or scale. Relationship banking still matters and will always be in demand.”
Challengers and incumbents isn’t a case of ‘old’ versus ‘new’
Ahmed Karsli, founder of Papara said, “Challenger banks aren’t old news, and for as long as customers want the best out of their banks, will never be.
“That said, banks that are disrupting the financial ecosystem do work hand in hand with traditional incumbents, which has helped to make the financial services landscape more innovative as a whole. It isn’t a case of ‘old’ versus ‘new’, but rather moving the dial to ensure that all customers get the best out of whichever bank it is they use.
“In the same way that we’ve used an existing banking model as a foundation to promote financial inclusion, the technology we’ve developed is challenging traditional providers to think more innovatively about how they serve their customers. Having both is no bad thing.”