Despite their fragmentation, challenger banks remain united in their need for operational agility, says Sarah Jackson, Sales Director, Equiniti Credit Services.
‘Challenger banks’, much like ‘fintech’ and ‘contactless’, is one of relatively few buzzwords that haven’t just gained notoriety in the financial industry, but have broken through to become part of the whole country’s vernacular.
Given the 2008 financial crash together with the range of subsequent bank related scandals, this comes as no great surprise. Consumer frustration with the banking sector soared and led to a surge of interest in alternative service providers, particularly those ‘challenging’ the traditional models.
The term ‘challenger banks’, however, is fast becoming a misnomer, such is the level of diversity displayed by today’s diverse range of financial services providers. At one end of the spectrum are the mobile only banks, like Atom, Monzo and Starling. These are true start-ups and focus on delivering an entire banking experience via the device in your pocket. Then there are the digital contenders, like Fidor Bank, whose ambitions and customer-base extend beyond the mobile environment to encompass online banking and API links to social networks. Also in play are the banks that, despite being branch-based, are rethinking the traditional approach. Metro Bank - open seven days a week - is a case in point. If that wasn’t enough, there is also the range of specialist banks that focus specifically on vertical industries, Virgin Money and M&S Bank, for example. Oak North lends to entrepreneurs and the self-employed, and Aldermore and Paragon have zeroed in on buy-to-let mortgages. With such diversity on display, it’s getting harder and harder to nail down what it is that brings them together under one coherent category.
So how do you identify a challenger bank? One suggestion is that they all share the need to operate differently, with far greater agility than their traditional high street counterparts.
These young, new lenders operate fleet-of-foot, unencumbered by the patchwork legacy systems and entangled processes that have long-hampered the bigger players, further complicated by each new acquisition. Innovation is the key to their success; each strain of challenger has a different view of the world, but all are committed to delivering a customer service experience which is both fresh and carefully differentiated – both from traditional banks and each other.
But as ‘the challengers’ continue to grow they are starting to face some very familiar challenges. How can they scale their operations, creating and dedicating resources to accommodate more customers, more accounts and more products, without impacting the customer service experience that forms such a core part of their proposition? These issues seem so familiar because they are a mirror reflection of the very banks that they are hell bent on challenging.
So what can they do to avoid getting bogged down in the practical challenges that come with scalability? Put another way, how can they protect the agility which has, so far, been such a key ingredient in their success?
The answer is simply said, but much harder to achieve: they must stay the course. Only by maintaining a laser-like focus on innovation, together with their own differentiated value proposition, can these banks realistically expect to establish themselves as long-term contenders and serious competition to the high street giants.
As traditional high-street banks have demonstrated, delivering financial services at scale does not lend itself well to business agility, particularly in this age of heightened regulation. It’s worth remembering that challengers must apply the same rigorous discipline to their own systems and processes as the bigger players, and with a fraction of the internal resources available.
A case study in the difficulties that smaller, challenger banks face in the quest for regulatory compliance has been making a splash in the financial media in recent weeks. Earlier this year, the Chief Executive of Atom Bank, which has until now focused on providing saving accounts and mortgages, stated that its current accounts would likely be available to some customers by July 2017. The Financial Conduct Authority is currently reviewing current accounts, with specific reference to increasing competition. At the beginning of June, this led to Atom Bank announcing that ‘The possibility of further regulatory restrictions on current account providers’ had forced it to re-evaluate, and push the launch back to 2018 at the earliest.
How can regulatory challenges like these be managed by smaller, start-up banks?
Outsourcing is the key, and will play a fundamental role in enabling this fragmented sector to continue to flourish. Challenger banks, in all their guises, must make a decision: Should they undergo the rigmarole of recruiting and training in-house staff, designing and establishing FCA compliant processes and integrating new servicing technology platforms? Alternatively, should they join forces with a tried and tested credit servicer which can manage their day-to-day operations with trained staff, pre-approved processes and proprietary systems which are already up and running in the marketplace? The best of these offer blended solutions that combine specialist technologies to automate the management of loan portfolios, for example, with skilled customer service staff and auditable, best-practice processes, all wrapped up in a tailored package designed to address the specific needs of each bank.
This collaborative model will buy ‘the challengers’ the breathing space to innovate their way ahead of the traditional players. What’s more, it will also help them focus on cementing their own brand of differentiation in an almost impossibly diverse and crowded sector.
The challengers face challenges of their own. That said, fragmentation does not mean failure and if there’s one thing that these banks are not afraid of, it is doing things differently. It will be interesting to see how many are prepared to apply this ethos to their internal operation as well as their business models. The potential payoff is huge.
Sarah Jackson, Director at Equiniti Credit Services
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