The financial landscape is delicately poised in an interesting position. In the beginning there were incumbent banks who struggle with legacy systems and inflexible ways of working. Then came a number of fintech startups, all aiming to approach banking from a new angle. Now there is a small number of fintech upstarts who have applied for a full banking license, signalling a change in how they expect to do business – think Starling, Monzo and lastly Revolut, which is aiming to add US and UK licenses to the European one it obtained 3 years ago.
Add into that equation a large number of partnerships between incumbents and challengers – largely as the traditional banks try to digitize and compete – and it’s easy to see why the battlelines have become so blurred. Do challenger banks and neobanks still offer a threat to incumbent banks or have they become an opportunity for banks to move and react more quickly?
These two terms – ‘challenger banks’ and ‘neobanks’ – have become synonymous with the large number of fintechs aiming to go head-to-head with large, incumbent banks. Both offer a digital alternative to traditional banking although challenger banks, unlike neobanks, might also have a physical component. For example, Metro Bank has high-street branches or Starling Bank has partnered with the UK’s Post Office for cash deposits and withdrawals. Neobanks offer their services to customers exclusively online.
As well as this main difference, you might notice a change in the products that challenger banks and neobanks offer. As the name suggest, challenger banks were launched to compete directly with existing high-street banks. That means they are more likely to have a wider range of products and services – similar to a high-street bank – while neobanks are more likely to specialise in a small number of product areas. Because of this, some larger challenger banks have become more likely to invest in full banking licenses in order to increase the scope of their business – something which the vast majority of fintechs see as unviable.
Are challenger banks a threat?
Niall Bellabarba, Fintech Innovation Specialist at Deutsche Bank, believes that fintechs have encouraged incumbents to be better at what they do. “The challenger banks and neobanks by their very nature are very small, and therefore they move very fast,” he says. “They’re not a threat – they’re more of an opportunity in my view for large banks because they showcase what is possible with modern technology.”
That was a view shared by several of our expert panel on the day. Mark O’Kelly, Head of Digital Channels for Bank of Ireland, believes that collectively challenger banks and neobanks may pose a threat to incumbents – but individually they have proved to be an opportunity.
O’Kelly says: “It’s been brilliant really because in terms of driving innovation – would banks have done anything like the investment in tech or customer experience? No way, not without fintechs.”
“I think it’s been fantastic for just making everything better frankly. But I think established banks are narrowing that gap on user experience, certainly not at the same level as some but I think… it’s all just led to the customer wins ultimately out of it because there’s definitely much better competition in different ways.”
Louise Døvling Andersen, First Vice President, Global Head of Treasury Implementation for Danske Bank, has the final word on how this dynamic between challengers and incumbents plays out.”[At Danske Bank] we’re still very diligent about selecting partners and setting up a good integration, but new banks tend to be… faster in setting up partnerships,” she tells us.
“We come to the world with an assumption that we’re not going to build all of our products ourselves, we’re not going to build all of our interfaces ourselves, we are welcoming a range of partners to build a collective and coherent offering for our customer segment. I think that is particularly inspirational for traditional banks.
“Another thing we’re also seeing is that new banks [are] up for more innovative pricing and product bundling. I think that a lot of the new banks, at least that come to mind like Revolut for instance, have a streamlined and simple and transparent offering. It resembles more what we see in telcoms or media enterprises – the offerings available there – than they do traditional banking offerings. If you look at the Danske Bank offering, you simply cannot count the amount of product varieties we offer because we just simply have such a wide offering! New banks take a completely different approach and I think that is very inspirational.”