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 newfound cooperation 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.
Coopetition is a newly created buzzword that’s been flying around the industry over the last year. A portmanteau of cooperation and competition, this is where challengers team up with the incumbent financial institutions to create new products, services and solutions for the industry. Many believe that this is a new way forward for the sector looking to continue its innovation, with teamwork being essential in order to create an ecosystem that better serves its consumers.
To find out more about this new trend, we spoke to several industry leaders to get their thoughts and share their insights into the industry’s latest fad.
Julia McColl, chief product officer at Chetwood Financial believes collaboration is important in order to best benefit the consumers.
She said: “Firstly, let’s address the issue of competition. Just because you’re a bank or a fintech doesn’t mean you’re necessarily competitors in the traditional sense of the word – you won’t be operating in the same space, or same customer segment, as all businesses within the same sector at the same time. This can create avenues where businesses can learn from each other. And we do. Conferences, forums and webinars regularly bring members of the same industry together to share ideas and best practices.
“For me, competition and co-opetition are two sides of the same coin. As a business, you’ll have commercial objectives, which puts you in direct competition with others in the same space but this doesn’t prevent you from working collaboratively on areas that transcend competition – such as promoting and enabling financial inclusion. At Chetwood, we work with businesses from a range of verticals, including traditional banks, to improve customer outcomes. Our banking-as-a-service proposition, for example, enables traditional banks to lend to existing customers who wouldn’t normally fit within their acceptable credit-risk profiles. Although the customer sits on our balance sheet, the proposition is branded as our partner so they benefit from the positive customer experience and the halo of goodwill that comes from providing services to customers that they would normally decline. This is particularly important for those who have loyal customers for non-lending products.”
Shifting Customer Demands
Nathaniel Harley, co-founder and CEO, MANTL said: “According to recent data from Cornerstone Advisors, more than 25 per cent of Gen Zers and nearly 33 per cent of Millennials now call a digital bank their primary checking account provider. It’s clear that digital banks are no longer the ‘challenger’ banks they once were. While some may claim that this means the digital banks have ‘won’, we believe this is more indicative of shifting customer demands.
“Banks and credit unions of all sizes must align their digital roadmap with the features and digital banking experiences that consumers and business owners now expect. For many institutions, this means doubling down on the basics. More than half of consumers (58 per cent) and small business owners (57 per cent) will not do business with an institution that doesn’t offer online account opening, regardless of whether they prefer to open an account online or in person. Currently, 43 per cent of community banks and credit unions do not offer online account opening for consumers and that figure is even higher for businesses. This is because community financial institutions have been held back by legacy banking infrastructure, which is the number one challenge limiting modernisation in the US banking industry today. Legacy technology vendors – FIS, Fiserv, Jack Henry – dominate the industry but their technology is outdated and they’ve taken an acquisition approach to innovation. That’s why, in the next year, the bank-fintech relationship will be critical to help community financial institutions close the technology gap and meet growing consumer and business demands for digital banking services.”
Adopting new trends
ForwardAI CEO and co-founder Nick Chandi, said: “The agility in adopting newer technology to meet customer needs makes challenger banks a very appealing option compared to traditional banks. Unlike challenger banks, traditional banks are often slower to embrace and implement innovation, leaving themselves unable to compete for underserved segments that are targeted by challengers with newer technology.”
Vinay Prabhakar, VP global marketing, Volante Technologies believes that “coopetition isn’t exactly the new competition.”
He continued: “The “old competition” is alive and well. But it is definitely a new operating model for the banking industry, which tends to lag in adopting new trends. If you look at big tech, co-opetition is business as usual: Apple has Google apps in the App Store, and vice versa; Microsoft provides hardware vendors with the Windows operating system for their PCs, but also offers competing hardware. It’s just that banks are catching up to this way of doing business.
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