• Nick Roi, Managing Director at Perivan Technology


• 31.05.2017 01:00 pm
Banking , Innovation , Open Banking

A vibrant, new type of banking business has emerged and is attracting a great deal of attention, mainly due to their ability to drive innovation and improve customer service levels. These banks are not any of the well-established high street names but are businesses within the banking industry that serve a specific target market.

Even though the development of these banks seems exciting, their diversity is often misunderstood because these ‘challengers’ are presumed to be identical in nature to each other and facing identical market dynamics. In a bid to challenge these assumptions and explore how best to exploit the opportunities available to these banks, PricewaterhouseCoopers (PwC) recently published a report: ‘Who are you calling a ‘challenger bank’’ based on interviews with CEOs and senior professionals from this niche industry. The report looks into the role these new entrants play in the UK banking sector and how they are driving innovation and improving customer choice.

The report concentrates on four areas: Definition of the term ‘challenger bank; Regulation; Open Banking and the challenges that each business faces.

‘Challenger banks’ address specific target markets

Before we explore the key findings, let’s look at what the term ‘challenger bank’ really means. The widespread assumption is that these banks challenge and even compete with the main high street banks. This is not the case and doesn’t adequately reflect the breadth and depth of their offerings or the variety of strategies these banks provide. These banks actually consist of four broad groups with different models, aspirations and challenges, usually based on geography, product specialism, client type and need.

There are four types of challenger banks within the UK – mid-sized, full service banks, specialist banks, non-bank brands and digital-only brands. Therefore, marketers in particular should be wary of the changing nature of this competition and its potential impact. The advent of these banks brings the formation of a customer-centric market in which digital technologies play a pivotal role in supporting banks to deliver a seamless service. This customer-centric market poses vital questions for marketers such as clearly defining their market, understanding product focus and how their services differ from existing offerings. In this sense, it’s key for marketers to be able to not only determine their strategy but communicate it within their market in a compliant way. 

‘Challenger banks’ do not define success in terms of their ability to rival the large high street banking groups, but rather, their goal is to serve their specific target markets profitably. In this regard, they can be seen as complementary to the traditional banking model rather than rivalling it. In fact, they claim that “We're happy being customers' second bank. We don't want to be their primary bank and we don't offer current accounts for this reason; current accounts are a dated product.” (PwC)

Regulation making it easier for new entrants

Regulation is often seen as an obstacle for innovation and competition; however, the report states that regulatory policy has actually begun to make it easier for new banks to enter the market. In particular, the FCA’s ‘Project Innovate’ has already assisted over 300 firms to date, and its ‘Regulatory Sandbox’ – a safe test environment in which financial services firms can trial new products and solutions - aims to help firms develop new delivery methods whilst staying compliant.

The banking groups’ CEOs which PWC spoke to are quite open to welcoming new entrants into the market and fostering further competition. However, they highlighted a number of areas, including regulatory proportionality, access to payments systems and transparency of products, which need to see further progress in the near future. 

Open Banking stimulating new business models

Participants in this PWC report feel that Open Banking, a government initiative which aims to increase transparency in data and sharing, will be responsible for driving a fundamental change in the banking sector.  This will lead to an increase in new business models, which will consequently lead some firms to develop products in niche areas or integrate niche offerings from a number of different companies.

The success of any Open Banking strategy lies in the firms’ ability to build their customers’ trust. Banks and third party providers must make it clear to customers that their data is well-secured.

So, remaining ahead of the competition means making sure product development is central to business strategy. Furthermore, the pace at which financial services firms react to industry changes is essential for maintaining a leading market position. 

Challenges ahead

Each business within the baking sector needs to overcome specific challenges in order to be successful and remain ahead of their rivals. But what exactly are those challenges? It looks like each group has obstacles specific to their own circle of influence. For instance, traditional banks need to present themselves as modern, customer-centric and even digitally-savvy in front of their customers. Digital-only banks, on the other hand, need to grow their customer base and use their distinctive service offerings to do this. Only when these digital-only banks have achieved strong awareness offline, can they claim to be firmly established.

So, is competition improving customer choice and driving innovation within the UK banking sector rather than challenging it? Looking at banking now and comparing it to just a few years ago, it seems that the industry has become increasingly customer-centric   enabling customers to combine and personalise the services on offer, with digital technology playing an increasingly important role in delivering exceptional customer service.

For this market to continue to grow, drive competition and improve customer choice, action is required by both the banking sector and policy makers. Ideally, both traditional and challenger banks must execute their strategic priorities and regulators must address the areas that require improvement. If this happens, the industry will move towards a more diverse market which offers customers a greater choice of banking services. New ‘challenger’ banks will continue to offer customers compelling and differentiated experience. Keeping on top of the constant changes in today’s dynamic banking sector is essential in order to take advantage of future opportunities.