Challenger Banks are already encroaching on the territory of the retail banking market. But where are the likely battlegrounds? Regular contributor Derek Britton takes a look.
Despite healthy trading statements in 2015 at HSBC, Barclays, RBS and Santander – and market dominance of around 77% of the available market, according to FT.com – the major retail banking giants face many challenges.
Many of the big four established banks – widely accepted to mean Barclays, HSBC, Lloyds and RBS – are still struggling to leave a post-2008 doldrums of – to some extent – their own creation. Renewed and increased regulatory scrutiny for past sins, including LIBOR, FOREX and PPI and the consequent damage to loyalty ratings are all contributing to a ‘big is bad’ narrative. Worse still, global economic growth will slow in 2015 to the lowest rate since the financial crisis, according to the British National Institute of Economic and Social Research (NIESR).
A perfect opportunity, then, for the challenger banks, untainted by the indiscretions of the past, to nimble manoeuvre themselves into position to snatch clientele and market share from the old guard.
This article will explore the potential battlegrounds where Challenger Banks and their established adversaries will meet, the attributes of Challenger Banks, the digital world and, perhaps conversely, the misunderstood world of underlying banking IT systems.
I like a good challenge
Challenger plus points
- Challenger Banks are more nimble to meet new market demand
- No branches improve margins for longer-term health
- Not affected by poor reputation of more established institutions
Retail Bank plus points
- Savings, loans, mortgages are all IT-based products, already built by established banks
- Retail banking is changing to reflect market demand through revised investment plans, branch closures and revised marketing
The umbrella of ‘UK Challenger Banks’ encompasses a variety of backgrounds and profiles, including new start-ups such as Metro, Atom and Starling; recently-established brands such as Virgin Money and TSB, and the banking arms of supermarket giants including Tesco, M&S and Sainsbury’s. This eclectic collective has sought to undermine and disrupt the retail banking establishment and – in the last few years at least – the plan seems to be working.
The Challenger Bank market seems buoyant in terms of customer acquisition and deposits. The most notable start-up example is Metro Bank which, during 2014, saw its deposits soar from £1.3bn to £2.9bn, with lending growing to £1.6bn from £754m and customer accounts increasing by 63% to 447,000 in the same period.
Clearly, a compelling market offer is behind this uptick. In the savings account arena, “challenger banks are offering 90 per cent of the top fixed rates”, said Anna Bowes of Savingschampion.co.uk.
As we have mentioned, the newer banks have something of an advantage in that they are not counting the cost of decades of IT, products and customer information. Another significant factor is the lack of overheads represented by the branch network, which claims a massive proportion of the operational spend for established banks and examples abound of new entrants emerging almost overnight offering a range of streamlined, online services.
However, when one considers the array of products – and the depth and breadth of retail banking facilities offered by the market leaders – it remains to be seen whether this is one battle that the would-be usurpers would prefer to avoid.
Some scaling down may be in order. Over recent months and years, the longer-established banks have taken a hard look at this issue, and some have undertaken a plan to reduce branches. More than 470 were closed in 2014, and 399 have already been lost in 2015, according to The Campaign for Community Banking Services as part of a more balanced customer strategy.
Challenger Banks Plus
- Unshackled IT infrastructure makes challengers more suited to new digital markets
- Cloud, Mobile, Big Data are hard to do with a large banking IT estate
- Built from the ground up to meet demands of modern customer
Retail Banks Plus
- Greater resources and previous investment enable established banks to have strong mobile presence
- Established banks will already have Cloud and Mobile-ready platforms as well as a lot of skills and software investments
The banking market is changing. No bank, however, big or small, established or otherwise, can behave or offer the same service it did even as little as five years ago. Product innovation is one thing, but so too is route to market and with the number of people using mobile banking set to double in the next four years alone, according to KPMG, the stakes are high. Even a cursory glance at the website of any of the established bank brands reveals a less than innovative experience.
One view is that as the more nimble, younger banks have “less to change” when pushing ahead with digital, they are arguably in a good position to offer cutting-edge online products and services. Newly-registered Atom Bank, for example, will offer online banking only, with no branches or telephone banking facilities: “Our aim is to make it so simple to operate online that it is faster than the time it takes to call someone”.
However, the level of resourcing, investment, skills and technology available to the more established bank may be an advanced position of strength for them. Clearly, by now they will obviously have invested in platforms and strategy in support of the digital age. According to Barclays, customers use the Barclays mobile banking app 26 times in a month on average, and the app receives 1,980 logins a minute – clearly this facility is now a major component of its retail banking service.
Legacy Looms Large
Challenger Banks Plus
- Established banks’ IT estates are harder to change because of their size and complexity, making challengers more able to get to market faster with new facilities
Retail Banks Plus
- The overwhelming majority use IBM mainframe platforms under 3 years old which possess unrivalled levels of reliability and performance
- The overwhelming majority use COBOL which remains fully supported
- Embracing Cloud, Mobile, Web and Big Data are all easy with core COBOL technology
There has been a lot of commentary about the reliance of current banks on ’legacy technology‘. Unsurprisingly, there’s also the issue of cost – and the concern of banks ‘overpaying for IT‘ is widely reported. The widespread belief seems to be that legacy banking systems cannot embrace the digital world and that this represents the established banks’ collective Achilles’ heel.
However, it is worth looking at that supposition carefully. Firstly, anything defined as ‘legacy’ has, by using this label, been working for some time. In a recent article I examined some of the dangerous conceptions around older systems – but in many cases, including many banking organizations, the following statements are true:
- the overwhelming majority use IBM mainframe platforms under three years old which possess unrivalled levels of reliability and performance
- the overwhelming majority use COBOL which remains fully supported by products from a variety of major vendors
- embracing Cloud, Mobile, Web and Big Data are all technologically straightforward from existing core COBOL IT systems
Ready … aim …
So what does all this mean? Is the challenge from younger, more agile banks mere sabre-rattling or does this mean a permanent shift in the marketplace dynamics of consumer banking? I see this as a war on two fronts; the battle for customer hearts and minds and – behind this – the struggle to deliver the technological innovation we all expect and demand from the organizations that receive our monthly salaries.
From a professional perspective, it feels as though the old guard have the edge. They may run so-called legacy systems, but the enabling technologies that bridge the old to the new – bring modern functionality to older tech – are evolving at such a pace that this no longer feels like an issue. For example, the mobile banking app on your phone is supported by a COBOL application written many decades ago. In other words, their IT investments are already paying off.
For the Challenger Banks, for whom mobile is not only a given but essential, their advantage lies in innovation – in utilising their agility and flexibility to outflank the more robust institutions.
From a personal, customer perspective I am looking forward to seeing how the battle plays out. Because unusually, whoever wins the battle, ultimately it is the bank customer who will win the war.
- Best (UK) bank accounts for customer satisfaction – http://www.which.co.uk/money/bank-accounts/reviews-ns/bank-accounts/best-banks-for-customer-satisfaction/
- Challenger Banking Results – http://www.kpmg.com/uk/en/issuesandinsights/articlespublications/pages/challenger-banking-results.aspx
- Money Insider: Supermarkets: the real challenger banks – http://www.independent.co.uk/money/spend-save/money-insider-supermarkets-the-real-challenger-banks-9922010.html
- Research to show high street banks are succeeding against challenger banks: http://www.finextra.com/news/fullstory.aspx?newsitemid=27591
- Benchmark shows banks overpaying for IT – http://www.bankingtech.com/349531/banks-overpaying-for-it/
- http://www.finextra.com/news/fullstory.aspx?newsitemid=27280 – challenger banks facing tough times
- http://www.finextra.com/news/fullstory.aspx?newsitemid=27274 – banks on brink as customer experience stagnates
- http://www.finextra.com/news/fullstory.aspx?newsitemid=27150 – Banking has reached a digital tipping point BBA warns
- IT Skills planning in FS – https://www.globalbankingandfinance.com/financial-service-it-skills-strategic-planning/
- Skills – Crisis? What Crisis? http://blog.microfocus.com/news/it-skills-crisis-what-crisis/3328/
- UK Challenger Banks Aim to Loosen Grip of Big Four – http://www.theguardian.com/business/2015/jun/01/uk-challenger-banks-aim-to-loosen-grip-of-big-four
- Metro Bank’s growth confirms its status as top ‘challenger’ bank – http://www.theguardian.com/business/2015/jan/21/metro-bank-top-challenger-bank
- Lailah Gifty Akita, Pearls of Wisdom: Great mind
- Mobile Banking users set to double – KPMG http://www.finextra.com/news/fullstory.aspx?newsitemid=27676
- A legacy case – examining the evidence – http://blog.microfocus.com/news/a-legacy-case-examining-the-evidence/3071/
- Global Economic growth to slow – NIESR http://www.bbc.co.uk/news/business-33772947
The future of offshore banking
By Granville Turner, Director at Turner Little.
Despite its misconceptions, the popularity of offshore banking is growing. Not only is it a perfectly legal way of holding your money, but with the right professional advice, it is also reassuringly simple to open an account.
This ease-of-use is prompting many offshore banks to change their offering to compete and make overseas banking even more accessible. No longer is it limited to just the super-rich.
So, what does the future look like for offshore banks? We’ve compiled a list of the top fundamental changes happening in the realm of offshore banking.
Catering to niche markets is the future
Rather than managing account holder’s money in general, offshore banks are tapping into how they can best serve different demographics. Essentially, it is about taking a more bespoke approach to managing money at various stages of life.
But catering to a variety of markets doesn’t just stop there. Many overseas banks are now accepting crypto as a form of currency to appeal to digital, tech-savvy generations.
Cryptocurrency is also attractive for those who see the security benefits it can offer.
Paper chains are fast becoming a thing of the past
As banks move away from paper in favour of digital, security is on everyone’s minds. This is because information is an important asset to many businesses, so protecting it is vital. As such, banks are securing data with the most vigorous encryption security standards.
For account holders, this means digital bank transfers and communication become less of a risk and the smarter thing to do. Paper chains are fast becoming a thing of the past.
Instant access, day or night
In today’s digital world, you don’t need to travel overseas to open an offshore bank account; everything can be done online or over the phone. And like most UK standard current accounts, many offshore accounts now offer online and mobile banking features. So account holders can manage their offshore finances and investments while transferring funds with ease.
Offshore banks are following the same route of challenging onshore banks by going branchless. This offers substantial benefits for account holders, as branchless offshore banks don’t pass on as much overhead costs to the customer. Ultimately, this means customers can earn better interest rates and other returns on their investments.
Happy to help
At Turner Little, we work closely with offshore banks to provide you with quality service tailored to your needs. With over 20 years of international banking experience and specialist expert knowledge, we will assist you with your enquiries, no matter how complex. And every account we arrange comes with internet banking, card facilities and the ability to transact internationally.
Hong Kong’s First Multi-Cloud Challenger Bank Goes Live with Temenos
- WeLab Bank designed, built and launched using cloud-native Temenos Transact in less than 10 months
- WeLab offers next generational digital services for the 7.5m people in Hong Kong to access from their mobile phones
- Customers can open accounts remotely in just 5 minutes with bank reporting 10,000 account openings within 10 days of launch
Temenos (SIX: TEMN), the banking software company, today announced that WeLab Bank, Hong Kong’s first homegrown virtual bank, has publicly launched using cloud-native Temenos Transact to provide a range of next generation digital services for customers to enjoy 24/7 from their mobile phones. Designed, built and launched in less than 10 months, the fully digital bank has seen rapid take up with a reported 10,000 account openings within the first 10 days of launch.
WeLab Bank is powered by cloud agnostic Temenos Transact for core banking along with Temenos Analytics and Financial Crime Mitigation. Implemented on Amazon Web Services and Google Cloud, WeLab is the first multi cloud digital bank in Hong Kong. Operating on multiple clouds at the same time gives WeLab increased operational resilience and disaster recovery capability and is a regulatory requirement of the Hong Kong Monetary Authority for new digital banks. According to the Economist Intelligence Unit 2020 report for Temenos, 81% of global banking executives surveyed believe a multi-cloud strategy will become a regulatory prerequisite.
Developing a cost-effective and scalable core banking solution was paramount for WeLab. Temenos cloud native software is built for the digital age using API-first and DevOps principles and engineered to deploy in containers and microservices. This makes it easy for WeLab to scale for future business growth efficiently and eliminates the need to provision for peak processing volumes so that the bank only pays for its actual usage, yielding significant cost savings.
Critically, with NuoDB the solution delivers a cloud-agnostic, distributed relational database that enables WeLab to deploy an active-active on-demand database across multiple cloud providers with near zero downtime failover.
Temenos Transact is a preconfigured system and so requires very little coding and with Temenos model bank to address local practices and regulations, WeLab was able to bring its service to market faster and extend its innovation with more than 400 out-of-the-box APIs.
With Temenos, WeLab bank is set to transform banking in Hong Kong. In as fast as 5 minutes, customers can remotely open a WeLab Bank account with $0 monthly fees and start enjoying differentiated services such as time deposits with competitive rates, an interest-bearing deposit account with an instant virtual Debit Card, and real-time payments powered by Faster Payment System (FPS). Everything can be done on a mobile phone, simply and effortlessly.
Adrian Tse, CEO at WeLab Bank, commented: “WeLab Bank was born from an initiative to reimagine the banking experience for the 7.5 million people of Hong Kong. From the start, we knew this vision needed the most advanced cloud native technology and a partner that shared our vision for digital transformation. With Temenos we have efficiently built WeLab Bank from scratch, free from any legacies, with innovative features that proactively help customers to take control of their money and their financial journey.”
Max Chuard, Chief Executive Officer, Temenos, said: “Congratulations to WeLab Bank on the launch of their trailblazing new digital bank. Building and launching a licensed bank in such a rapid timeframe is a fantastic achievement and we are proud to have supported them in becoming the first multi-cloud digital bank in Hong Kong. Temenos cloud-native, cloud-agnostic strategy means we can satisfy the needs of the most innovative and ambitious neobanks like WeLab Bank to run on multiple cloud providers. We know this is just the beginning for WeLab and we are excited to be part of their story as they revolutionize banking for people in Hong Kong.”
Bob Walmsley, CEO of NuoDB said: “We are excited to be partnering with Temenos to help WeLab Bank achieve their aggressive launch timelines and deliver innovative banking services to its customers. We were inspired by the technical vision of WeLab and knew that executing an on-demand, multi-cloud strategy was a perfect fit for NuoDB. Our enterprise-class, distributed SQL database combined with Temenos’ cloud-native technology helps banks of all sizes around the globe migrate to the cloud to improve agility and reduce costs.”
The Bank is Where the Heart Is
By Nick Barnes, Practice Director, Financial Services & Customer Success at JRNI
When unexpected events occur, people turn to their banks to provide a sense of trust, security, and stability. They need to be available anywhere, anytime, and from any device. As it’s a business based on trust, one-on-one communication is key.
With the world still emerging from the COVID-19 crisis and endeavouring to avert a possible second wave, every country, state, and region has their own unique requirements. Plus, every customer or member has their own demands. Experts and pundits have discussed a new normal, but what’s normal for now involves keeping customers and employees safe while also providing the same sense of stability as before.
For banks, building societies and credit unions, the main concerns include how to maintain personal relationships amidst social distancing; how to be available at any time on any device; and how to provide a sense of calm and security amidst the chaos.
Adapt or fall behind
Customers are quickly learning which of their service providers are adapting best to this new world. Are financial services providers like banks and credit unions adapting, or falling behind?
Finances are a highly personal topic, and often, illogical or emotional. Will I have enough? Will it be available when I need it? It is always a hot topic of conversation, but especially during a pandemic when unemployment rates are rising, and the economic landscape is unsettled. In the past, a customer could walk into the bank, have a reassuring conversation with a representative and move on.
So, how can banks help their customers through tough financial times during the current crisis, when in-person communication is nearly impossible? One solution is to provide helpful, personalized customer service through digital channels.
While in-person assistance will remain important after COVID-19, customers are looking for assistance now. Banks are turning to remote video and voice appointments to boost customer satisfaction and meet customer expectations.
3 reasons to use remote appointments
1. To comply with social distancing
Our Modern Consumer Banking Report last year showed that when consumers visit branches, it’s primarily to talk face-to-face and ask questions/get help. Research from Bain reinforces this, and emphasizes that “many retail banking customers think it’s easier to purchase through a human channel, or prefer to speak with an employee before buying a product.”
Due to social distancing measures, branches cannot be customers’ primary way of managing their finances during this pandemic. However, this doesn’t mean that customers aren’t interested in personalized attention that can be made available via video and voice.
2. To meet new demand
Although spending habits may have changed, consumers are still making critical financial decisions during the COVID-19 pandemic.
Individuals: The financial effects of coronavirus are drastically different from one customer to the next. While some are counting down the days to receipt of their unemployment check, others may be taking advantage of low-interest rates to buy a house. Ultimately, banks and credit unions need to address each customer segment with a unique message and way of providing assistance.
Small business banking: Countless small businesses around the world have been forced to close their doors. Whether they’re needing loans, payment deferrals, or advice, small businesses are looking to their bank as a guide, and a comfort.
Investment management: A recession is upon us, and with that comes a new approach to investing. Financial advisors are fielding questions, providing recommendations, and staying up to date on the market. Beyond this, many are building entirely new strategies for their clients.
Regardless of customer type, it’s clear that each subset of customer needs help from their financial institution at this time.
3. To boost customer retention
Financial institutions cannot afford to lose customers during the pandemic, so customer retention is crucial. Great customer service boosts customer loyalty, and research from Bain shows that loyalty is key to retention:
- Customer loyalty increases revenue, and loyal customers are less likely to switch to a competing bank.
- Customers who are a bank’s “promoters” recommend the bank to others as much as six times more than “detractors.”
- A bank’s “promoters” spend one-quarter more than detractors on their primary credit card.
Ultimately, being able to connect with a customer in need using video or voice can give customers peace of mind and boost loyalty. Delivering personalized financial services without interruption is crucial.
Initial results from video banking show that consumers consider the service valuable. Phoenix Synergistics’ survey from December 2019 found that 17% of customers polled had used video chat through a website or app with their financial institution. Of those that had used video chat, 89% found video chat valuable.
Some suggestions for banks using remote video or voice appointments would be to: firstly ensure your solution is secure and doesn’t expose personal information outside of the conversation; secondly create a culture of consultation to alleviate outstanding fears; thirdly leverage appointment setting to allow customers to pre-schedule consultations and enquiries; finally include remote appointments as part of a wider suite of ‘touchless’ offerings.
The dos and don’ts for bank branches
Forty-three percent of banking customers have expressed their desire to change the way they bank due to the pandemic. As with retail and hospitality, several key customer segments have doubts about visiting physical locations and are transacting more remotely.
The challenge for banks is to make services available wherever customers want to bank – be it by phone, online, or in branch – and when it comes to any transaction, the key is to make customers feel cared for, heard, and secure.
With social distancing parameters in place along with other health and safety measures, there’s significant focus on the need to retool the branch experience. Here are a few suggestions as we move into that next stage of business and interaction:
DO: Have a plan.
Think about how customers will enter and exit each location. Plan for increased space between people in line, how to attend to at-risk customers, properly spaced lobbies, and waiting areas. Consider your employees and what they need in order to stay safe including break rooms with increased space between lounging areas, removal of shared snacks, availability of hand sanitizer and masks.
DO: Make sure you can effectively manage footfall.
Overcrowding will create fear and loss of trust. Make sure you have plenty of directional signage, crowd control measures, and staffing. Solutions including people counters, occupancy managers, and pre-booked appointments both allow for the throttling of traffic, and the ability to build in cleaning time.
DO: Hire the right team and staff adequately.
Being courteous and in control will be the most important ingredient to success. Have enough staff, you will need the extra hands to ensure that all staff is properly trained and ready to enforce new protocols.
Some customers will be understandably anxious going into branches, and some will want to feel that everything has returned to normal, so staff may need to be very firm and well-versed in a new operating style.
DO: Offer customers the ability to bank when and how they prefer.
We’re not suggesting that you remain open for 24 hours, but the goal is to make it easy for the customer. Adding the ability to set an appointment with a wealth manager or an advisor online will enable customers to bank from home, and will enable banks to provide the personalized service customers have come to expect.
Leverage online appointment confirmations to remind customers to have key documents available if they need them. Virtual solutions position the bank to serve as an advisor rather than just a financial institution.
DO: Demonstrate your commitment to a safe environment.
Use clear signage to convey the measures in place to ensure customer and employee safety. Make hand sanitizer or wipes available throughout the branch, and in all high-touch areas. Ensure cleaning supplies are visible, around doorways and near greeters to provide customers with an added sense of security. And make sure that employees are following every measure required of customers.
DON’T: Lose customer confidence.
If you are not prepared, it will show, and it will be very hard to gain back customer confidence once compromised. Social media will not be your friend. Forrester Research reports that 52% of US online adults prefer to buy from companies that demonstrate how they are protecting customers against the threats of COVID-19.
DON’T: Overcrowd or fill your branch to capacity.
Consumers are being trained to avoid crowds, so failure at the branch to comply could result in losing their business. Most physical locations are operating with fewer staff and accommodating 10 – 25% of the traffic once allowed. Keep in mind that you only have one opportunity to make a first impression on customers, and they’re looking to trust you have their best interests in mind.
You will need to expect the unexpected and having more hands-on deck will prove to be beneficial in the long run. Having the wrong staff, or those that don’t take the time to learn new operating procedures or feel comfortable telling that customer who won’t keep a mask on, may not be the best fit.
DON’T: Make it difficult for customers to do business with you.
Social distancing introduces a number of disruptions to the way you’ve traditionally done business. So limiting options to customers – providing no ability to bank online or via phone, not having a live customer service voice or chat option – is not going to help. In addition to making sure the services are available, it is imperative to communicate all options to customers.
DON’T: Assume someone else will do it.
Bank staff need to show that the branch is being tended to, cleaned between visitors, and before opening each day. It is important that staff jump in to help move customers safely through the branch, ensure their questions are answered and overall, take a proactive approach to service without assuming that a sign or another staff member will take care of it. Customers will come to the branch, but gaining their confidence is everything. Don’t lose it by not being prepared. It will be very hard to win it back.
With the constant threat new restrictions in response to COVID-19 outbreaks, banks will need to take a long view on how they enable the operational flexibility that will be needed to adapt to fast-changing conditions. As people prepare to live more risk-averse lives, banks will need to go the extra mile to ensure customers feel less wary about visiting in person whilst also offering a seamless experience for those customers who prefer to remain in the safety of their homes. Those that manage to do so will emerge from the crisis with a sustainable advantage over their competitors.
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