Challenger banks are having a rare time exploring what it means to be serving customers in the 21st century. Unlike established retail banks who are having to work hard to rebuild reputations and services following the 2008 crash, new entrants are up to date, fleet of foot and digitally native. Most importantly, they’re emerging at a time when customers are crying out for the banking tide to turn.
Statistics from the industry support this. The Bank of England is charting a regular decline in lending by British banks to UK businesses while investors have pooled $80bn to put into direct lending funds over the last two years, according to the FT.
Savers aren’t likely to have it any better, with the Guardian reporting that the Bank of England plans to keep interest rates low until 2017 at the earliest. But unlike standard retail banks, challengers are able to offer rates of 2.4% or 2.7% bonds.
It’s not all doom and gloom. The big four banks reportedly still hold 77% of personal current accounts and 85% of small business lending. There is evidence, however, that something of a David versus Goliath battle is brewing.
The crash of 2008 made the large retail banks wary. And if they weren’t wary enough, regulatory restrictions helped them behave warily. The result has been the emergence of a risk-averse, process-heavy sector. But customers’ lives are populated by Amazons, Ubers, Airbnbs and Netflix. Restriction is no longer their thing.
Innovations in fintech and data are leading to boutique services springing up all the time. We are in an era where technology lets new entrants service handfuls of clients for the same cost and return as thousands of them. The attraction of pursuing the unbankable, the underserved or the plain unusual is clear.
Ecosystems, decision-making and the new currency
It is the retail banks’ inherent lack of flexibility and adaptability that has allowed the challengers to sneak in between the cracks.
Some are able to take advantage of the inability or unwillingness to deal with unusual risk profiles. Shawbrook bank, for example, is able to consider less stringent loan to value mortgage ratios or credit card consolidation loans. It doesn’t mean challengers are forced to sup at the poison chalice of poor risk. Underserved can mean customers disillusioned by impersonal service, those with solid but unusual credit histories or non-standard employment.
“It’s important in any business to have access to data and understand context but there is an unhealthy dependency on scorecards in making policy lending decisions. Life is never as simple. Data is used unintelligently to make poor decisions. That’s a shame,” states Steve Pateman, CEO of Shawbrook.
Others, being built from the ground up in a digital environment, have been able to adapt to the mobile-first, modular customer. Mondo considers itself to be one of the first mobile-only current accounts. When its users need services outside its core offering it simply integrates with other services.
Conversations are also happening around what it is the customer wants to bank. Is cash always going to be the only currency?
With increasingly smart cars, risk through burglary, fire and accident has been significantly reduced. However, the inclusion of telematics has also introduced a link to smartphones, lifestyle concierges and highly personal data.
What happens in a data-hungry world where the customer holds the key to their information? Secco, for example, proposes a model where the individual holds their own ‘bank’ trading data, money or any other asset out of it in exchange for goods and services. Secco is the secure interface, the second key holder to the customer’s own personal bank vault.
Such flexibility means challenger banks don’t even need to restrict their offerings to traditional banking norms. The data sharing economy is opening up whole new avenues and revenue streams beyond renting out a spare room or car. Using beacon technology, Secco proposes upping the ante of the social review space.
Rather than leaving a five-star review on a static website, customers can broadcast information about what they’re wearing and where they’ve been while in and around associated retailers. The value proposition between customer and retailer becomes so much more than an exchange of goods for cash. The simple act of wearing clothes becomes a bankable revenue stream for every individual.
“It changes the role of a bank and capitalises on our interactions as social animals, bridging the physical and digital blur. We all have our real and digital personas,” Chris Gledhill, CEO and Founder, Secco.
Where now for retail banks? Are we heading for a future where we will see the established institutions crumble? It has to be said, this is a highly unlikely scenario. But, the presence of the challengers creates some very real and present dangers for established brands, if only in their competition with each other.
To see the full article featuring Chris Gledhill, Steve Pateman and Ole Mahrt, follow this link.
By Andrew Foot, Financial Services Project Director, FC Business Intelligence.