Ronit Ghose, head of global banks research at Citi went hard before Money 20/20 Europe 2019 attendees headed home from Amsterdam and graced the stage to discuss long term strategy for building a bank from scratch.
Setting the scene for the rest of the afternoon, Ghose spoke about why incumbent financial services institutions are launching challenger banks in what he referred to as “the challenger bank moment” and how this seems like an oxymoron.
The challenger bank moment
Transformation in the form of regulation, technology, competition, consumer needs, venture capital funding and the rise of platform companies has created a catalyst for this “challenger bank moment.”
“With customers wanting instant gratification, banks are scrambling to catch up and at the same time, technology has changed to facilitate that catch up,” Ghose said. He added that during the “dot com euphoria,” some executives believed that bank branches would be eradicated, but it was too early to make this prediction and before “the smart computer in our pocket phase.”
Ghose explores how especially after the financial crisis, the banking sector is highly regulated, but there is also more competition, which means that in the developed market, while before change happened at a glacial pace, transformation has now been turbo-charged due to eight new banks in the UK getting licenses.
He went on to reveal that bank CEOs are petrified of an uneven playing field and the availability of financing has resulted in many competitors setting up. Traditional banks are reacting and setting up their own challenger banks because they face significant revenue disruption, which is what happened in what used to referred to as the emerging markets.
Ghose said that after payments, newcomers will enter the deposits market and then lending and at that stage, when lenders start serving the underserved areas - like SME offerings - “that’s the core profit pool and where you make money.”
The cost challenge
Banks have to change their model to tackle the significant headcount reduction emerging and respond to challenger banks. However, Ghose pointed out that the challenge is not over interfaces or speed to market, the challenge is a battle of costs bases because new banks can scale up to a few million customers on a narrow range of products and a low number of employees. “Incumbent banks have 10 times the cost, but do have trust, a brand and clients, maybe not the love, and this is why they need to create their own challenger bank,” Ghose highlighted and gave the example of Marcus.
“Banks don’t have the monopoly on client base when it comes to money,” Ghose explains and spoke about the penetration of mobile money in countries like Kenya. Banks will be scrambling to catch up with telcos too - who also have a large client base.
Build, buy or partner?
Is it better to build, buy or partner? Drew Graham, director, digital strategy at Barclays chaired a session with Matthias Kroener, CEO of Professional Development, Simon Vans-Colina, engineer at Monzo and Ben Goldin, CTO of Mambu.
This session posed questions around the construction of a bank and how to decide which components of the technology stack to build, which to buy and which to partner to create.
However, there’s no right answer.
Advocating partnering, Goldin said that the decision should be made after looking at the value chain, starting at what is most visible to customers and then down to what is practically invisible. “It depends on where your proposition is, build what’s unique for you and drive competitive edge.”
Kroner advised looking at USP, finding a pre-existing solution that fits into the core and focusing on value proposition, while Vans-Colina stated that banking is a software business and tech giants such as Google and Facebook write their own software, so banks should do the same to be in with a chance with competing with the likes of Monzo. “If you buy or partner, you are giving another company control over part of your destiny.”
Goldin hit back and asked Vans-Colina if he would build Google Maps from scratch and “when you find the right subscriber to partner with, you’re in charge. It allows you to focus on something that is closer to the visible stuff in your value chain.”
Kroner chimed in and said that with Open Banking, “integration means integration with other systems and making it easier and quicker, therefore better. If a bank is not a sales-centric organisation, the company will be dead. You may have the best stack, but you will be alone.”
However, building end to end welcomes mistakes and it is hard to drive evolution. when that is a fundamental part of the business. Goldin advised designing architecture that does not prevent a bank from innovating, to which Kroner replied with an analogy, saying that if he wanted to write a new song, he would use the eight notes, but there are so many songs in the world.
He continued: “This is BS. It depends, but I agree at the end of the day. It is a culture game, not a technology game and that is my core message. However, I still think that we have to start with the customer and their problem statement, then about time to market and specialisation.”