When the public bands together, their voice is truly distinct. During the 2008 financial crisis, considered to be one of the world’s worst economic disasters, their collective voice could not have been louder. Venerable Financial Institutions crumbled or merged with others, leaving behind 10 million homes in foreclosure and Wall Street in a state of uncertainty. Consumer confidence was at a record low, the Financial Services Industry was ripe for upheaval.

Enter the digital challenger bank. A new breed of technology company that provides the services of a traditional bank minus the operational expenses and legacy technology that traditional banks are built on.  They have continued to gain momentum as they redefine the banking experience by implementing the latest technologies and frictionless user capabilities, without the need for physical branches. Through lower fees, account transparency and an understanding of consumer behavior, it is no wonder they are gaining popularity. 

The most popular challenger banks, Monzo, Fidor and Starling, provide the core components of traditional retail banking and have even been granted full banking licenses, allowing them to operate as standalone banks. Those without a banking license, such as Simple (located in the United States, where it is harder to receive a banking charter), use their banking partners to provide FDIC-insured banking services. Regardless of the approach, the market is now saturated with digital banking options.

New to the market, it is unclear if they will surpass the traditional household bank, but they stand a good chance:

A customer-centric approach.

 According to a Facebook study on Millennials and money, only a mere 8% of Millennials trust Financial Institutions. That is a disturbingly low number for the world’s largest generation. Digitally-focused Millennials are accustomed to an on-demand lifestyle and want the automation and speed to bank on their spare time. Similarly, the unbanked and underbanked share these feelings when it comes to their trust in big banks. They want the financial literacy and account transparency that the challenger banks provide. In line with this thinking, the challenger bank’s most notable (and marketable) feature is their purely digital, customer-centric approach, which enables them to empower their customers.

Society's push towards a digital economy.

Society is increasingly moving towards a digital economy with some countries, such as India, China and Sweden, are even planning to phase out cash. Although the disintermediation of the brick-and-mortar bank hasn’t fully occurred yet, technology has already disrupted the world’s most popular industries, making it only natural for the banking industry to follow suit. For financial services, the dynamics are even more noteworthy as the technology within challenger banks seeks to replace the entire financial ecosystem: lending, financial management, peer-to-payments, every day banking and even cash. As the market and customer demands change and technology advances, challenger banks will have the flexibility to continuously morph into the ideal banking platform – a huge advantage over the traditional bank sitting on a legacy platform.

Regulatory initiatives and the open banking movement.

Regulatory initiatives targeting consumer transparency and security, such as the revised Payments Services Directive (PSD2) and Open Banking, are also forcing traditional banks to rethink their current business models as they level the playing field for banks and FinTechs alike. This shift in power will enable challenger banks to rival their larger competitors. Commentators believe large banks are worried that this increase in digital disruption will make it harder for them to remain relevant as the core provider of retail bank services.

However, traditional banks aren’t going down without a fight. For one, they have the edge on challenger banks when it comes to capital, brand recognition and customer loyalty. This is nothing to scoff at. Understanding this advantage, top banks are embracing FinTech through investment in technology and talent and by collaborating with their FinTech counterparts. Some big banks, Bank of America, Lloyds and Capital One, to name a few, have taken it a step further by committing to closing down physical branches in order to build their online banking platforms and improve their digital experience.

In the current market, large, established banks are still the Financial Institution of choice. However, should they grow complacent, challenger banks could render them obsolete. Traditional banks will need to make tactical choices, prioritize their digital presence, embrace competitive customer intimacy strategies and diversify their offerings – a challenging feat in a constantly evolving market. This will be an experimental phase for traditional banks as they look to partner, build and / or buy their digital footprint and for challenger banks as they continue to push the boundaries of banking.  Ideally, traditional banks will partner with challenger banks to form a hybrid bank with unrivaled functionality for the modern-day customer.

This is part of my FunTech blog series; FinTech through the eyes of a Millennial.