FinTech: Challenger Banks Vs Incumbents
Challenger banks are kicking up a FinTech frenzy
Challenger banks are small, young financial companies that compete with the UK’s four financial heavyweights: Barclays, Lloyds, HSBC and RBS. Challengers specialise in areas that are generally underserved by these bigger banks, using digitalisation to make processes easier and simpler for customers. Most of the major challenger banks were founded in the past five years. They are characterised by mobile first apps, personalisation, and customer centricity.
Categorising the challengers
Within the bracket of challenger banks, there are a number of different categories.
- Monzo, Starling, and Revolut, for example, are ‘new banks’. They have full banking licences and can compete with the big four more or less on a level playing field.
- There are also ‘neobanks’ like WeBank and Yolt, which don’t have their own licences but operate through partners who do.
- The third category comprises beta banks, which are subsidiaries of existing banks that offer services through the parent company’s licence. Finally, ‘non banks’ have no connection to traditional banking licences and provide services in other ways. Monese, for instance, operates on an e-money licence.
Each category of challenger bank is equally important, demonstrating the scope for disruption in finance and how diverse the industry has become. As confidence in technology increases, so too will trust in challenger banks and their digital, mobile first approach. Challengers are friendly, flexible, and highly attuned to customer demands – all of the things which big banks can fail to be. As the market becomes more saturated, legacy financial organisations are buffeted on all sides by these agile adversaries.
Old dogs, new tricks
The UK’s four financial heavyweights – Barclays, Lloyds, HSBC and RBS – are tasked with defending themselves against these new kids on the block. It’s not something they’re taking lightly… In fact, some of them are operating their own internal challenger style brands. This year, for example, RBS is due to launch their own digital lender called Bo.
Other approaches include working with challengers themselves. Lloyds has invested in UK FinTech Thought Machine to come up with more tailored projects. The Barclays Accelerator Programme, powered by Techstars, aims to scoop up promising companies so that they develop their disruptive ideas in tandem. Big banks can also use their financial might to push ahead. Last year, HSBC spent $2.3bn on AI and digital innovation, and has partnered with Chinese technology leader Tencent to take advantage of new access channels.
A financial fight
Challengers have agility, customer centricity and personalisation on their side. They were born from, and into, a digital world, and they aren’t constrained by outdated infrastructures. What challengers lack, however, are extensive networks. The Big Four have built up strong customer bases that stretch back for generations. As challengers are finding out, it’s very hard to get consumers to abandon big banks. They might use the services of, say, Monzo, but they’re likely to keep their Barclays account too.
New banks, neobanks, beta banks and non banks will shake up the financial scene, but major financial companies are far from helpless. They can adopt new technologies and strategies, but FinTechs can’t simply adopt a loyal customer base. The battle of the banks will be won by the company that moves the fastest. Big banks must adapt legacy systems before startups can convince customers that their products are preferable, and vice versa. Either way, expect to see changes in banking law. Now that you don’t need a banking licence to be a bank, starting a financial venture has never been easier. This is great for competition, but maybe not so much for the competitors…
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