Are Challenger Banks Transforming the Lending Market or Just Providing Digital Makeup?

Are Challenger Banks Transforming the Lending Market or Just Providing Digital Makeup?

Steve Morgan

Senior Director, Financial Services Europe at Pegasystems

Views 288

Are Challenger Banks Transforming the Lending Market or Just Providing Digital Makeup?

06.03.2020 09:45 am

The short answer is yes…. sometimes to both. However, there is a huge change underway and enough evidence to suggest that customer and competitive pressure alone will drive more change, even without further regulatory updates.

Globally, and in the UK, margins in the lending market are feeling the pressure. Slow credit growth (currently at 2.5% in the UK), and low interest rates are the primary drivers. This has fuelled competition, especially for lending products with higher margins, such as mortgages.

Established banks are choosing to deal with this problem by being far more aggressive in retention efforts and attempting to steal their competition’s customers. None of this is surprising, in fact some are doing a very good job at differentiating on service and personalised offers.

Following the financial crisis, some customers seeking loans looked to challenger brands as a vital source of cash. This included the growth of a range of alternative funding, such as crowdfunding and peer-to-peer lending with brands like Zopa and Funding Circle. More recently, in August 2018 Starling in the UK launched its first personal loan products, with Monzo announcing their full loan offering a year later. Also, in 2018, Atom bank launched first time buyer mortgages and has since expanded its product offering. A number of challengers have also moved into small business banking usually covering secured and unsecured lending up to £250k. These companies are already succeeding by providing slicker technology, often cheaper rates or lower fees.

The newer challengers are clearly focused on delivering a different experience and seeking to target low risk customers who are more reliable in terms of repayment. The most recent current account switching data in the UK showed that whilst the largest net gain went to Nationwide, the second largest was to challenger bank Monzo. So, how are the new fintech organisations succeeding in differentiating?

On trust, newer brands are seeking to differentiate by the very fact they have not been associated with issues in the past such as poor lending practices. They are also differentiating in the way they use technology to help customers. A great example of this is 86 400, a new bank in Australia that sends a push reminder to customers of how close they are to getting their bonus saver rate by depositing or saving a certain amount that month. This is not something you would typically expect from a financial organisation, but this behaviour is becoming expected.

The larger banks are taking action to improve both in terms of digitisation and branding/market positioning. For example, NatWest has launched brands such as Bó and Mettle which are built on a new more modern technology stack, to enable the same service as the challengers and aim to appeal to the same at-risk customer base. Setting up a new brand means they avoid the constraints of their existing systems and can develop innovative technology in the same way a nimble start-up would. All while having the security of being connected to a long-standing organisation that can provide vital resources.  

The real threat will come from the impending generational wealth movement. A majority of new loans will soon be offered mainly to people who are now in the 20-30 year-old range. If they can access a mortgage through a challenger, they will do so because they will favour these brands and the expected trust advantage is either not there anymore or needs to be regained.  

Challenger banks lent a record £115bn in the 12 months to September 2019, according to BDO. However, this was just 3 percent more than a year earlier, a significant fall from 19 percent, the previous growth rate. Much of this will have been linked to lower levels of lending with Brexit uncertainty, so you would expect this to recover.

The main barrier that will hold back the challenger brands in lending is their relatively small balance sheets. But there is no shortage of money looking for a return and if they can find an appropriate backer or partner who is willing to fund the money to support, there is nothing stopping them from taking the charge.

Ultimately the future of lending will continue to come down to a battle of two key differentiators: ‘time to yes’ and the overall customer service experience (including the service post-lending). If customers don’t perceive a difference, their choice will ultimately go back to the very basic criteria of price and any limited product differences.

Challenger banks have already had a big impact on how technology is being used, and in some cases how service is being provided. As they scale, and as the existing banks make improvements, lending will become the new battleground, if it is not already…

 

Latest blogs

Martijn Bos Holland FinTech

Making it through the rain: Finance in times of turmoil

You’d need to be living on a remote island, without electricity or internet to not be aware of what the world is going through right now – a medical crisis that has spread across the world and disrupted supply chains, goods and services production, Read more »

James Devoy Sysnet Global Solutions

PCI DSS and Remote Assessments

COVID-19 is obviously changing many aspects of daily life. Some will be short term measures to see us all through these times, although I wonder how many will become more permanent fixtures in our lives. The PCI SSC has provided guidance to allow Read more »

James Booth PPRO

Brave New World: A Futuristic Vision of Payments

Over the last ten years, the retail e-commerce ecosystem has undergone a wide-ranging transformation. As recently as 2010, the e-commerce and payments value chain were relatively straightforward: Any eCommerce merchant could integrate a payment Read more »

Nish Kotecha Finboot

How blockchain could potentially transform global healthcare in the wake of COVID-19

In the globalised world we live in, entities such as the World Health Organization (WHO) have been established to ensure cooperation between different governments on global health-related issues. In the face of pandemics such as the one we are Read more »

Lina Andolf-Orup Fingerprints

Dispelling biometric myths and misconceptions

Gangsters cutting off enemies’ fingers to access secret locations and spies lifting fingerprints from martini glasses - the imagination of the entertainment world has been running wild ever since biometrics entered the scene. Couple that with the Read more »

Related Blogs

James Daniels FIME

Taking the pulse of India’s Fintech market at Finnoviti & Technoviti 2020

Last month, FIME attended Banking Frontiers’ Finnoviti & Technoviti 2020 in India. This year’s theme ‘Experience Everywhere’ reflected the growing emphasis put on the user-experience in today’s evolving payments ecosystem. Read more »

Matthew Phillips Diebold Nixdorf

Are We Building The Right Foundations For Banking Innovation?

The future of banking could be closer than we think. As the industry continues to build the bridges between the financial services of today and the financial services of tomorrow, the pockets of innovation coming to the fore are impressive. From AI Read more »

Steve Morgan Pegasystems

What Trends Will Shake Up the Banking Tech Sector in 2020?

In the past year, we’ve seen technology play a huge part in shaping the banking industry landscape, from emerging fintechs to new solutions facilitated by Open Banking to the latest AI tools. With such progression happening throughout the sector, we Read more »

Deborah O'Neill Oliver Wyman

Why Robots & AI Will Never Rule Banking

Around the UK, alarm is growing from a belief that robots are taking away jobs. This fear is misplaced. From the steam-powered cotton mills of the industrial revolution to the rise of ATMs in the 1970s, there is little evidence to support the theory Read more »

Denis Novikov Qulix Systems

How Can Digital Customer Onboarding in Banks Increase Sales and Build Loyalty?

While banking product portfolios tend to become similar, banks must select between 2 most popular strategies (or combine them): to compete in pricing or to focus on customer experience improvement.  If you prefer the first strategy, you may skip Read more »

Magazine
ALL
Free Newsletter Sign-up
+44 (0) 208 819 32 53 +44 (0) 173 261 71 47
Download Our Mobile App
Financial It Youtube channel