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The financial industry’s landscape has certainly undergone many changes in recent years. In the past, the entire industry was made up of lending institutions (like banks) and companies that delivered preneed products and services (like insurance and pensions). The typical lifecycle of a client was very linear. Often, they would engage the services of a single bank (usually the one that their parents banked with) and would then stick with that bank for their entire life. Savings accounts, personal loans, mortgages, and every other type of banking product would be acquired through this bank, a model that served most banks very well and contributed significantly to their own profitability.
All of that has been flipped on its head. The rise of the internet and online banking, the 2008 financial crisis, and the recent global COVID-19 pandemic have all had irrevocable impacts on the way banks operate. On a more micro level, the days of simply banking where your parents did, with banks simply waiting for clients to walk through their doors, have long since passed.
Today, banks are beset on all sides by new stakeholders and forms of competition, and those without the tech tools to compete in this new environment are often left to flounder or fade away. A bank today must be ready with cloud-hosted services and a fully digital banking platform in order to remain competitive and relevant in today’s landscape. This is all the more crucial given the proliferation of financial technology companies, banking-as-a-service, and challenger banks.
If you’re part of a bank’s management committee and are thinking of finding new ways to keep your company relevant in the face of this new competitive landscape, then you’ve come to the right place. Here’s a primer on what challenger banks are and how you can address them.
What Are Challenger Banks, Anyway?
Challenger banks are smaller, newly established banks that operate in a niche that they consider underserved or unrepresented. They operate as a bank in every other way that larger national banks would and are subject to the same regulatory and legal scrutiny. However, in many cases, challenger banks operate on a much smaller scale or in spaces that other traditional banks have not acclimated to yet. For example, there are a number of challenger banks that have no physical branches or even automated teller machines. Instead, they operate completely online through their own apps. Electing to operate in this way reduces the bank’s time to market as well as its overhead and many of the complexities associated with in-person banking.
Given this understanding of challenger banks and the way they are structured, strategizing how to go up against them should take the following into account:
They’re Probably Here to Stay
Considering the relative ease of establishing fintech companies and challenger banks as compared to more traditional ones, it probably is no exaggeration to expect that these new financial industry players will be around permanently. Many potential clients have expressed at least a passing curiosity about them, if they haven’t embraced them fully already. In a recent survey of banking clients, 64 percent of clients mentioned that they’ve already split their banking requirements among several banking apps and fintechs. Meanwhile, around 30 percent of those who haven’t yet adopted fintechs and online banking have expressed an interest in doing so eventually.
In short, clients today are spoiled for choice, and they are more than willing to explore all their options to find the services that match their needs. This ready acceptance of new brands in the financial services sector is sure to spur action by even more new entrants. Because of this, all these new players are likely to be around for good and the entry of more of them is likely to continue.
What Your Clients Want
Whether your clients are GenZers who grew up with the internet and are looking to establish their first savings account or sunsetters looking for a safe place to put their retirement funds, today’s banking clients expect immediacy and accessibility. For younger clients, this is not unsurprising, but even older clients have begun to shift to online banking, given the perils wrought by the coronavirus. Clients of every demographic have begun to demand seamless service from their banks, whether via app or over-the-counter transactions. If they don’t get them from their current bank, these clients are more than happy to take their business elsewhere.
Therefore, adopting a banking platform that lets you reorient your operations online is a non-negotiable in today’s digital world. Doing this will give your bank the capability to move its core systems online and prepare it for app-driven transactions. It will also set your bank up to adopt the principles of open banking, where banks freely move client information amongst themselves via application protocol interchange technology. This, in turn, allows competitor banking systems to engage with each other over the net. Finally, this will give your bank the opportunity to offer banking-as-a-service. Essentially, providing this service will allow your bank to engage with fintech apps as a vendor for the backend services that they need (such as savings accounts and payments channels) while reducing your own bank’s need to develop client-facing apps.
While the banking industry today is not without its challenges, this does not mean that your organization is helpless. However, adaptability and agility are going to be key traits that will determine whether your bank remains relevant or not.
