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Emerging challenger banks: Where are they now?

The UK’s decision to leave the European Union in June shocked many businesses worldwide. In the following weeks, as the markets slowly recovered, firms have been left to contemplate how the financial services industry will be affected in the long-term.

The ensuing Referendum debate has brought a variety of arguments to the fore focusing on the effect a British exit from the EU could potentially have on the economy, with a particular focus on banking. Consumers have historically had just a few big names to choose from when it comes to selecting a bank, but over the past few years, we have seen new entrants and challengers enter the ring in a bid to increase competition and give consumers more innovative and flexible lending options.

Although there is still some uncertainty on how smaller businesses may fare post-Brexit, some analysts have identified strong opportunities in the retail banking sector as a result of the space left by traditional banks that are trapped by legacy IT systems, a positive regulatory environment and more recently, the power and potential of new technology.

You can bank on agility

With a number of new retail banks, mortgage lenders and tech-only players expected to receive full authorisation soon, the challenger bank space is already getting competitive. These businesses are already making significant headway and are keeping more established players on their toes. As such, many of the bigger banks will be looking at their internal technology processes and strategies and assessing how they can take on the advancing wave of agile new financial services firms.

Some traditional banks are already embracing digitisation and disruptive technologies and are bringing their offerings into the digital age. The motivation behind these transformations is to build propositions around the consumer and provide innovative services. However, this means that technology will need to be faster, more convenient and easier to access in order to cater to the growing demands and needs of everyday customers.

The adoption of the cloud-based services that the more agile challengers are implementing have also strengthened the customer-centric view that banks are taking. Cloud services not only allow lenders to make faster and more accurate lending decisions for their clients, but also give them access to a wide range of data. The on-going development of these tools is therefore vital to the success of both challengers and more traditional banks.

Challenging the challenger banks

Challenger banks may have a head start in the technology race, but it will be interesting to see how they continue to establish themselves against traditional players. The speed and agility that challengers thrive on will eventually slow over time, leaving them with their own legacy systems and allowing newer, more disruptive banks to emerge in their place. If new challenger banks fail to take a proactive approach to stay one step ahead of the competition, they may lose out to traditional banks that have already developed large, well-established customer bases and have access to increased data as a result.

Playing to the strengths they have over the start-ups will put big players on the high street back in the driving seat. Challengers will have to be wary of the combination of experience, assets and funding that high street lenders have access to, as this combination could enable them to potentially disrupt the market on a much larger scale.

After all, established companies moving to more digital, cloud and tech based strategies can combine their physical branch presence on the high-street and potentially offer what the start-ups cannot: an all-encompassing customer experience that blends the physical and the digital. However, whilst challengers can adapt to digital far more quickly, older banks may struggle to keep up with, let alone lead the way with these tactics.

The two greatest weak spots for traditional banks, and where their focus must be concentrated, are technology and reputation. The challenger banks have been able to start with a blank sheet of paper on both counts. Some, like newcomer Starling, have built their bank using digital only software to encourage a competitive environment where customers are offered the opportunity to control their finances from their phone, rather than needing to visit a high street branch. It is clear that the popularity of these new modern IT systems has led to enhanced customer experiences and in turn have helped to build their reputations.

The future of financial services

The question is; how can companies, whether big, small, traditional or challenger keep up with these changes? There are many factors that firms will have to think about, including regulatory changes, mitigating risks and developing innovative technology. By embracing collaboration and ensuring that IT departments are not just ‘an afterthought’, businesses will be able to respond to challenges much more quickly, and without the traditional hierarchy and complex decision making processes.

Many new businesses will pull in the help of IT consultancies to support their propositions for entering the market. This can include updating flexible back office processes or even using them to help navigate the complex regulatory environment. Getting the technology and digital ‘right’ can be an essential game changer for those recently launching to market, as well as those who are looking to deliver a new feature on an existing proposition.

Banks with lethargic legacy systems have no chance of staying competitive as the industry moves further into automated, bespoke and enriched solutions. Instead, retail banks will be able to position themselves closely with consumers through continued technology investment. While challengers may not have the historical customer relationships that traditional banks benefit from, the latter will have to embrace FinTech and regulatory technology to create the right foundations in order to disrupt their own business model, rather than sit on the sidelines watching challenger models knock down their diminishing competitive edge.

As the financial services landscape continues to develop organically and adapts to the current economic climate, it is clear that the market will transform faster than ever before. Although it’s difficult to predict the direction of the industry, we can be certain that new breeds of challengers will continue to emerge.

Jon Williams, Chief Technology Officer at Niu Solutions

Image source: Shutterstock/MaximP