A new breed of banks and fintech start-ups has come along to overthrow the big, bloated incumbents and offer customers unprecedented levels of convenience and customer service. At least that’s what some sections of the media would have you believe.
The truth is more complex and less dramatic than that. There is, without doubt a massive change occurring in the banking industry. However, the so-called ‘challenger’ banks that have come along have much to do before they can position themselves alongside the more established industry names.
The banking crisis of 2008 is still being felt in terms of customer perception – banks no longer have the same levels of customer trust that they enjoyed pre-crisis. However, that doesn’t mean to say that challenger banks, free of the stigma of this turmoil, are necessarily considered trustworthy straight away either.
Of course, everyday consumers are relatively slow to change their behaviour, especially when it comes to banking. Nonetheless, we’re seeing a lot of change in previously underserved sectors by banks, such as the small and medium enterprise (SME) sector, which suggests the challenger banks and other fintech start-ups are making headway. Niche markets such as buy-to-let and specialist commercial lending are also areas where challengers are very active.
Head-to-head or side-by-side?
So, while the banking landscape is changing, it is unlikely that the emergence of these new banks will be the catalyst for the disappearance of any of the big banks. It’s much more likely that we will see a future of acquisitions and partnerships between these new players and incumbents. Look, for example, to Spain’s BBVA, which has been investing in and acquiring various new financial companies such as Holvi, Atom and Simple.
It’s happening on both sides of the Atlantic, with JPMorgan partnering in the US with online lending firm OnDeck, while payments firm Square counts Goldman Sachs, Citigroup and Morgan Stanley among its investors.
This consolidation is going to be of great benefit to both corporate and individual customers. While many established banks have traditionally concentrated on getting the best results for their shareholders, building products that have the greatest boost for profit margins and treating customer convenience as an afterthought, this is not how the challengers play the game. They typically turn the whole thing on its head, thinking about creating products customers want and getting them onto the market as quickly as possible.
The challengers keep their focus narrow until they achieve market penetration; only then do they think about scaling up the service and adding to their product set. They’ve also astutely realised that today’s customers expect much more from their bank than previous generations. Overall, they want clear differentiation between banks before thinking of switching; they want a personalised experience based on their data, with a forward- looking analysis of their finances. They also increasingly demand a real relationship with their finance institution, instead of a transactional approach.
The effect of this is that end customers, now licking their lips in anticipation at the possibility of more convenient and user-friendly products, look to switch to the new service – or go to their existing bank and demand something similar. The established banks, hindered by legacy IT systems and internal bureaucracy, are then faced with a stark choice. Do they undertake the arduous process of planning, commissioning, building, testing and releasing the new product? Or do they partner up with – or even acquire – the new upstarts, which can meet these customer demands from the off?
This is, of course, a simplified representation of what is happening in the banking industry right now, but the point is this: customers’ expectations of banks have changed and banks must change too in response.
The customer-centric approach
So, the big banks need to learn fast from the challengers when it comes to developing and implementing new products. A new focus on innovation will only get banks so far, though. To continue to be relevant in today’s market, all banks should take this customer-centric approach further. As well as offering the products that customers want, they also need to deliver the service that the customers want.
It’s no good having branches that only open on weekdays and close for lunch – users want online access to their accounts 24/7, and not just to check their balances, but to make transactions, apply for loans and credit cards, and to get help or ask questions through whatever device they happen to be using at the time.
Making customers feel valued is more difficult when there are millions of them, and this is one of the most significant challenges that the big banks have today. For the new entrants, it is much easier to build communities for smaller numbers of customers, giving them a voice and the chance to talk directly to the people who look after their money, build and manage the innovative new services that they use. For those challenger banks growing at an exponential rate, artificial intelligence (AI) is a critical part of their strategy in being able to continue to offer a personalised experience to customers and this is a trend which will only accelerate as the technology becomes more sophisticated in the coming years.
However, challengers do have various issues that they need to address too. In order to scale, they need to build their brand, which is hard to do when budgets are tight and you rely primarily on word of mouth. But through partnerships with and acquisitions by bigger players – and niche audience segment targeting- these problems can be addressed, while also solving a problem for the established banks.
The banks posed to make the biggest impression in the market over the coming years will be those that are ahead of the curve in terms of understanding what customers want, and providing tools and services that match these desires. Furthermore, the customer experience and customer service provisions need to be best-in-class.
The shift that is required from the traditional banks is simply explained – they need to put the customer first. However, without following the example of the challenger banks – whether by investment, partnership or acquisition – this will be a very difficult goal for them to achieve.
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