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.
In the early days of challenger banks, new arrivals to the market were seen as a threat to incumbents; a similar scenario in almost every sector.
Fresh faces once meant fresh competition in the world of finance, but as challenger banks continue to cement themselves as industry figures in their own right, both sides are beginning to move away from the initial feelings of threat and distrust.
This is a topic that has been thoroughly unboxed earlier into our challenger bank focus, so today we’re going to be looking at the picture from a different angle, to further understand the benefits of the two sides working together; as seen through the eyes of on-the-ground industry professionals.
Vinay Prabhakar, VP of global marketing at Volante Technologies, opens the discussion with: “The benefits are clear, as they are in the tech world: increased value for customers, greater revenue, higher market share. But co-opetition has to be done right – good partnership structures will create more than the sum of their parts; bad structures will destroy value.”
According to Julia McColl, chief product officer at Chetwood Financial, speed to market, risk management and the sharing of industry knowledge are all examples of the benefits collaboration could bring: “There are some obvious benefits for traditional banks to work with challenger, or digital banks. Let’s take speed to market as an example. We know that, despite ongoing digital transformation projects, traditional banks just aren’t as agile as challengers. Being able to drive projects to market much more quickly, means a quicker route to revenue and ultimately profit.
“Another interesting benefit is the ability to open up propositions to new customers without taking on the risk – where a bank might typically cap their annual percentage rate (APR) for loans at 29.9 per cent pricing ‘riskier’ near-prime customers out, our banking as a service (BaaS) proposition would enable them to offer loans at say 39.9 per cent APR without taking on the credit risk. In this instance, the customer would sit on our balance sheet, but to all intents and purposes have a loan with a high-street brand.
“You’ve also got softer benefits such as learning and sharing best practices – how you deal with Covid regulations, diversity inclusion, financial inclusion and vulnerability are all examples of areas that transcend competition. It’s these areas where collaboration works in the interests of the individual businesses and drives consumer interest – and isn’t that what we all want – to do the right thing by our customers?”
Mike Kraus, principal at CMFG Ventures, the venture capital arm of the US insurance company CUNA Mutual Group, largely agrees with the points raised by McColl, and provides an interesting US-specific approach to the benefits: “In the US, a clear benefit for challenger banks partnering with traditional banks is leveraging a banking charter. This provides the challenger with the ability to provide banking services with far fewer regulatory obstacles. The banks ‘renting’ their charter are typically compensated via a monthly program fee.
“Traditional banks may be able to grow loan volumes with lending partnerships or provide its customers with an enhanced user experience if technology capabilities are outsourced. Partnering with challengers can also allow traditional FIs to rapidly accelerate time to market for new products.”
Stacey Conti, VP of global strategy, sales and partnerships at Sybal.io, added to this with: “Allowing Fintechs to work in the same space coexisting with banks creates a new audience or group of bankable clients that otherwise may have avoided the traditional banking system. There is a large percentage of underbanked in the US because of the economic structure and lack of fintech to attract more tech-savvy consumers with trust in the financial system.”
The benefits of working together are accentuated when we look at the wider image of what both sides are able to achieve when partnering with others who do not work in their immediate field of banking. For example, Santander has recently been able to establish new payment corridors between Spain and the emerging markets of Brazil through its work with PagoNxt.
On a similar note, Starling Bank recently joined the lending panel of Funding Option to provide UK SMEs with more comprehensive and efficient lending options. The benefits of working together in the banking field are further put forward by Disruption, a book by Ignacio Garcia Alves, Philippe de Backer and Juan Gonzalez. In it, they identify collaboration as the new survival plan for banks on both sides who might be falling behind.
David Royle, chief operating officer and MD of financial services consulting at SRM Europe explains how the emergence of fintechs has inspired traditional players to rise to a new level of digital: “The rise of fintechs has undoubtedly raised the bar in terms of usability and digitally rich functionality to improve overall customer experience, which has driven huge investment in innovation and digital catch-up activities by the high street brands, to the greater benefit of customers across the sector.
“In a BaaS environment, successfully combining the innovation, culture, technology, absence of legacy and regulatory constraints that fintechs enjoy on the one hand, with the entrenched market knowledge, technical skills, balance sheet strength, brand and data of traditional banking brands on the other, can result in positive outcomes that place the resolution of customer needs and problems at their heart.”
However, Royle also highlights how the hype around challenger banks is now, as he sees it, beginning to fizzle out, and that the pools of consumer interest are flowing back into traditional hands: “However, as ‘innovation’ becomes ubiquitous, so the points of difference start to fade and with UK customers generally quite unwilling to switch banks, there becomes less to differentiate banks of all kinds and, therefore, less to compete on,” he continues.
“The early adopters were attracted to a differentiated digital experience and bright coloured cards and were quick to get onboard, however the market has reverted to valuing more traditional dimensions including service, ease of use and value for money.”