Banking: The challenges of the challengers

Finance district
By Andrew Harbison, CA Today

18 August 2017

Positive culture, niche offerings and a customer-first focus are among the strengths of challenger banks, but has the market become over saturated?

Challenger banks have a unique opportunity to provide an innovative and tailored approach to banking for their new breed of millennial customers, according to a new report.

KPMG interviewed the CEOs of 12 challenger banks to better understand the challenges and opportunities they face as the new kids on the block. 

The next gen customer

A key influence on how challengers operate is the customer, more specifically the millennial customer and the evolving expectations they bring with them when searching for a bank that suits their needs.

The report points out that millennials are the driving force behind the “upheaval in the financial ecosystem” which is in turn “shaping the future of banking”.

The millennial customer’s financial behaviour is different from their baby boomer and generation x predecessors. They borrow more than they save, they are more likely to rent property than buy, and they are accustomed to companies presenting their products and services with a ‘digital first’ focus.

Craig Donaldson, CEO of Metro Bank, said: “I have three priorities: understanding who our customers are; understanding what drives their decision-making; and making sure that Metro Bank’s corporate culture is enabling the creation of fans.”

The niche approach

Being able to provide customers with targeted niche products and technologies is one of the main USPs of challengers.

As the FinTech industry continues to provide innovative and streamlined digital solutions in markets such as peer-to-peer lending and insurance, challengers are increasingly incorporating new technologies into their products.

“Sainsbury’s Bank regards FinTech as a great opportunity to help accelerate our growth and create mutual value for us and our FinTech partners,” said Colin Tate, Head of Digital Transformation at Sainsbury’s Bank.

A cyber incident for a Challenger bank will have a far greater reputational impact than an incident in a larger bank as people will inevitably assume that the smaller bank has under-invested in cyber security," Nick Fahy, CEO at Bank of Cyprus

By providing customers with specialised niche products and services, challengers are not only able to provide a high level of service, they also save on many of the costs incurred by their incumbent competitors.

With many new banks now providing customers with single serving products this could also spell the end of customer loyalty, something which the incumbents rely on.

However, with a steady flow of new challengers appearing, is the market about to reach saturation point? And, if so, what steps can the challengers take to ensure they keep to their core values while still appealing to their target customer base?

“I expect there to be some form of consolidation as the market continues to mature,” said Richard Iferenta, KPMG Partner and Head of Challenger Banking.

“That might include the bigger players gobbling up smaller Challengers who have niche products or technologies.”

Half of the CEOs KPMG spoke to said they would prefer “collaborations or strategic partnerships over acquisition” to ensure they keep on top of emerging trends and technologies.

Familiar foes

For all their differences, challengers and traditional retail banks do have at least one thing in common: risk management.

The move towards the Open Banking model, where customers are able to share their data securely with different financial institutions, is accelerating.

Issues surrounding the privacy of customers’ information, coupled with the recent mass hacking-attacks which effected hundreds of businesses across the globe, means cyber-security is now more than ever a top priority for banking CEOs.

And, as Nick Fahy, CEO at Bank of Cyprus UK points out, cyber-attacks are likely to effect challengers more than their rivals.

Nick said: “A cyber incident for a Challenger bank will have a far greater reputational impact than an incident in a larger bank as people will inevitably assume that the smaller bank has under-invested in cyber security.

“In actual fact, the inverse is often the case.”

Regulation, although essential, is usually a bugbear for most financial institutions, and challengers are no different.

“The current regulatory environment in the UK does not provide a level playing field for challenger banks,” said Craig.

“Regulation such as MREL serves to encourage consolidation within the market and stifles competition. There needs to be some conscious thought on how we pave the way for growth banks in the UK.”

The MREL regulation stipulates that any bank with more than 40,000 customer accounts will be subject to the same strictures as the major high street bank which often have upwards of 22m accounts.


  • Financial Services

Previous Page