Banking disrupted: The rise of the challenger bank has been saved
Banking disrupted: The rise of the challenger bank
While customer expectations have shifted, the need for digitalisation was amplified by COVID-19. Along with increased focus on regulation and cybercrime, this scenario presents a series of challenges to traditional banks, highlighted by the rise in more agile financial players.
Since the era of digitalisation and after the crisis of 2007, the banking sector has faced challenges that were unknown during the golden ages of the 70s, 80s and 90s. Back then, high interest rates, bank secrecy (e.g., Switzerland and Luxembourg) and the necessity of personal banking ensured a steady flow of new customers. Bank’s internal systems were simultaneously being developed to support this rapid growth – at a time of non-agile systems development. Until the mid 90s, the internet was mainly used by academics and research organisations and represented only 1% of telecommunications globally. At the same time, Outlook and Excel appeared as part of Microsoft Office. Newly developed systems were then heavily dependent on paper, calculators, paid phone calls and internal post exchange. IT covered only specific banking activities, disconnected virtually from the rest.
So, what is happening today? Incumbent banks with heavy legacy systems are facing fierce competition from the so-called ‘challenger banks’ such as Revolut, N26 or the new local Moneybase, to name just a few. In traditional banks, new projects have focused more on meeting regulatory requirements than on streamlining IT systems. Historically low interest rates have made customers search for the returns outside of banks. At the same time customer needs are shifting – a website or a simple application are not enough – people expect to have their needs anticipated quickly and to access banking services via coherent channels. COVID-19 has increased the pressure on digitalisation. On the top of that, the rise of global digital financial transactions and political turmoil has amplified the necessity of enhanced cyber-security systems.
So, what exactly are ‘challenger banks’? They are recently founded and mostly digital-only banks that currently focus on the retail sector. What is their biggest strength? Vast majority of them, having been founded after 2010, were able to ”jump-onto” newer agile technologies, without any hefty transformation at all! Little paper, no calculators, no costly brick-and-mortar agencies! Additionally, digital-only operations are easier to data mine – hence to understand the client and their needs better. Where a customer waits too long in an online helpline chat – a chat-bot is needed. Customer clicks “like” for the app they are using – a bonus €60 offer pops for a recommendation to friends.
Do these challengers have any weaknesses at all? Indeed, they tend to think globally, not locally and product offerings do not differ significantly from one country to another. Challengers focus mostly on retail customers, omitting big corporations and High Net Worth Individuals. High-amount lending (i.e., mortgages or corporate loans), advisory or any other highly customised approach are still in early development.
Current banking sector regulations were brought in to face global social and economic challenges such as risk of terrorism, tax evasion, private data leaks and lack of transparency in the financial sector. For those who have not adjusted to new compliance standards - heavy penalties are applied. Compliance comes at a price - regulations like MIFiD II, AML, GDPR and FATCA and CRS agreements need budget to be addressed. Internal changes to meet the new regulatory demands have therefore out-paced digital innovation in incumbent banks.
We want it all, we want it now!
Customer behaviours are shifting. Today’s 17-year-olds know the world where social media is omnipresent. 30-year-olds know the world where the Internet is omnipresent. No surprise, their consumer habits are drastically different from those of their parents. So, what do millennials and gen-z’s actually want? The new generation of consumers want their banks to support financial decisions with helpful information, at the right moment and at the right place. A leasing contract for a new car? Would you like to buy an insurance as well? A credit card with fuel purchase cash-back? Consumers get easily accustomed to the highly responsive and tailored services, where elements and interactions still keep the human touch. Slogan Talk to the real person, not a robot! is actually attractive. Similarly, with tasteful and modern-looking apps and cards design, such as the transparent/metal N26 or design-your-own Revolut cards.
Hiring a social media marketing specialist certainly does no harm either, where influencers like Austin Hankwitz can explain passive investing or tax optimising in fancy Instagram videos.
The new normal
Needless to say, cybersecurity has become a top priority for firms, as cybercrime damages stood at $6 trillion in 2021 across industries – almost double when compared to 2015. Given the rapid rise of online banking (and not only banking) activities and the current political turmoil, the digital world has become one of the battlegrounds. Stay vigilant – Si vis pacem, para bellum! The global pandemic and resulting restrictions have accelerated digital adoption among banking clients, who have had to stay home and avoid cash handling. Banks have profited from the increased trading activity encouraged by the “discounted” trading market, low interest rates on saving accounts and simple human boredom. Newly learned digital skills will not be un-learned and are likely to become used as a routine.
Incumbent banks need to refocus and redefine the role they want to play and what they want to be in the current market. Do they sit back, reconciled to their existing role, and risk a diminishing market share as new fresher challengers join the fray? Or will they raise their heads, understand the changing demands and expectations of younger generations/customers and invite innovation and agility into their day-to-day business? This requires a vision beyond simply keeping pace with regulation. It demands a concise and long-term strategy for an on-going transformation. Principles such as a customer-driven strategy, security, data-driven decision-making, respect of regulation and data privacy will need to lead the bank, its processes, its culture and its product offering.
About the author
Zuzanna Wilkowska is a Senior Consultant at Deloitte Consulting in Malta.