We recently took part in a Financial Services event in London attended by the High Street banks we all know and some newer names to banking, notably Atom and Tandem. The presentations pointed out both the challenge facing Challenger Banks as well the competitive
advantages ‘Old Guard’ banks need to jealously guard.
The UK is awash with challenger banks, five were founded in 2015 alone. To put this in context until 2008, when the Bank of England relaxed the rules, there was a total of 40 banking licences in the UK and foreign banks held 32 of those. So if traditional
banks were unconcerned about the prospect of a Brexit, capital requirements and regulations, the new guys have strength in numbers.
Small is almost never beautiful in banking, where economies of scale have made some ‘Too big to fail’. When disrupting an industry though, especially one as reliant on IT as banking, having a greenfield site can be a positive advantage. No existing software
licences, long-running consultancy suppliers or inherited infrastructure from acquisitions can save a lot of money on start-up.
The real issue comes a little later. Even with low IT overheads, the banking services provided by challenger banks are generally not home-grown. More often they are assembled from off-the-shelf services, albeit perhaps available in new ways to customers
who are disinterested in bank branches of firms their parents used.
Herein lies the challenges for challenger banks; customer acquisition and retention in a market, where others can bolt similar offers together. In this way, they face the same challenges as their more venerable rivals but without the branch network, maturing
capital pots of older customers to target or brands which have been advertised for, in some cases, centuries.
For the High Street players the issue is the other side of the coin from customer acquisition, it is customer churn, in other words customer attrition. There is no doubt this has, until recently, not been an issue as UK customers are more likely to get divorced
than to change banks. The number of market entrants intent on disrupting this status quo though is now becoming a worry.
The answer to both dilemmas is customer engagement of course, but perhaps not as most execute it today.
Bolting together services behind a slick front end can become as addictive as games developers who need to add new levels and new features to their offerings to keep interest. If this is the ‘new normal’ of challenger banks, orchestrating coherent offers
will become technically challenging very quickly. Over time, their greenfield IT infrastructure will also become despoiled with rewrites due to regulatory compliance and other demands. Not building flexible offer management in early could be a fatal flaw.
Equally the big banks, with their large users bases traditionally lack the capability to smartly and rapidly segment their customers. This means very valuable customers feeling less than special, if not neglected.
Such feelings will become harder to ignore when a new generation of customers learns about new services from their peers on smartphones, rather than through monthly printed statements, or when they can summon the effort to log on to a clunky website.
So while both sides have their issues, there are lessons each can learn from the other. The impression we came away from the event with though is that while the old adage “The customer knows best” may have been avoided for a while, the real challenge for
Challengers and traditionalists is to “know your customer better”.