Banking Disruption: FinTech and The Rise of Challenger Banks – by Véronique Rapetti
Like me, you probably have seen an increase in data and articles mentioning how the world of banking is changing to become “digital-centric” or “mobile”. In London, I have noticed, two key words seem to be floating around all the time: “FinTech” and “Challenger Banks”. So what does this mean for the more traditional banking system and why is this happening? What are the drivers for change?
- New consumer mindset
Firstly, I think the digital revolution that is being forced upon the banking world can be credited to a new consumer mindset, a societal trend that is changing the way people want to interact with and use the services of their bank.
The Millennial generation is the most likely to embrace digital-only. Around 66% of Generation Y (born since the early 80s) already use mobile banking weekly or more. Additionally, 40% see mobile banking as a must have – and these numbers are growing. (Source: Novantas Bank Choice Monitor, June 2014).
They also have very high expectations when it comes to making a transaction, or what I might call “action at the point of thought”: i.e. they want to make their transaction straight away, as soon as they think of it, and the experience needs to be smooth and fast. This is why mobile banking is so important and attractive to them.
- Rise of the Fintech Start-up (or Challenger Banks)
One of the key players in this digital transformation (and revolution) are the “Challenger Banks”: These are FinTech startups with aspirations to challenge banking head-on as a Bank rather than build services on the periphery of banking. Their numbers, in the UK alone, keep on increasing. For example, Mark Dunne, Head of Research at AJ Bell discusses the rise of these challenger banks in the UK and how they actually outperform larger banks on key metrics: https://www.youinvest.co.uk/video/challenger-banks
Another example of this rise is the recent launch of the UK’s ‘Blockchain-Inspired’ Challenger Bank by Chris Gledhill: Secco Bank (www.seccobank.com). In a press release dated of 6th October 2015, Chris explained: “At the core of Secco is a store of value, the difference being in a digital economy your data can be just as valuable as your money. With data comes identity. With Identity comes reputation and what is more valuable than one’s own reputation — and where will you store/manage it? I believe this should be the role of a bank.”
- Technology Disruption
Technology has also a key part to play in this digital transformation. New technologies such as Bitcoin and Blockchain, new Open APIs, new IT infrastructures are all part of the changes. Also, for example, new features from device providers will help enable the next wave of mobile banking innovation (e.g. biometrics, wearables, augmented reality).
A key trend is for the challenger banks to build new banking software. In her recent speech at the London Fintech Week 2015 Eileen Burbidge partner at Passion Capital and the Government’s special envoy for FinTech explained: “The first wave of disruption to financial services came in the form of lending, payments and remittance, so that’s your Funding Circle, TransferWise and MarketInvoice. But the next wave we’re starting to see is disruption of the backend of financial services, like challenger banks with full-stack software decoupled entirely [companies like mobile bank Mondo which are building brand new banking software and systems separate from legacy banking software].”
According to Burbidge, building these entirely new financial services for the digital world, ditching legacy systems, is the next big trend, and one London is uniquely positioned to exploit. (Source: http://www.thememo.com/2015/09/15/eileen-burbidge-these-are-the-reasons-fintech-in-london-has-conquered-silicon-valley/)
This will create more flexibility for these challenger banks and allow them to be more responsive to their customer’s digital expectations and needs.
- Better Rewards
In light of the above, the “traditional” banks that can exploit their digital levers to build new digital capabilities to meet new demand and behaviours, will reap many of the rewards. Let’s not forget that most of us don’t change banks every day even though the process is relatively straight forward now. Traditional banks have the advantage of millions of customers who already use their services. But, they can’t afford to sit on their laurels. “These banks can increase customer interactions by up to 250 percent” (Source: Accenture, The Everyday Bank, March 2014), and hopefully retention and higher revenues per customer!
In conclusion, digital disruption is becoming more mainstream and the banking sector has to act as if this is business as usual. The pace of change and disruption coming from the challenger banks, and the other FinTech Start-ups is not slowing.
Indeed, every day new FinTech start-ups are being launched. On the NEF programme a number of Fintech start-ups have been launched, the most recent were: Quinn Murray and his “Beating the world to information “cloud-based and real-time analytics software: Krzana (http://www.krzana.com/) and Donald Gillies and his start-up PassFort (http://passfort.io) looking at revolutionising compliance and online identity checks for regulated services.
As mentioned in a BBA report on “Digital Disruption: UK Banking”- March 2015 (https://www.bba.org.uk/), traditional banks, to succeed and survive need to:
– Invest in forward-looking activity to spot the disruptions ahead of them
– Work to create a faster adoption cycle for new services, solutions and new IT systems
– Change the cultural balance and risk culture inside the banks
In short, banks have to wake up and smell the ‘digital coffee’.
Véronique Rapetti, Learning Director, New Entrepreneurs Foundation