In a true David and Goliath story, does Goliath have what it takes to keep up with the pace of change, or will the more agile David win out once again?
Challenger banks are not a new concept. When the best known Challenger bank – Metro Bank – was first granted its licence in March 2010 it was the first new high-street bank for 150 years. In the 5 years since, there has been an explosion of new or upcoming banks intending to challenge the big players through both traditional and Digital channels; TSB, Aldermore, Virgin Money, and Shawbrook to name a few.
Along with tighter regulation and capital controls, it seems another new normal of Britain after the 2008 crash, but what’s driving this phenomenon of the Digital age? And this time round, is David really a threat to Goliath?
A 2013 survey by Ipsos Mori claimed that little over one in five consumers trust bankers to tell the truth. A 2012 survey by Which? found that only 11% of consumers trusted their bank to act in their best interests.
Whether correct or not, global media pointed the finger squarely at the financial sector as we have lived through an era of “banker bashing”. This, coupled with the crash and resulting loss in value of investments, particularly pensions, has resulted in the British public feeling repeatedly let down by the banking sector.
There’s no denying that retail banks have borne the brunt of a crisis which was in some ways out of their control, but recent incidents of bad faith or mis-selling, including PPI, have only served to worsen their reputation.
Enter the Challengers, the bold underdogs of the financial world. Here David returns, with none of the perceived sour taste of existing high-street banks and so much potential to win the hearts and minds of the public.
It seems regulators like a David and Goliath story
Speaking in 2014, the Economic Secretary to the Treasury said, “the focus on more regulation will ease off and the focus on making it more manageable for smaller banks will increase”. Politicians, regulators and the British Banking Association (BBA) have all publicly stated that they would focus on competition in preference to tighter regulation.
Specifically, the BBA spoke in the same year of the Bank of England making its Lending Scheme more accessible to Challenger banks, pressure to reform the payments system so all banks have fair access and preventing the cost of new regulation adversely affecting challengers against their larger counterparts.
It seems the industry has grown weary of years of dominance by a few Goliaths of the retail banking world and is welcoming the Challengers with slightly more open arms.
Technology moves slowly, and digital is the future
78% of customers use online banking at least once a month, while 53% said they were confident they could do the majority of their banking online or over the phone.
With the use of e-banking – online and mobile – clearly on the rise, banks need to leverage a single view of the customer across multiple channels to improve their service offerings and present customer information in a consistent and unified way. The digital revolution has begun – there’s no escaping it – but the legacy platforms retail banks are built on are obstinate beasts, dealing with these pressures with costly and accident-prone bolt-ons.
And these platforms are creaking. Spates of technical outages, most notably the frequent outages in recent memory at RBS & Natwest, exemplify the issue.
Challenger banks on the other hand benefit from a clean sheet of paper – the liberty to design their technology systems from the ground up, or buy in third party technology, allows purpose built, reliable systems. They’re slowly building trust, and having the technology to back this up goes a long way. Some challengers are taking this a step further, with the likes of Atom and now Tandem, granted their licences in June and December 2015 respectively, choosing an online-only approach to providing digitally-enabled high street banking services.
So is this threat really here to stay?
Only time will tell, but the signs look interesting. Metro Bank – the first Challenger bank – is going strong, and news of funding rounds and initial public offerings frequently make the headlines in the financial press. The interest is certainly there, and even more extreme versions of the Challenger model are on the horizon as Atom Bank aims to be the first online-only retail bank in the UK.
Only by embracing the change can Goliath compete
Risk and change are not always a bad thing. Many of the difficulties presenting the retail banking sector at the moment can be turned into opportunities with the right strategy and attitude to change.
With public perception of banks at an all-time low, large banks can use the requirement to change and adapt to demonstrate a refocused commitment to their customers by ensuring the changes are delivered successfully and securely.
The changes being implemented by the industry and by regulators to help challenger banks by definition help the sector as a whole. Large banks should adapt their strategy or structure to take full advantage of these changes. The wave of challenger banks can be ridden by investing in their own spin-offs, as HSBC have shown with M&S Bank.
The digital revolution is here to stay, and challenger banks are taking full advantage of it.
In order to deliver these strategies in a successful way, Goliath should look to FinTechs, absorbing them or adopting their development methods as their own. By adopting an Agile and Digital operating model, existing banks can overcome the difficulties of legacy platforms and use their purchasing power to carve out new differentiators in short timeframes.
There is certainly change afoot. The digital revolution is here to stay, and challenger banks are taking full advantage of it. But what’s to stop Goliath having a rethink, change his ways and join the FinTech crowd? David is bringing the fight, but this time it’s nothing Goliath can’t handle.
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