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.
Challenger banks have proven time and time again that they’re a force to be reckoned with. Creating new innovative products and solutions and listening to the demands of their consumers, challengers are constantly striving to race ahead of the traditional banks.
However, despite ranking highly with their customers, the majority of the public feels that they aren’t as trustworthy as traditional banks, with a YouGov survey finding only 17 per cent of respondents believe a challenger bank is as reliable and trustworthy as other banks. Is this lack of trust and loyalty causing them to fall behind, or is the innovation they create enough to push them in front? We asked some of the industries experts to share their thoughts.
So, are challenger banks leading the industry?
David Royle, chief operating officer and MD financial services consulting, SRM Europe answered:
“That very much depends on what aspects of the industry you include in your definition. Over the years, ‘challengers’ have taken many guises, from the supermarket brands of the early 2000s, to the digital start-up brands of the last five years. However, collectively, challenger banks have been the very vehicle to awaken what could be described as a concentrated and complacent market. Unfettered by constraints of their heritage, challenger banks reimagined an array of banking products, channels, and journeys. They re-set the benchmark for customer experience and their emergence provoked more established players to respond. Their philosophy, capability and ambition show no signs of abating – and continue to drive both improvements and competition into the market.
“Many have had their fair share of challenges, and some are becoming cross-market leaders by several measures, however, they are not consistently leading the industry in terms of profitability, market share, ethical and social impact, inclusion, or face-to-face service. Customer numbers and thereby profitability remains the predominant issue but they have undoubtedly caused the big five to bring their A-game and better respond to changing customer behaviours and needs.”
ForwardAI CEO & Co-Founder Nick Chandi, agrees and believes that particularly digital challengers are leading the industry and setting examples by “prioritising user experience and meeting customer expectations.”
He continued: “A report on the UK’s banking industry suggested that the UK’s digital challengers have grown their market share of current personal accounts from 1 per cent in 2018 to 8 per cent in 2021, and their share of micro-business current accounts from 1 per cent in 2019 to 10 per cent in 2021.
“Challenger banks with a digital-first strategy are equipped with the technological agility to meet rising consumer expectations in today’s financial service industry. They are far from being old news, as the pandemic has accelerated the need for digitised banking, with most consumers stuck at home and accessing banking services digitally. Plaid’s survey showed that only 58 per cent of respondents in the US stated they used technology to manage their finance in 2020, but that number jumped to 88 per cent in 2021. Digitising the banking experience is what makes or breaks a financial institution today, and challenger banks are still at the forefront.”
James Butland, VP of financial partnerships, EMEA at Airwallex however, disagrees.
“Challenger banks aren’t leading the industry, but what I would say is that challenger banks are leading certain segments. For example, people under 30 want a simple UI and app to bank with instead of a high-street bank that offers an outdated customer experience. That said, there is still hesitation among this generation who don’t want to fully bank with just a challenger.
For Mike Kraus, principal at CMFG Ventures, challenger banks are industry-leading only in terms of innovation and customer satisfaction.
“In an independent survey of almost 20,000 UK banking customers, challengers far outperformed traditional banks in overall service quality and online/mobile banking services,” he said.
“However, in the US, the percentage of the market share held by challengers remains very small. In addition, challengers are winning with a segment of the market that has traditionally been ignored by traditional banks. No overdraft fees, no minimums, and early access to direct deposit have been lauded by lower-income users who have felt nickeled and dimed over the years.”
Philipp Buschmann, CEO and co-founder of AAZZUR, thinks its all about innovation.
“Challengers are leading innovation in the industry; however, they are not yet leading in profitability in the industry.”
He continued: “I would say that the functionality gap they are creating and the UI/UX is impressive, look at Netherlands, Belgium, and Poland. In these countries, the challenger banks are asking the customer what they want and then providing it. They are driving innovation. Incumbents tend to do market research and then think they know better. They are slow to change and adapt.”
Finally, Joanne Dewar, CEO of Global Processing Services (GPS), agrees with this view and believes challengers are headlining innovation.
She said: “Time after time we have seen challenger banks raise the bar of what is expected; initiating innovation that ripples through other challengers in a matter of months thanks to agile teams, frequent releases and the ability to leverage partners for functionality. Maybe two or three years later, features are seen within traditional banks. Examples range from the basics of online account opening to features such as freezing cards, PIN reveal, gambling blocks, real-time notifications and dynamic spending limits. These show consumers what is possible and what they should expect.”