bobsguide sat down with Sarah Jackson, Director, Equiniti Credit Services to discuss what 2018 has in store for challenger banks.
Does the term ‘challenger bank’ mean the same thing it did three years ago?
The term has evolved. It used to mean any financial institution that wasn’t one of the high-street banks, but it has moved on from there as different entrants to the market have challenged different sectors.
There’s also a question over whether foreign high street banks who are just now entering the British market, such as AIB, could be described as challengers. Yes, they are challenging the high-street set, but they are traditional banks in their own right.
How should we define the term challenger bank today?
The term ‘challenger banks’ is fast becoming a misnomer, such is the level of diversity displayed by today’s 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.
Is traditional banks’ increasing digitalisation a positive or negative development for these challenger banks?
Personally, I don’t think it’s either. The appearance of challengers has forced high street banks to digitalise perhaps sooner than they otherwise would have. But this is simply the way that this (and most other) markets are evolving, and the challengers have seen it coming. The challengers will always lead the drive for increasing digitalisation because they aren’t encumbered by legacy systems that hinder modernisation – they can be truly fleet of foot. While traditional banks have been pushed into the digital space by competition, the challengers are there by choice.
Is traditional banks’ competitive advantage over challenger banks now solely trust? Is this even a competitive advantage anymore?
Trust and reputation still represent a significant competitive advantage. That’s why the majority of people still bank with the big high street names – it’s a big leap to break the mould and hand your earnings over to a start-up or unfamiliar brand.
However the market is moving towards a more holistic approach, because customers now expect it all. Trust and reputation alone aren’t enough; consumers want an excellent customer experience and innovative new products as well.
What are the key next steps for challenger banks to scale whilst remaining agile?
They must stay the course – although that is easier said than done. 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.
For a small, high-profile, high-growth bank, what is the most sensible option? Undergo the rigmarole of recruiting and training in-house staff, designing and establishing FCA compliant processes and integrating new servicing technology platforms, or, partner with an established credit servicer and tap into trained staff, pre-approved processes and proprietary systems which are already up and running in the marketplace?
Knowing what to keep in-house and what to outsource will be a major determinant of future success for today’s challenger banks. Fortunately, the outsourcing market recognises this and is adapting to the market opportunity; a new wave of next-gen specialist credit servicers is emerging, offering 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 model, safeguarded by clear service level agreements, will enable the visionaries behind these new banks to concentrate on cultivating the disruptive and innovative qualities that have brought them this far. Allowing themselves to be distracted by operational management, which can be readily delivered through other means, will not only limit the success of their own organisations, it could also divert the wave of positive change that is sweeping through the UK’s banking industry.
What is the biggest mistake that challenger banks make?
Trying to do it all themselves! 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 more 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.
Can you envisage web giants such as Facebook and Amazon entering the banking space soon and how will this alter the landscape?
I see no reason why they would not. I don’t think it’s a question of ‘if’ but rather ‘when?’ and ‘how much?’
Facebook has already made its first forays into peer-to-peer payments in Europe by acquiring an e-money license from the Central Bank of Ireland, so the whole ecosystem is waiting to see what impact that has. Although there are new revenue streams to be gained from entering the banking space, it’s a very different and vastly more regulated industry. It may be that the Facebooks and Amazons want to provide certain third-party services from the outside looking in, rather than compete with dedicated banks and financial institutions, be they traditional or challenger.
Any introduction of further competition in a market will either move the market forward or knock out some players, but I believe that no matter the new entrants, there will always be a place for the high street banks.
Do you expect today’s challenger banks to continue to be successful in the main, or will many we know of today die out or be reliant on consolidation to survive?
Some consolidation and failures are inevitable, there are bound to be some casualties in any marketplace. However, I think that many of the same names will still be operating in five years, although many will have evolved, and expanded outside their currently well-defined niches in order to widen their appeal.
Will the challenger bank landscape look the same in twelve months?
There’s uncertainty surrounding the whole financial ecosystem, not just challenger banks. In Q2 2017 the UK economy only grew by 0.3%, which was described by the ONS as ‘A notable slowdown’. Plus, the current ambiguity surrounding Brexit and the potential associated regulatory changes means that it is difficult to say what any of the financial landscapes will look like this time next year!
One thing we can say with confidence is that twelve months ago, the landscape did look different. There have been plenty of new entrants in the last year, so maybe that is what we will continue to see going forward.