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Challenger Banks and Established Banks: Innovation maturity

18 Mar 2019
by Violeta Uzunova

Banking

Challenger banks, referred to as neobanks or financial start-ups internationally, are quickly winning customers in the UK, while traditional banks find it hard to make strategic investments in their digital advancement. Moreover, they have a long road to go to catch up with the trends and achieve modernization focused on simplicity. This article examines the rising vs. established banks’ innovation maturity, seen through our experience with both, and shares key tips for maintaining a competitive advantage in the sector.

Embracing the Fintech revolution  

Though the topic of fintech is over-discussed, it is one that cannot be neglected when it comes to banking in 2019. Driven by tech trends like blockchain, automation, big data, as well as increased regulation, this revolution directly impacts small and big banking organizations. Machine learning and advanced analytics are introduced to help improve risk monitoring and mitigation across the sector. Banks are able to leverage the power of internal data, external market data and advanced analytics to better understand customers and risk factors. Artificial intelligence and automation enable banks to examine transactions in real time and avoid fraud by additional authentication and assessment. Overall, all these technological innovations offer countless opportunities for banks and those that are not afraid to embrace the change can easily unlock them in a cost-efficient way. Monzo, Sterling, Atom and Tandem are the real evidence – their user-friendly and data-driven approach disrupted the market and put competitive pressure on the traditional banks.

Challenger banks setting the bar high

All challenger banks share some common features. They are agile, flexible, serving a niche sector and providing better-fit, faster or cheaper services than traditional financial service providers. With all these in mind, it’s no wonder they are a treat for the conventional banking sector.  

“These banks don’t carry the weight of legacy technology, so they can leapfrog over traditional infrastructure and disrupt the status quo.” 

– Judd Caplain, Head of Global Banking & Capital Markets, KPMG International

They don’t have a legacy system and because most of them don’t offer a full suite of banking services they don’t have to operate within such tough regulatory environments. Thus, they have more freedom and flexibility. Their competitive advantage is delivering simplicity which is an achievement most businesses strive for - creating something that appears simple and is experienced by the user as “easy” is a result of hard work and complexity under the surface.

A great example is a company, specializing in short and medium-term funding to private individuals and retailers, that we’ve been working with for over three years now. The solution we have built together is a state-of-the-art platform, entirely based within Cloud infrastructure. Consulting with us regarding technology choices and being open to innovation like integrating Machine Learning engine for estimation of user reliability and affordability helped them stand out. To reach the shore and merge with one of the biggest players in their niche, they have undergone tremendous challenges and changes in company structure, while our relationship remained stable throughout. Thus, being an external technology advisor, Accedia was also involved in the due-diligence activities of the acquisition transaction. Overall, collaborating side-by-side with the client’s team allowed us to take a look under the banking surface. We have found out that the key to success is making the most of the three strengths that set them apart from traditional banks:

  • Customer-centricity in product and service design
  • Being new to the situation: taking a fresh look unrestrained by legacy technology or mindsets
  • Small organizational size enabling focused and comprehensive execution

The place of traditional banks in the digital race 

So, what does the traditional bank do about it as more and more challenger banks are entering the market? Trust and security seem to be their main weapon for maintaining a competitive edge, due to higher reliability with regards to data protection.

According to Toby Coppel, the CEO of Mosaic Ventures, the number of people who switch to digital-only banks is growing but only a minority are choosing a challenger bank to provide their main bank account. In most cases, people use their services to pay bills and track their expenditure. Isn’t this a reason enough for traditional banks to fight back?

Years of working closely with traditional players in the UK helped us gain insights into their technological and business hurdles. In our view, the biggest stumbling block on the road for them has been their multiple legacy IT systems that just weren't designed for a digital age. The 70s was a very different era. Yet, the core systems that help the finance sector operate today are the same ones that were built in that first innovation wave. Legacy systems kill innovation. This should be the banks’ wake-up call. To endure, they need to invest the time, money and resources necessary to modernize IT infrastructure.

Not everything, however, is about technology. Another challenge we help big names in banking address is to fully adopt the agile mindset. Competing with innovative startups requires a significant change in thinking, processes, decision-making, and even overall corporate structure.

Though, an established bank cannot fully transform their business model into the one of their agile rivals, leadership can look for ways to gain agility in the sense of more niche product focus and better feedback processes. This agile model, in turn, will lead to faster delivery of solutions which are more innovative and valuable, as judged by customers. Their experience must be the guiding belief of product and service design, so the first thing to do is getting to know customers better.

All these doesn’t mean giving up proven technology and methodologies but rather embracing innovation. For example, we’ve been able to achieve across-the-board automation of the consumer lending processes for a UK traditional bank by utilizing their existing tech stack. Having a digital automation strategy in place means your organization is already on the journey to agile bank future. The longer established financial brands wait to change their strategy along these lines, the further innovative challengers will pull away. Have you got a sense of urgency? It’s all a matter of unlocking closer collaboration with the right combination of talent and making the first steps.

  • Leverage the trust of your existing customers - use Big Data in your customer analytics to re-evaluate their growing needs.
  • Embrace collaboration - forming а collaborative partnerships with tech companies, is not a new great idea but a mandatory strategy for long term sustainability. Most importantly, let them contribute with ideas for new features and be sure to take their recommendations into account.
  • Flexibility and winning tech strategy – to provide these you’ll first need to tick the first two off your list and introduce new technologies. Migrating tech workloads to the Cloud is a fundamental step to unleashing new products and services faster and more cost-effectively.


The winning bank formula of today

The real mission for banks, whether it is a challenger bank or an established one, should be finding the right mix of fintech solutions and traditional banking. Play to the tried and true strengths of each type of organization and open up to new opportunities to utilize tools that will empower consumers engagement and loyalty. Technological innovations have the potential to continue to significantly transform the banking industry and benefit customers. They can replace individual banks’ legacy systems, enhance processes, improve efficiencies and strengthen restrictions. They can also provide opportunities for the creation of new products and services that benefit customers.

In the due course, the fintech revolution holds great promise for the classification of new customers and the delivery of financial services to the unbanked or underbanked community in a safe and sound manner.

To sum up

Although challenger banks are currently on the rise, those considered more conservative have all the capabilities to catch up on innovation. Now that they are aware of the threat the challengers pose, they need to be already preparing for a battle. The traditional banks have the advantage of a large and well-establish customer base and strong branding that promotes trust. The challenger banks will have to earn and justify trust. Finally, regardless of your organization type and size, bear in mind the change in customer behavior over the upcoming decades, as the new generation will be more fluent in digital than ever.  

This article is written in collaboration with Accedia's Project Management team, looking after clients in finance, insurance and banking. То learn more about our expertise in the sector, get in touch with us today!

References:

The UK’s new breed of digital challenger banks: ranked

Legacy banks are fighting back against the Monzo insurrection

Violeta is a Marketing Specialist at Accedia, promoting the value of developing software innovation. Social Media savvy, passionate about writing and traveling. If you’d like to learn more, get in touch via LinkedIn.  

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