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The Battle for the Future of Banking


A lot has been said about how challenger banks such as Monzo, Atom, Tandem, Zopa and Starling bank are wowing consumers and investors, and giving established banks a run for their money. However, whilst these challenger banks are building cult-like followerships once attributed to brands like Apple; it’s important to highlight some of the key challenges ahead:

  • Investment - this is a key requirement that may determine the success or failure of a challenger bank. It directly impacts their ability to scale, sufficiently adhere to compliance requirements and recruit the right talent and build or buy appropriate technology. For a reminder of how important this is we can examine the case of Tandem bank – who are to surrender their ‘banking license’ won from Prudential Regulatory Authority due to their lack of sufficient investment. Whilst this is caused by no fault of their own, to continue operating as a bank – Tandem would need to reapply for a deposit-taking license. Therefore, to successfully crack the dominance of the biggest banks, the challengers would need to build up their capital base.


  • Regulation – another very important requirement to take into consideration is regulatory compliance. These range from Know Your Customer (KYC) and Anti-Money Laundry (AML) to Foreign Account Tax Compliance Act (FATCA), Second Payment Services Directive (PSD2) and General Data Protection Regulation (GDPR) amongst others; and established banks are spending millions of pounds annually to ensure compliance. So, to compete at the highest levels, challenger banks must be well prepared.


  • Technology – whilst the established banks are struggling to replace legacy systems, and infrastructure; the challengers have a slight advantage as they can begin with a clean slate and utilize the most advanced digital technologies (i.e. robotics & artificial intelligence, blockchain, and cloud) to enable seamless banking operations. However, with new technology also comes increased levels of risk. For example, app-only startup bank Monzo went down on the 5th of March, 2017 and 120,000+ customers were affected as they were unable to access their money. Customers with alternative bank accounts could continue business as usual, but for some others this was certainly a bad day.However, Monzo bank were not alone as other challenger banks including  Revolut,  CurveStarling BankLootPockit and Uaccount were also affected by the same technical slip. Therefore, to compete at the highest levels the challenger banks need to ensure their technology stacks are highly efficient and always available to customers who depend on them.

The list above is not a one size fits all approach to building a successful challenger bank, but an attempt to kickstart a series of conversations around the future of banking both for established and challenger banks.




Comments: (5)

A Finextra member
A Finextra member 22 March, 2017, 11:58Be the first to give this comment the thumbs up 0 likes

I think top of the list is business strategy. Will just "better experience" be enough. Disruption I believe will only come from a change in business model and none have done that yet. Exploiting digital, lowering costs and raising capital will allow you to play, but to dominate they will have do to something fundementally different.  

A Finextra member
A Finextra member 22 March, 2017, 13:19Be the first to give this comment the thumbs up 0 likes

Well said Dharmesh, strategy has a role to play. However, wouldn't you say they are doing something different with their business models in comparison to Big 5 banks? And isn't it strategic to adopt a different go-to-market proposition in comparison to other banks? Also, before they can dominate they'd need to compete effectively I believe. 

A Finextra member
A Finextra member 22 March, 2017, 13:27Be the first to give this comment the thumbs up 0 likes

Apart from the "experience" what is different?

A Finextra member
A Finextra member 22 March, 2017, 13:43Be the first to give this comment the thumbs up 0 likes

When we say 'experience', I'm assuming you're looking at it from a comprehensive perspective - external (customer journeys, touchpoints, and environments where the interaction takes place), & internal (strategy and operations, product engineering & infrastructure...). If yes, the the difference is how they 'bundle' and integrate the people, process and technology which makes up the business model, into something tangible which is what the customers are buying into. So, the 'experience' is the outcome of their business model which differentiates them in the market. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 March, 2017, 16:41Be the first to give this comment the thumbs up 0 likes

I think Product is another important critical success factor for Challenger Banks.

If they launch, for example, a P2P loan product targeted at SMEs, no-file and thin-file market segments, they will quickly make inroads into segments that traditional banks have shunned. If they are able to claw their way up from there, they could disrupt traditional banks in the classical-Christensen mold. But as long as they just offer the same old checking account and debit card, no matter what their business model or CX, it will hardly make any difference to the mainstream market. They will win some customers from the Innovator and Early Adopter segments of the market but they will face a huge challenge in crossing the chasm to the mainstream market.

IMO, Technology per se does not matter. How much money they can pay for Technology is what really matters. The same AWS will give varying levels of uptime depending upon how much you pay for it e.g. $100X will get you Backup & Five-9 uptime but $50X will probably get you no Backup and only 98% uptime.

That takes us back to Investment, which is perhaps the most important determinant of success of Challenger Banks.

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