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THE GROWING PAINS OF THE UK’S CHALLENGER BANKS

Challenger banks must think carefully about their operational setup if they are to remain true to their roots, says Graham Donald, Managing Director, Equiniti Pancredit.

The UK’s big banks have had a tough start to the year, with fears relating to global economic slowdown, the impact of the huge fines imposed by the FCA and the threat of more big regulatory changes all taking their toll.  Few if any of these factors, however, are affecting the performance of the UK’s so-called ‘challenger banks’. These young, new lenders operate fleet-of-foot, unencumbered by the legacy systems and entangled processes that have long-hampered the bigger players. Innovation is key to their success; each has a different view of the world and all are intent on delivering a customer service experience which is both fresh and carefully differentiated in the marketplace.

They are certainly causing a stir. 2015 saw Aldermore and Shawbrook float and the FCA give the green light for a number of new lenders to launch, including Atom Bank and Tandem Bank.[1] Small, highly specialist banks that focus on particular vertical industries are performing healthily[2] and Virgin Money recently posted record profits.[3] But as ‘the challengers’ continue to grow they now face a challenge themselves – that of growing up. This means dedicating resources and scaling their operations to accommodate more customers, more accounts and more products – all of which lead to major hikes in servicing requirements. On top of this, just like the bigger high street lenders, they too must apply the same rigorous discipline to their own systems and processes as demanded by the ever-watchful FCA. All of which begs a question: How can they avoid getting bogged down in operations and processes? What can they do to protect their agility, which has been such a defining characteristic of the sector?

The answer lies in maintaining a clear focus on innovation, together with their own differentiated value proposition, and outsourcing the rest to a tried and tested partner that can manage day-to-day operations. Let’s think about this for a moment. For a small, high-profile, high-growth bank, what is the most sensible option? Undergo the rigmarole of recruiting and training in-house staff, designing and establishing FCA compliant processes and integrating new servicing technology platforms, or, partner with an established credit servicer and tap into trained staff, pre-approved processes and proprietary systems which are already up and running in the marketplace?

Knowing what to keep in-house and what to outsource will be a major determinant of future success for today’s challenger banks. Fortunately, the outsourcing market recognises this and is adapting to the market opportunity; a new wave of next-gen specialist credit servicers are emerging, offering blended solutions that combine specialist technologies to automate the management of loan portfolios, for example, with skilled customer service staff and auditable, best-practice processes, all wrapped up in a tailored package designed to address the specific needs of each bank.

This model, safeguarded by clear service level agreements, will enable the visionaries behind these new banks to concentrate on cultivating the disruptive and innovative qualities that have brought them this far. Allowing themselves to be distracted by operational management, which can be readily delivered through other means, will not only limit the success of their own organisations, it could also divert the wave of positive change that is sweeping through the UK’s banking industry.

In 2016, as more challenger banks enter the market, the case for establishing full service outsourcing partnerships is looking more compelling than ever before.