An uncertain future for challenger banks

Shut Down: Of ~630 launches since 2010, ~180 challenger banks have ceased operations due to lack of sustainable revenues and hence failure to attract funding, or due to compliance issues. In 2020, Moven, one of the world’s first digital challengers set up in 2011, closed its banking operations to refocus its efforts on becoming a digital banking and financial technology provider to banks and fintechs. Other examples of banks running out of cash include Dozens (UK), Xinja (Australia), Volt (Australia) and Glorifi and HMBradley (US). The challengers, Beam and Ahead in the US, had to close down due to regulatory non-compliance.

Merge: Consolidation is not off the cards either. Successful growing challenger banks will acquire or merge with counterparts to grow internationally or to consolidate in saturated niche segments. Greenwood, the digital banking startup for Black and Latino people and business owners, has acquired fellow neobank Kinly, bringing the two largest fintechs focused on the Black community together.

Get acquired: There are fewer examples of incumbents buying out challengers for their modern technology and digital expertise or for entry into niche segments. After the early acquisition of Simple in the US by BBVA in 2014, there have been few cases. The Australian challenger, 86400 set up by the founder of Atom Bank in the UK, was bought by National Australia Bank in 2021 for its digital platform to strengthen and merge with its own digital subsidiary, UBank. Societe General bought out Shine to focus on the micro SME segment. Incumbents are tending to form technology partnerships and embarking on their own digital initiatives including setting up own-brand challenger subsidiaries rather than outright acquisition of a successful challenger.

Grow:  Only those challenger banks that demonstrate the ability to maintain a strong and engaged user base and can scale, will ride out the current storm. A prerequisite is to build digital trust and demonstrate transparency in data handling and privacy, managing cybersecurity and adhering to the highest regulatory standards. Securing a banking license helps in the journey to growth, making it easier to secure funding from the debt and private markets whilst those without a license could attract BaaS partnerships with license holding banks.

The technology enabling success

Having a technology platform that is designed for scalability from day one enables challengers to embark on and continue with their steep growth trajectory to success. Whilst a small minority have built their own proprietary platforms, most have chosen to form strategic partnerships with banking technology providers offering pay-as-you-go SaaS models to kickstart the business and scale with their business growth. This has allowed them to achieve the extremely fast times to market needed to achieve market traction, and to focus their efforts on the superior customer value proposition and compliance they need for success,

A pre-requisite is an open and composable banking platform. One with the breadth and depth of functionality from product engines to financial crime, payments and origination, localised for different markets, that offers challengers the agility and time to market to rapidly launch and then scale their businesses. A platform that offers scalable and adaptable APIs focused on building best-in-class digital experiences. Low-code extensibility and developer portals with advanced API documentation and ease of use as well as pre-integration to an eco-system of third-party technology providers offer the ability to hyperpersonalize products. Challengers can select the products they need for their business model from the composable platform which elastically scales to their growth. With continuous updates, they can consume new features as they become available to develop their customer-centric specific propositions at their own pace and desired frequency.