9. Emergence of Challenger Banks
If Challenger Banks are going to drive significant numbers of customers to change financial relationships, they must not only offer powerfully attractive alternatives and improvements, they must also convince consumers they can be trusted — to deliver on their promises and for security and privacy. 2017 will be a year the industry finds out about the long-term strength of this segment.
Challenger brands may be offering far better interest rates and lower bank charges, or easy to use digital services, or better design, or improved service, but the reality is that very few consumers switch providers despite widespread and often deep dissatisfaction and distrust with the financial industry’s established players.
Even though these new innovative providers have been “challenging the status quo” for a few years, the net number of those switching accounts has barely changed. In the UK, for instance, one million people switched their primary financial institution last year — 11% less than the previous year, even though several banks have been offering generous cash incentives to encourage switching.
The same is true in the US, where new challenger organizations have many of the ‘bells and whistles’, but not the scale that one would expect from a better offering. The challenge is a combination of consumer lethargy, difficulty in switching accounts (more so in the US) and a lack of trust in many of the lesser known start-ups.
Despite these challenges, these organizations are proliferating in the UK in numbers unseen elsewhere around the globe, according to data from Burnmark. For instance, there are 40 challenger banks identified in the UK, compared to only 5 in the US. Despite the advantages offered by the UK market, it still seems likely that some challenger banks will fail. That’s because the market is becoming increasingly crowded, making customer acquisition an uphill challenge.
“2017 is the year challenger banks will need to prove they can actually win customers, and traditional banks need to prove they can truly make digital the center of their strategy.”
“There are many new digital challengers in the UK gearing up for their full launch and the lifting of their banking restrictions. When this happens, it will herald a huge shift for the fintech sector, with real competition finally being possible. Customers will have real choice.”
– Anne Boden, CEO of Starling Bank
“In 2017, we will begin to see the era of insurtech (insurance technology). The integration of advanced analytics, digital delivery and devices will herald in new challengers that will be watched closely by start-up banks and legacy organizations.”
“Being truly digital will come of age, as organizations like N26 and Monzo (who now have banking licenses) look to expand. Both have a digital core … It will be interesting to see how they differentiate, grow and what sort of ROE they can deliver.”
– Simon Taylor, Co-Founder of 11:FS
“Unlike single-product fintech solutions, challenger banks are rethinking comprehensive banking services from the perspective of the ideal customer experience. They are ‘new hope’ for the financial services industry. Their models and experience could turn into a key factor for the whole industry transformation over the next 10 years.”
“It’s going to be the year where 30 new banks come to the market in Europe and we start to see whether or not they will make dents in the retail, commercial and wealth spaces.”
– David Brear, Founder and CEO of 11:FS
10. Investment in Innovation
The innovation agenda has become intertwined with the digitalization agenda, with both requiring changes in culture and back office operating systems. While increases in innovation investment have slowed, the focus is still on reducing costs, improving engagement and making banking easier.
According to the Efma/Infosys Finacle Innovation in Retail Banking study, the proportion of banks with an innovation strategy has increased marginally in 2016 to 74%. This is only a one percentage point rise from last year, yet significantly than the level in 2009. The slowdown in innovation spending is also reflected in the proportion of banking organizations that have increased spending YOY, where we see a drop from 84% increasing their innovation investment in 2015 to 78% in 2016.
The areas where most banks are increasing innovation investment are customer service/experience (84%) and channels (82%), followed by processes (67%), products (63%) and sales and marketing (56%). Interestingly, 50% of banks regard their innovation performance in channels as high (scoring 6 or 7 on a scale of 1 to 7). In all other areas (customer experience, processes, products and marketing/sales), less than one third of banks feel that their innovation performance is high.
Small and medium sized banks might be at a disadvantage to larger banks when it comes to innovation investment. However, there are steps they can take to ensure they are keeping up:
- Monitor Trends and Other Organizations. Make sure your bank is aware of all the critical innovations taking place around the world and understand how these are impacting the business model of banking.
- Build an Innovation Culture. Smaller banks will have an advantage over larger banks when it comes to developing an innovation culture so this is an area on which to focus attention.
- Prioritize. With limited resources, smaller banks need to be very selective and disciplined in choosing where to invest.
- Leverage Vendor Relationships. Make use of relationships to access innovation at lower cost, done by vendors, other organizations or even trade groups.
“I think that over the next twelve months we will see the comeback of the innovation edge from those few traditional banks that have thoroughly embraced digital. Insight + digital infrastructure + customer experience design will produce a new, powerful competitor to fintech start-ups.”
“The biggest news will be material or mission-critical financial services technologies moving to cloud-first architectures, opening the door for innovation at the core of a bank.”
– Scott Bales, Managing Director at Innovation Labs Asia
“Due to economic and bottom-line pressures, banks will witness massive lay-offs and disinvestments in innovation labs and initiatives. These initiatives will be re-branded as research efforts, focused solely on incremental improvements in the core business lines.”
– Peter Vander Auwera, Founder of Petervan Productions
“2017 will be the year of accessible integration…finally! Look for trade groups, cores and community bankers to unite in the effort to make community bank tech relevant and open to innovation.”
Some Closing Thoughts
“Long time stable financial institutions will no longer be the safe bet for many. Waves of hidden entrepreneurial minds are about to leave their comfort zone to look for ‘new income models’ or to create/strengthen start-up ventures. It’s time to refresh talent in banks, as many ‘legacy’ employees become obsolete.”
– Maria Jose Jorda Garcia, Head of Customer Experience Transformation at BBVA
“There will be a continued power shift to the East. The emergence of Asia, led by China, as the leader in fintech investment and innovation of financial services products will occur due partially to the uncertainty in Europe thanks to Brexit and the new administration in the US.”
– Sam Maule, Director and Senior Practice Lead at NTT Data
“2017 will see an increase competition for talent with the rise of the Asian hub. This has been set by the success of several very large fintech events that have produced fintech unicorns with key figures like Jack Ma, CEO of AliPay, with the intention of tuening Fintech into TechFins.”
– Claire Calmejane, Director of Innovation at Lloyds Banking Group
“Social media has given rise to a new class of online influencers in financial services, comprised of experts and analysts, competitors and collaborators, journalists and bloggers. Whether you’re a disruptive start-up or an incumbent brand, you need to identify relevant influencers and start building relationships with them. You can buy followers, but you can’t buy influence.”
– Jay Palter, President and Founder of Jay Palter Social Advisory
I would like to thank the more than 100 members of this year’s crowdsourced panel who accepted my invitation to be interviewed for this expansive annual report. The insight shared was extraordinary, and the continued support of this effort is greatly appreciated.
I would also like to thank the more than 900 banks, credit unions, suppliers and vendors who took the time to help us prioritize the trends from both 2016 and 2017. I know you’re busy, so some special thanks.
I would also like to thank Carol Ryan, Jim Booth, Jeffry Pilcher, Ron Shevlin, Brett King and the rest of the Fintech Mafia for the daily support, inspiration, insights and laughs. My wife, Linda and son, Cameron also get a huge thanks for putting with me daily (it’s not easy).
Finally, and most importantly, I would like to thank the sponsor of this year’s research, Kony, Inc. Without your support, this research would not be possible.
I don’t think there is any annual research available that provides as in-depth a review of annual trends from such a diverse audience. But I’m always open to suggestions.