Chris Skinner is one of the most recognized commentators on financial services and fintech worldwide through his blog, the Finanser.com and is the author of the bestselling book Digital Bank and its sequel ValueWeb. Skinner is also chairman of the European networking forum, the Financial Services Club, and has been voted one of the most influential people in banking by The Financial Brand and several other organizations.
In this exclusive Q&A interview, Skinner discusses the impact of challenger fintech banks and the opportunities, challenges and future prospects of these organizations.
How has challenger banking evolved? Have you noticed any interesting trends or developments in the space?
Chris Skinner: First and foremost, I don’t really like the term challenger bank. What are they challenging? The incumbent banks? I don’t think so, as the incumbent banks dominate. So, I would rather refer to them as neobanks or different banks.
And that’s the key. Are they different? Are they really doing something new? There are some that I can see as being different, and most of this is based around information services about money, rather than running as a transactional bank. That’s where the key trend is: to focus upon information services on transaction data and inform. Providing predictive analytics, lifestyle management services, information about your spending and savings habits, cash flow forecasting and alerts, and doing all of this in a fun, informative, entertaining and visual way.
In other words, incumbent banks are viewed as being constrained by their historical systems, which focus upon payments and balance reporting whilst neobanks can create a whole raft of information services about money by starting at a different point.
Do you think lack of legacy and a better customer experience will continue to be the biggest advantages for neobanks?
Chris Skinner: Those are certainly advantages, but neobanks lack history and therefore trust. Who are they? Are they legal? Can they be trusted?
Those factors take a long time to develop, and I tend to talk about the two extremes. Incumbent banks have centuries of history, millions of customers and billions of capital, but are stuck in their entrenched legacy; Neobanks have a clean sheet of paper but they have no history, no customers and (often) no (or limited) capital, so they are challenged to build a legacy.
How can fintech banks avoid falling into a negative stigmas as they grow larger?
Chris Skinner: That’s a tough one, especially as many neobanks are being launched by leaders who aim to sell out at some point to an incumbent bank. If they’re not looking for a sell-out, they’re looking for an IPO, and that’s also a challenge.
Therefore, the focal point must be: how big can a neobank grow before it gets acquired? That’s how banking has always developed: the biggest banks just get bigger because they either squash or buy the competition. By way of example, and a figure I keep falling back on, is when the internet boom occurred at the end of the 1990s, the Big Four UK banks (HSBC, RBS, Barclays and Lloyds) had 69% of the deposit account market. That figure dropped to 63% by 2003, giving everyone a feeling that the internet boom had busted the big banks.
That view was wrong. It was actually the conversion of Building Societies (thrifts) that impacted those numbers, and many of those converted Building Societies either got acquired (Halifax by Bank of Scotland and now Lloyds) or were bankrupted by the credit crisis (Northern Rock). As a result, by 2014, the Big Four UK Banks owned 77% of the deposit account market.
I don’t expect that to change much in ten or twenty years to be honest, as they have the luxury of adapting to change, regulatory protections, legacy customers and the capital to buy out or shut out any neobanks challenge.
Which challenger fintech banks have done well?
Chris Skinner: There are a few that stand out: N26, Bunq, Atom – the reason they stand out is they’re out there actually working and getting recognition. That’s part of the biggest challenge for any neobank … actually getting a banking license and getting to market.
Do you believe there will be consolidation among the neobanks either through acquisition or combination?
Chris Skinner: I believe we will see some acquisitions as have already occurred in the US. There will also be investments by legacy banks in some of the challengers like BBVA has done with Atom.
But, the challenger banks don’t need massive size to succeed. Their infrastructure and delivery strategy is built on a much less expensive platform, allowing them to make money while legacy organizations are still paying for bricks and mortar.
What do you expect will be the biggest trends impacting challenger banking in the 2017?
Chris Skinner: I keep coming back to how are you going to be different? And how are you going to attract customers? Some customers will be self-selecting.
For example, Fidor Bank tells me that around three out of five customers are over 35 and half are over 45 years old. These are people confident with money and competent with technology. That is probably the largest demographic who will move to digital only banks – people who don’t want to deal with a bank face-to-face, have experience with money, and are good with tech. Typically those people are wealthy, in good jobs and are among the mass affluent: a good target market to reach.
Then, if you have five or ten new banks all targeting the same people, it’s too many. Equally, if they’re the low hanging fruit, how do you get others to switch? Even banks with branches find that a challenge.
For example, Santander was spending over £1 billion a year in the UK to bribe customers to switch using interest rates. These neobanks don’t have that. So, the biggest driver in 2017 will be coming up with a new business model that doesn’t just offer another bank or another digital bank, but actually offers a completely new money service never seen before. I’m yet to see that model, and eagerly await the launch of one that’s hugely different.
The other driver has been niche neobanks. I’m seeing more and more niche neobanks focusing upon students, small businesses, refugees and migrants. I think we’ll see a lot more of the niche, or boutique, neobanks appearing in 2017.
Purchase the Report
The Challenger Bank Battlefield report provides insight into more than 30 fintech challenger banking organization globally. Beyond a review of the strategies and products offered, this report includes an analysis of the competitive positioning of the organizations reviewed.
The report also includes interviews with challenger banking organization founders and financial services industry leaders like Chris Skinner. The report has 82 pages of analysis and 15 charts/graphs. Finally, the report includes secondary research into the competitive marketplace and guest articles from organizations who are close to those organizations involved.
You can download an executive summary of this Digital Banking Report or order a copy of the report by clicking here. This report is not intended to provide a review of all of the challenger banks in the marketplace. With new entities being developed daily, this would be impossible. The report is intended to provide a helpful overview of players and strategies.