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,  Curve, Starling Bank, Loot, Pockit 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.