Challenger banks: The rise, risk and rewards

Challenger banks: the rise, risks and rewards

The advancement of technology opens a new door for a wide range of new financial services, with a common aim to enhance customer experience and revolutionize financial services. Born in the digital age, challenger banks have a significant impact on the financial space. There is a widespread worry among incumbents that these new players are gradually taking over market share in the banking world, placing traditional banks at risk. To help you understand the concept of challenger banks and answer the question of why their model is competitive and viable in the long run, the Holland Fintech team has analysed the driving forces behind its rise, as well as the risks and rewards for banks and technology players. 

What are challenger banks?

According to Wikipedia, challenger banks are small, recently created retail banks that compete directly with the longer-established banks, sometimes by specialising in areas underserved by the big incumbent banks. Challenger banks, also referred to as Neobanks, distinguish themselves from the traditional banks by their use of modern financial technology, such as online-only or even mobile only operations, that avoid the costs and complexities of traditional banking through branches.

Why are challenger banks winning the game?

  1. Low fees: Since challenger banks don’t have to maintain physical locations, they offer substantial lower fees to customers compared to traditional banks. 
  2. Innovative: Challenger banks are further ahead than traditional banks in the technological competition. Thus, customers are allowed to enjoy the latest advances, convenience and efficiency in their products and services. For example, Monzo, one of the challenger banks in the UK, surprised consumers with a transparent debit service that offers intelligent notifications and instant balance updates to give consumers more control over their financial management. Revolut, another UK based challenger bank, allows consumers to open a bank account within 3 minutes, which grants them ATM access to 90 different currencies. 
  3. Personalization: Challenger banks maximize customer satisfaction and smooth customer journey by tailoring banking experiences for each customer. The hyper personalization allows them to respond to customer needs, as well as differentiating their brands, boosting revenues and helping improve financial inclusion. Taking advantage of AI such as chatbots and personalized digital conversations, challenger banks are on the way to transform customer experience, forming a close-knit relationship with their clients. 
  4. Real-time notifications: The feature of real-time notifications is super informative to customers when an alert is sent every time there is a new activity in their account. This function allows customers to keep track of their spending, and at the same time spot fraudulent activities in case of unauthorized use and invasive transactions. 

What are the bumps in the road for challenger banks?

  1. The challenge of AMLD:  Challenger banks depend heavily on technology rather than human resources/personnel, which could result in issues during customer onboarding processes. The problem would grow more seriously if these customers open many fake accounts at the same time to transfer money overseas and continue doing that without being detected. However, AMLD is a challenge, but rather because focus is more on growth and not on compliance. They are also smarter in using technology to find fraud and be compliant than incumbents.
  2. Lack of customer’s trust and confidence: According to research from Accenture, 45% of UK-based consumers think challenger banks will only exist in a year’s time. This hinders growth opportunities of challenger banks as consumers will be discouraged to invest/put funds into banks they suspect might not be around for long. Furthermore, the survey also shows that one-fifth of respondents don’t trust challenger banks “at all” for the insufficient capacity to look after their financial well-being. A majority of respondents were reluctant to change their current bank and admitted being unfamiliar with challenger banks. 
  3. Funding pressure: Challenger banks may be under pressure for funding, given the fact that they are often not yet profitable. They also rely heavily on online retail deposits with short-term fixed rates, and deposits from SMEs and corporate clients, according to Fitch Rating. These sources of funding are more price-sensitive and less stable than current accounts, and could become more costly to attract and retain in the event of rising interest rates and financial pressure on consumers.

Interesting insights: Offering exclusive benefits and advantages over traditional banks, the mission of challenger banks is to fix the weak spots of traditional banks, not to replace them. Instead of having a head-to-head competition, challenger banks and traditional banks will allow more collaborations in the future, with the aim to increase profits and overall, to enhance customer experience. “The core of the message is that Fintechs that serve the underserved and the unserved will be far more successful than addressing the needs of those who are already served” – Chris Skinner.

Don Ginsel, Founder & CEO of Holland Fintech: “Challengers are essential to make parties compete for the customer. New players, with bold ambition, new technology and a modern vision on providing financial services, are really making an impact on financial services. But the market is not easy to take on. Incumbent players have some time to follow and adapt, before their customers will consider to jump ship. It is very exciting to follow the latest innovations and see how customers are making considerations for their financial service provider. May the best bank win!” 


Read further other content about challenger banks by our members:

Fincog – Overview of Challenger Bank Unicorns by Core Product

W.UP – The X Factor In Banking – Why Personalisation Is Key To Hacking Growth For Challengers

bunq – The first challenger bank to offer instant payments across Europe

W.UP – Challenger banks have taught us much but W.UP discusses what can they learn

New developments from energegic challenger banks

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