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What is a Challenger Bank? A Deep Dive

The banking revolution has been unfolding in front of our very eyes for quite some time now. What’s the main challenger to the long-lasting monopoly of brick and mortar banks? Digital banks.

Imagine a bank with no physical branches that only exists on your phone, through a carefully designed mobile app. Digital / Neo / Challenger banks (different names, same meaning), are creating a completely new banking experience for the user.

The main way they try to win market share from traditional banking institutions is through faster, more reliable and modern service via cutting-edge technology. Utilising digital channels immediately creates a bond between challenger banks and younger generations.

Using mobile phones has become second nature to most of us. The convenience of handling your finances in real time, through your phone, without having to run to a high street bank, is a major factor to the early success of challenger banks.

That sounds exciting, but can we really trust them? Are they real banks?

The trust factor is big. As human beings we are creatures of habit, instinctively resisting change. Now add the money factor and you can understand why someone would have reservations and be a bit hesitant about trusting a challenger bank.

All you have to do is look at Accenture’s latest study on how trust affects business. The results are staggering showing that a substantial drop in trustworthiness had cost firms a jaw-dropping $180 billion in revenue over the previous two years.

How do you get people to trust challenger banks then? Enter the 2008 crisis.

The 2008 financial crisis was a big factor in changing attitudes and perceptions on this matter. It revealed the glaring weaknesses and corrupt foundation the traditional banking system was built on. The crisis was eye-opening for the average consumer and the prospect for change in the financial services industry.

Just read this small snippet from the interview of Chime’s CEO Chris Britt with CNBC:

“In the old days you would trust your bank because it had a great-looking edifice in front, with pillars that made you feel like your money is safe and secure,” said Britt, a former senior product leader at Visa and SVP at the prepaid-card giant Green Dot. “Companies like us are a direct result of what happened in 2008, which exposed and resulted in distrust among so many consumers for traditional institutions.”

The crisis burnt every notion of security, trust and credibility associated with banks to the ground. It created a blank canvas for financial innovators and tech enthusiasts to create and propose a new offering to the market.

Challenger banks did not just bloom out of the burnt banking landscape. In the beginning, they started out as FinTech solutions to specific financial problems and scenarios. The thought of a digital bank was something that took some time to nurture, figure out and grow before becoming a reality.

It didn’t take long though because the market demand and tech development were growing at an incredible pace. These very specific FinTech solutions developed into fully fledged banks providing deposit/current/savings accounts and all of the other functions of a traditional bank.

Challenger Banks are the new big thing in banking. What are they? Why are they successful and what does the future hold for them?

How big are they at the moment? Are they noteworthy players in the market?

Let’s talk some numbers.

Germany’s N26 becomes Europe’s top FinTech with $2.7 billion valuation. The online bank raised $300 million from US Insight Venture and Singapore’s GIC

Revolut becomes latest fintech unicorn after $250 million funding gives it a $1.7 billion valuation

In their 2018 annual report, Monzo recorded more than 750,000 customers using current accounts whilst their first round of crowdfunding in 2016raised £1m in 96 seconds

UK’s Atom Bank raised $206M led by BBVA for millennial and SMB financial services

The huge valuations and investment money thrown at these unicorn challenger banks only goes to show how much confidence investors have on the impact and importance of these institutions for years to come. Considering their bold value proposition in a market as rigid and stiff as banking, their impact has been immediate and powerful.

The reason behind this early adoption and response has been the willingness and openness of newer generations to embrace challenger banks and their progressive offering.

Digital banking specialist Crealogix’s latest survey points out that millennials and generation-z are the driving forces behind the challenger bank’s early success.

The survey recorded that 1 in 4 under 37s participants have confirmed they are using digital-only challenger banks and 14% of UK bank customers across all age groups have at least one mobile-only digital banking provider.

The high adoption rates and positive response to the products and services of challenger banks are not the only signs of growth and limitless potential. Just take a quick look at what N26’ CEO Valentin Stalf had to say in a recent interview with CNBC:

“The next goal is taking N26 global and transforming it from being a European company into a global company,” Stalf said. “We would like the business to grow to four to six more markets other than the U.S. and Europe.”

The message is clear – international expansion. What started out as localised, problem specific financial solutions has slowly yet steadily grown into digital banks that are here to challenge the household names in banking.

Challenger Banks are the new big thing in banking. What are they? Why are they successful and what does the future hold for them?

Why have they been so successful, this early?

This answer might seem too simplistic but simplicity is what made the iPhone revolutionise the mobile industry, Amazon transform the retail industry and Deliveroo reshape food ordering and delivery.

Tech, design, personalisation and authority over their financials.

These factors might seem unimportant on a first read but numbers don’t lie. People’s core interest might still be the banking products and services but the impact of UX and UI on the overall experience is huge.

Just try and visualise the mobile app of a traditional bank and then compare it to Revolut, Monzo and N26. The difference between the two is staggering. Traditional bank apps are usually characterised by clunky UX, confusing UI, not reliable logins, basic and ugly graphics and too much unnecessary information that end up confusing and discouraging the user.

Think of it as two shops serving steak but for one of those shops, steak is the only item on the menu. If they want to get customers through the door, they need to get that steak as close to perfection as it is humanly possible.

That’s exactly what challenger banks do. Have one item on the menu and do everything in their power to perfect it. Their app is their shop, their customer service channel, where people can have their bank accounts, their savings, their transfers and loans. A one-stop-shop for all banking needs.

From vibrant colours and minimalistic design, to intuitive navigation and simplified menus, this new breed of banks is pulling all the stops to impress, engage and make the user return for more.

Challenger banks leverage their FinTech expertise to increase efficiencies and resolve painstaiking bottlenecks that have been troubling customers for years. Think of real-time payment notifications, budgeting tools, spending breakdown, loan applications and personalised suggestions on money management.

People seem to relish the sense of power and control this new era of banking is offering them. Everything they need is at their palm. All you need is an internet connection and boom. You’re in business.

Even problems, questions and queries do not require long phone calls and uncomfortable conversations with customer service representatives. You can resolve any problem you might have through a quick chat within the app.

What also needs to be pointed out is the freedom and flexibility challenger banks enjoy. Unlike traditional banks, they don’t have legacy systems or fixed organizational structures to weigh them down. They are free to look at banking problems on a blank canvas. Their main focus is to attack problems at their core without extenuating circumstances affecting their work.

Challenger Banks are the new big thing in banking. What are they? Why are they successful and what does the future hold for them?

What does the future hold for challenger banks?

The real question here is whether challenger banks will stop being called “challenger” and simply be banks. In other words, will they ever manage to overtake their rich-in-legacy but poor-in-momentum counterparts or will they all always be the “cool” second option?

One of the key factors for such a scenario to bloom is awareness. Even though adoption and success have been much higher than expected, these banks are still infants in terms of branding. Time, patience and their ability to communicate their message and stability as a business will be critical in order to infiltrate more demographic groups and capture more market share.

Other than brand awareness, it will be paramount for challenger banks to keep playing their strong card: tech. These companies are seen as innovators and developers of new products and services that understand and meet the customer needs. From faster mortgage approval times to a wider range of products, people need to see that digital banks are not resting on their laurels and they keep on working on customer-centric solutions.

Algorithms based on the interaction of user and app will be able to suggest the best available deals based on your income, expenses and activity. Artificial intelligence will play a huge role in the development and establishment of challenger banks. Not only will it improve customer experience but it’s going to give them a competitive advantage and unique selling point against their traditional counterparts.

Another very important development is the expected change in the regulatory system around banking. There’s an overall appetite for adopting an open standard for accessing bank data via Application Programming Interfaces (APIs). The reasoning behind that is to give consumers more options by increasing competition and closing the gap between banks and fintech startups.

As a recent paper from CBI Insights suggests, 2019 will see fintech startups expand on the back of open banking. Such a development is another competition lubricant: it will decrease costs, streamline operations and minimize the time-to-market process for new products.

Demographics are working in favour of challenger banks. What do we mean by that? As time goes by millennials and generation Z are gaining more and more ground in the market. According to a study from multinational innovative workforce solutions provider ManpowerGroup, millennials will make up 35% of the global workforce, while ‘Generation Z’, those aged 20 and younger will make up 24%.

What does that mean for digital banks? That they will be now trying to infiltrate a market that’s tech-savvy, already accustomed to managing most of their lives through their phones. These two generations have the Internet, mobiles and apps instilled in their psychic so convincing them to switch to a fully digital banking service won’t be hard.

Traditional banks are not oblivious to the shifting landscape. They understand that in order to stay in business and compete with their challengers, they need to adapt.

A recent report by multinational professional services provider PwC shows that 55% of retail bank executives view nontraditional players as a threat to traditional banks, whilst fewer than 20% of executives feel well-prepared for the future. The awareness of what’s coming has mobilized traditional banks to retaliate and combat the meteoric rise of challenger banks.

UK retail banking powerhouse HSBC is opening up their own challenger bank. Andy Maguire, HSBC’s banking Group Managing Director and Group Chief Operating Officer mentioned in a recent interview that the bank partnered with more than 100 fintech start-ups to ensure that the project has the right supervision and development. His words summarize the position traditional banks find themselves in:

“We use them because they work in every country that we work in,” he added. “We do have pride in what we do, but we are not an invention business and we want people who have answers.”

Even when trying to remain competitive, traditional banks seem to understand and accept that technology is key. Neo-banks have made such headway in developing such technologies that trying to beat them in their own game is a lost cause. Partnering with them seems inevitable and that goes to show that even though digital banks are still behind in market share, they are making waves in innovation, technology and product development.

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