The momentum behind the global neobank movement shows no sign of slowing down in its challenge to incumbent banks. Last month, Nordic neobank Lunar raised USD$77M in additional Series D funding, which valued the bank at more than USD$2B. The Aarhus, Denmark-based bank, founded in 2015, also launched a crypto trading platform and B2B payments for small and medium business customers.

On the other side of the world, in February Indian neobank Niyo raised USD$100 million in a new financing round and announced plans to add lending and insurance to its offerings. Niyo was also founded in 2015 and claims to have more than four million customers, with 10,000 new users signing on each day.

The well-known neobank model

After several years, the neobank model is by now familiar. Most operate exclusively online and offer customers digital-first, mobile-friendly products and services, often with lower fees and lower interest rates, and accessible via an easy-to-use smartphone app. Services vary from basic online banking and debit/credit card to loans, investments and savings: up to merchant accounts, insurance - and even equity trading and cryptocurrency.

Neobanks typically start off by specialising in particular products and services. But for many, the ultimate aim is to build a multi-country, full-service digital bank offering multiple products and services - including current accounts, loans, international payments, insurance and investments.

New technology means fewer financial burdens

Unlike incumbent banks, neobanks don’t have the financial burden of staffing and managing traditional physical branches. They also benefit from not having legacy technology assets and overheads to maintain. They can pursue profitability without the cost burdens of infrastructure, physical premises, staff, and - initially, at least - shareholder dividend payouts.

Neobanks’ use of cloud technology means they avoid having to spend heavily up-front on expensive IT infrastructure. And thanks to standardised open banking APIs, neobanks can build and bring to market products and services that enable faster, more frictionless fund transfers between account holders, other financial providers, and transactions with merchants.

With these foundations in place - and sustained by a steady flow of private equity cash - neobanks are free to focus their time and effort on creating and launching easy-to-use current accounts and other products that prioritise a top-notch customer experience.

They also have the freedom and flexibility to come up with other innovative digital-based services for customers to access and use online or on their mobile phones. They can test and then roll out new digital features and products quickly and easily - and then tear them down just as quickly and easily if they don’t work out.

With these foundations in place - and sustained by a steady flow of private equity cash - neobanks are free to focus their time and effort on creating and launching easy-to-use current accounts and other products that prioritise a top-notch customer experience.

Taking on customer frustrations

The rise of neobanks comes at a time when customers have become dissatisfied and frustrated with established incumbent banks for a number of reasons - a lack of transparency, an absence of useful new features, plus hidden or expensive fees for everything from overdrafts to closing your current account and moving to another bank.

Focusing on customer frustration and other pain points is central to neobanks’ ongoing success. As consumer trust in neobanks grows and users become more confident and familiar with technology, incumbent banks are set to lose customers and market share.

Reaching niche and underserved markets

The retail banking market is overcrowded. But neobanks are finding pockets of opportunities with significant but underserved sub-markets - such as millennials, gig economy workers and micro-businesses.

It's an approach that’s paying off. Neobanks are squeezing the market share of older established banks from both ends: at one end, with personal accounts and other consumer-facing services, and more recently at the other end with business-focused offerings such as buy-to-let loans for property investments and bridging loans for small businesses.

Banking after the pandemic

Neobanks were already in a strong position before the Covid-19 pandemic. But the consequences of the pandemic have created new opportunities for them.

Small and medium businesses need access to extra credit to help their recovery from the economic slowdown caused by Covid-19. In addition, people who were stuck at home during national lockdowns are now using online and mobile banking services significantly more than they did so previously. These changes have reportedly accelerated digital banking’s progress by up to ten years.

Neobanks are set to benefit from these developments. But if neobanks can benefit, so too can incumbents. However, to do so, they must abandon their outdated methods, overcome their reluctance to change, and adapt their operations and their mindsets to customers’ changing needs and wants.

Make digital the priority

Wherever possible, incumbents need to emulate their younger, more agile rivals. They must prioritise digital - in particular mobile. Many incumbents currently spend their money in the wrong way, on large, multi-year IT projects that eventually lead to the launch of new services. But this approach takes too long and is too expensive.

It’s a similar story with new apps and features. At the moment, a new app developed by an incumbent gets held up for at least a month in a staging area where Risk and Compliance will test and check it. That’s crazy.

Accelerate time to market for new services

The answer is to implement test-driven development. Here at Buckzy, we want our developers to write code: submit it: and 30 minutes later it’s in production. We’ve automated black-box testing and UAT (user acceptance testing), to ensure that the new features and functions we introduce are secure and don’t interfere with existing systems.

Time to market has to be the priority. At Buckzy, risk and compliance experts are part of our development teams and validate new code as it’s created, which accelerates the entire testing and resolution cycle and so reduces the time to market for new features and services.

Importantly as well, incumbents should take on board the idea, “don’t make perfect the enemy of good”. By this we mean that rather than delay the launch of a new product or service because it’s not complete, banks should not be afraid to launch it anyway, but then be prepared to make small incremental changes, updates, and improvements on an ongoing basis.

Fresh ideas and new approaches

In their ongoing contest with neobanks, the principal challenge for incumbent banks is to be more open to fresh ideas and new approaches. These might initially seem costly with no guarantee of an immediate financial return. But their value is longer-term and lies in restoring trust, retaining existing customers – and even gaining new ones.

Incumbents can ensure they stay trusted service providers to their customers by creating useful and worthwhile services that generate new incremental income, and which also define and drive the future direction of the wider industry.

For more information, visit https://buckzy.net/

Wayne Johnson, CEO & co-founder of Encompass, explores trends in open  banking and their implications for financial services in the UK.

The UK banking industry faced some serious challenges throughout 2020, as financial institutions responded to restrictions on business activity designed to stop the spread of COVID-19. Crucial to this response was the fact that we had the technology and infrastructure available to facilitate remote operations and digital banking, particularly during a time when customer need was greater than ever.

The popularity of open banking has surged in recent years, paving the way for fintechs to provide seamless access to cutting-edge financial management services. It is a secure way to give authorised third-party providers access to financial information from banks, such as spending habits and regular payments, with the aim of helping people to understand financial needs and find new products and services to help customers.

At the beginning of 2020, the main goal for banks in the UK was to continue pushing towards more mature, scalable, and resilient open banking plans so that they could still compete with players in other markets. However, after the global pandemic hit, banks had to turn their attention to health and safety, dealing with branch closures, remote working, and efforts to support their customers and clients as thousands of businesses had to close and jobs in all industries were on the line. A benefit of open banking is that it allows financial data to be shared across everyday financial life, making banking more convenient. Now that 1 in 4 millennials and gen-Zs are using challenger banks, it is clearly a desired way of using services, and inevitable that more banks will use open banking to provide a better customer experience.

Many organisations that customers share data with could be budgeting, lending services or other banks, as well as various fintech companies on the market to consumers. Open banking is therefore very advantageous to the fintech industry and will likely contribute to its growth in the UK as the data provided will be much easier for start-ups to see and use. Since the outbreak of COVID-19, Open banking’s benefits have taken on a new significance. Now, open banking can be considered as a powerful tool in helping finance providers evaluate cost efficiency during difficult times and as consumers face changing circumstances.

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With the current pressure on personal finances, and three out of five UK households negatively affected financially, Open Banking can help obtain an accurate view of the consumer’s financial situation which then helps them make important decisions and gain additional insight to help tailor products for individual needs.

In 2021, the focus of the finance sector will likely be on improving the digital experience, and we have already seen that there has been a major shift in the fintech ecosystem, with it seen by many as a source of potential innovation for banks, rather than a direct competitive challenge. When it comes to open banking, this is only the beginning. Despite the industry still being in the early stages of implementation, there is increasing interest in moving beyond this to include a far broader spread of financial products. It is also likely to encourage a shift in regulation through the increased demand for transparency, with RegTech here to help solve the problems of regulatory compliance.

Georg Ludviksson, CEO and Co-founder of Meniga, a leading provider of AI-driven digital banking solutions, reveals the top 5 challenger banks which will make their mark within the retail banking sector in 2021, as he dissects some of the key attributes and traits that make them such fierce competitors to incumbent banks.

1. Empower Finance

Launched in 2016, Empower Finance has quickly gained recognition by establishing itself as one of the best personal finance management solutions. The San Francisco-based company, which is headed up by former Sequoia Capital Partner Warren Hogarth, uses AI to automate and simplify the banking experience for over 650,000 users. The mobile app acts as a personal financial adviser through a number of budgeting and categorisation features, including the ‘AutoSave’ feature, which automatically sets money aside each week for users who activate it.

Empower Finance is unique in the way it leverages customer financial data to provide users with actionable advice and guidance on staying ahead of the financial curve. For instance, the app tracks and monitors a user’s spending behaviour through transaction data, to offer invaluable insights and tips on how to stay on budget each month.

Since its inception, Empower Finance’s driving mission has been to empower users to make better financial decisions and take control of their finances. I think it’s fair to say that this challenger bank certainly lives up to its name and will continue to do so for quite some time.

2. Monzo

Monzo is arguably the most promising and exciting neo-bank to have emerged from the UK. With almost 5 million customers and an estimated value of £1.2 billion, it seems astonishing to think that Monzo only received its banking licence in 2017. Today, Monzo is the most ‘switched to’ bank in the UK and the top-rated in terms of its overall service quality.

Monzo excels in terms of the usability of its interface, with customers able to effortlessly spend, save and manage their money, all in one convenient place. With accessibility and financial inclusion at the core of its mission, what makes Monzo really stand out from the pack is that it enables new users to open an account within a matter of minutes at no cost. On top of delivering an outstanding user experience and providing a first-class personal finance management tool for its customers, Monzo is also a fully-fledged bank so it offers all the services typically provided by traditional banks, such as access to overdrafts and loans.

Having recently expanded to business banking and attracted over 60,000 business customers already, there’s no doubt that this challenger bank will continue to make waves in 2021.

3. Qapital

When it comes to engaging platforms which motivate users to save money, Qapital is up there amongst the very best. The New York-based FinTech - rooted in cognitive science and behavioural psychology - is on a mission to change consumer behaviour around spending by encouraging people to put their money into things they truly care about, and ultimately, make better financial choices overall.

Qapital places personal goal setting at the core of its product offering to make the process of money management both practical and emotionally fulfilling. Specifically, users set short and long-term goals for themselves and then create spending rules to help them achieve them. This unique approach to goal-based money management is what makes the Qapital digital banking platform one of the most engaging out there. To add to that, the app also includes elements of gamification through its “Money Missions” feature, which - through fun challenges - allows the user to unlock helpful insights into how they use their money. This is one of the many smart ways that Qapital has managed to create new dimensions of customer engagement within its digital bank.

The platform has already saved customers over $1 billion since its launch, having helped millions of users save an average of $5,000 annually. There’s no doubt that Qapital’s growth will continue to accelerate, as it establishes itself as the first-choice app for budget-conscious and financially savvy consumers.

4. Chime

Without doubt one of the most established and long-standing challenger banks in the world, Chime is considered a real trailblazer within the global FinTech sector. Founded in 2013 with the mission of encouraging smart spending and saving, Chime - worth approximately $15 billion - is today the most valuable US consumer FinTech.

It is primarily down to its featurisation and customer-centric approach that Chime has been able to grow at such an unprecedented pace and rapidly attract a vast amount of customers. Some of the key features that draw users in include its no-hidden-fees banking, an automatic savings account, as well as its instant direct deposits which allows users to get paid early.

Chime has also been extremely successful in its marketing efforts, thanks to a substantial advertising budget and impressive search engine tactics, which have enabled the bank to rank highly on Google searches for some of its feature keywords, such as “free overdrafts”. These exceptional marketing capabilities have played a significant role in the company’s exponential growth, and this will no doubt drive the company’s continued expansion into 2021 and beyond.

5. Varo Money

In terms of full-service digital banking experiences, Varo Money’s product offering is unrivalled. Based in San Francisco, the bank was created specifically for groups underserved by traditional banks, such as millennials, to grant them an easily accessible bank account with no monthly fees or overdraft fees, high-interest savings, and a modern mobile app experience.

Beyond being one of the best digital banking apps for millennials, Varo is also the first challenger bank to obtain a national bank charter from the Office of the Comptroller of the Currency (OCC) in the US. This has presented Varo with a significant advantage over other challenger banks, as it is now able to expand its services and offer a larger suite of products such as credit cards and loans, and therefore target a broader set of customer needs while diversifying its own revenue streams.

To add to that, Varo really lived up to its mission of helping everyday Americans make progress in their financial lives during the COVID-19 crisis, when it supported its customers through a number of initiatives, such as providing early access to stimulus and unemployment relief funds and partnering with job platforms, Steady and Wonolo, to help connect its customers to new work opportunities. The best banks are the ones that can be there for their customers in the most turbulent of times, and Varo certainly proved it could do so. 

Closing thoughts

The steady rise of challenger banks is unlikely to slow down anytime soon. Key players, both old and new, are continuing to transform modern-day banking, as they relentlessly roll out new user-friendly and innovative financial self-help tools, which everyday customers have grown to love. And with the challengers’ superior digital capabilities, it would seem they are the current front-runners in the race against the incumbents.

That said, the race is far from over. Incumbents still have many assets which their competitors lack, but first, they must study what makes these challengers so successful and shift their focus towards improving the digital user experience of their customers, or else they risk being left behind. Ultimately, by treating their digital channels and mobile banking apps as a strategic asset, incumbents can get into the position where instead of following, they will pave the way for game-changing innovation.

James Johnston, Regional VP at Cloudera, presents a case for greater utilisation of data by banks and financial services firms.

For those who master the art of delivering customer service in financial services, there are huge rewards — including 55% higher returns for customer-centric banks. However, the financial services market is highly saturated, and challenger banks, of which there are 102 in the UK alone, are rivalling legacy institutions when it comes to giving consumers choices. In fact, Starling Bank, which only opened its doors in 2014, came out on top as one of the brands in the UK excelling at customer experience. So, how can financial institutions improve customer experience and remain competitive? One word: data.

True innovation lies in data

Organisations in the financial sector need to use data and analytics to offer their customers the most relevant products and services proactively. Currently, they do this by looking at traditional data sources, such as account activity, loan requests and investments. This helps these companies to form a complete understanding of the customer and their needs. However, for some banks, it is often here where their data analytic capabilities come to a halt. And it needs to change, as it is leaving them with only half the picture.

Today, there is a wider range of data sources available to banks than ever before, fuelled by the increasing amount of data we are producing. For example, unstructured data sources, including clickstream data, location data, social media streams and chatbots can provide a wealth of actionable intelligence. But by only analysing legacy sources, key insights into customers are lost. True innovation comes with the ability to analyse new and old data sources simultaneously. By doing so, banks can complete the picture of their customers and comprehensively anticipate and predict their needs based on their customer profile.

Organisations in the financial sector need to use data and analytics to offer their customers the most relevant products and services proactively.

Given the complexity and variety of traditional and newer sources of data, financial service providers need to ensure they have the tools in place to support them on their data journey. Gaining full visibility on every piece of data flowing through their network, from a single toolset, regardless of where it resides or where it came from, is therefore critical. By implementing this level of visibility, data can be analysed, and the true value derived in real-time to the benefit of the customer. The ability to detect fraud is a perfect example of this. Suppose a bank can ingest and analyse data in the here and now. In that case, the business can identify patterns and trends that are indicative of fraud and alert the customer to this activity, before it becomes an issue.

Embracing a customer-centric approach

It’s clear that the way data is linked together, in a data lifecycle, is what enables organisations to derive intelligence through which exceptional customer experience is delivered. This is why focusing on developing a connected data lifecycle, which takes into account the holistic view of the entire data journey from edge to cloud, will become a cornerstone of success for banks who want to lead in their industry.

A connected data lifecycle will, however also help banks and other financial services organisations to can meet critical business goals, including:

Acquiring new customers

Segmentation allows businesses to analyse and profile their current customers. By leveraging techniques such as segmentation, companies can fine-tune their outreach and target prospective customers by taking insights and creating messaging that is tailored to target new customers.

Expanding existing business

With a complete picture of the customer, including every interaction they have with the organisation, banks can look for opportunities to offer new products and services proactively. When looking for opportunities to cross-sell, it is important that the salesperson has access to the customer’s entire profile, including previous searches and history, in order to offer the most relevant product. If the different data sets relating to the customer are sat in silos based on how they were ingested into the business, it can delay this process, and the customer may lose interest or look elsewhere.

With a complete picture of the customer, including every interaction they have with the organisation, banks can look for opportunities to offer new products and services proactively.

Driving customer loyalty and long-term retention

Using analytics-driven customer engagement tools, such as digital assistants, customer surveys and feedback analysis, financial institutions can gather this information, derive insights from it in real-time and then push the outcomes back to their customers. It is a quick and effective way to garner a deep understanding of customers’ needs and personalising offerings accordingly. In fact, continuous re-evaluation of the data could quite literally allow companies to give customers what they want, despite their ever-changing needs.

Putting data insights into practice

The focus on customer experience is a critical component to a financial services organisation retaining loyal customers and remaining competitive. Two premier businesses that have remained at the forefront of their industry because of their use of data are Rabobank and DBS.

In order to help its customers — including small businesses — become more self-sufficient and improve debt settlement, Rabobank needed access to a varied mix of high-quality, accurate and timely data, that they could feedback to customers on demand. To achieve this, Rabobank implemented technologies that can cope with heavy pressures on data processing and ingest large quantities of streaming data. This gave Rabobank the ability to rapidly process historic and real-time data together, helping its employees run faster queries. From customers’ loan repayment patterns to up-to-the-minute transaction records, Rabobank and its customers can now immediately access the valuable data needed to help them understand the status of their financial situation.

DBS, one of the leading banks in Asia, recognised that in order to deliver superior customer experience it had to become more data-driven. However, the company’s traditional technology stack for supporting advanced analytics was expensive to scale and not flexible enough to support this work. This led the bank to build a central data team and enterprise data hub that now enables staff to continually experiment and be at the forefront of innovation, to understand the customer experience more fully. DBS then used data and knowledge to apply human-centred design to its services. With the ability to more easily store and analyse billions of events in a modern data platform, DBS can answer questions before they’re asked, effectively engaging customers and proactively delivering a better service.

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Utilise data, remain competitive

Competition amongst financial institutions is fierce, and one negative experience is all it can take for a demanding, and changing, consumer to jump ship. To avoid this, financial services companies need to be guided by their data. The organisations that excel in the future will be the ones that are investing in the means to effectively ingest, analyse and derive value from data and put these insights into practice. After all, the data is there to be analysed and acted upon, so financial services organisations need to ensure they are getting the most out of it. If they don’t, they risk losing out to the more customer-centric competition.

Georg Ludviksson, CEO & co-founder of digital banking solutions provider Meniga, tells Finance Monthly why banks' most important innovation focus must be to help customers build 'financial fitness'.

People across the globe are experiencing new and uncertain circumstances for their personal finances, whether through unemployment, business closures or the sheer impact of the economic recession. One thing is certain, however: that healthy financial habits have a new pertinence in our society and for many, their first port of call to achieve this will be their bank. 

We have entered a critical point for the banking industry, where it is now absolutely crucial for banks to step up their innovation game to support their customers in a personalised and engaging manner through digital channels.

It is impossible to predict exactly what the financial ramifications of COVID-19 will be. However, we shouldn’t expect this pandemic to be a short-distance sprint but rather a marathon, and for this, banks need to be there for their customers to ensure that they are financially fit - or they will start training with somebody else.

Banks need to stay ahead of the curve by turning to digital channels and preserving the financial wellbeing of their customers

The personal finance landscape, specifically the way in which people make sense of their finances, has evolved tremendously over the past decade. In particular, there has been a shift in consumer behaviour whereby the demand for personalised services has increased dramatically, and people have become more critical of the banks that fail to help them lead healthier financial lives.

The personal finance landscape, specifically the way in which people make sense of their finances, has evolved tremendously over the past decade.

People no longer view banking as a purely transactional and one-dimensional functionality, but rather as a full-service experience helping them take control of their finances and achieve financial wellbeing. This shift in consumer behaviour and the increasing association of good financial habits with positive health and wellbeing also explains why the notion of ‘financial fitness’ has gained recognition within the personal finance landscape over the past few years as a term describing one’s increasing desire to feel good and confident about one’s financial situation.

The last few years have seen an increased prevalence of digital banking and a plethora of more personalised tools which suit the shifting needs and wants of consumers. The rate of digital banking adoption has also been significantly accelerated by the pandemic.

Research by deVere Group found that the use of fintech apps in Europe rose by 72% in March 2020, whilst a McKinsey study found that the pandemic has accelerated the shift to digital banking by two years. In particular, the latter study found that online bank use rose in most European countries, from a 7% increase in Italy to 19% in Portugal, and that more than 20% of customers in Spain and the UK tried online banking for the first time during lockdown.

As both digital banking and financial health have gained increasing significance in 2020, it highlights the urgent need for banks to view their digital channels as a strategic asset and start re-prioritising their resources to focus on developing personal finance management (PFM) services and the financial self-help tools their customers need. If not, they risk losing significant market share to the challenger banks, who already excel in user experience and have digital leadership in their DNA.

The last few years have seen an increased prevalence of digital banking and a plethora of more personalised tools which suit the shifting needs and wants of consumers.

Becoming your customer’s financial personal trainer and drawing upon the health and fitness world when developing PFM services

In a global financial crisis, a bank’s underlying mission statement should be focused around helping their customers lead healthy financial lives. By instilling financial fitness into the organisation’s mission, banks will be able to truly prioritise developing PFM services, and thus provide their customers with the support they need to take ownership of their financial health.

In fact, when developing PFM services, banks should consider studying what makes health and fitness apps so addictive. The popular fitness app Strava uses all kinds of features and gamification to keep users engaged and to encourage them to take control of their own health, from social activity feeds, to weekly targets and personalised nudges.

In a way, physical health is very similar to financial health, it’s about building the right habits to positively impact your fitness and wellbeing. Banks should analyse what makes fitness apps successful and replicate some of their gamified features and elements of their design to  develop user-friendly banking apps which can be comparable to personal finance coaches and which focus on helping customers achieve goals and build healthier habits.

Ultimately, the main functionalities of a digital banking app must on one hand be to ensure it delivers the right information to customers through features like spending reports and automated budgeting, and on the other, enable customers to build better habits and stay in control of their finances. The latter can be achieved through financial gamification like savings challenges, or other features including personalised nudges and notifications, social media-like activity feeds, cash-flow assistants and personalised cashback rewards.

One bank that has done particularly well to create personalised banking solutions for their customers is Portugal’s Crédito Agrícola. Like many other European banks, Crédito Agrícola has been facing rapidly growing competition from challenger banks like Revolut and N26, but by bringing their own digital innovations to market they have been successful in maintaining their position as one of one of Portugal’s most reputable banking groups.

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In September 2019, Crédito Agrícola collaborated with Meniga to launch one of Portugal’s most popular digital banking apps, “moey!”. The moey! app relies on Meniga’s technology as an engine for categorisation and enrichment, to provide customers with a more immersive and interactive experience. The app enabled Crédito Agrícola customers to, firstly, stay on top of their finances through a number of informative features, such as insights, reports, budgeting and financial planning; and secondly, be encouraged and motivated to build and maintain healthy financial habits through a feature that is, in many ways, the foundation of all fitness apps: the ‘Activity Feed’. The activity feed is a functionality that enables banks to engage with their customers through personalised messages such as insights, advice, fun facts, targeted rewards and product recommendations.

The results were almost instantaneous, with over 130,000 app installs in the first 6 months after launch. Crucially, the app enabled Crédito Agrícola to increase its user engagement, with 90% of transactions being made via the app and more than 50% of moey! customers now active users.

By drawing upon the health and fitness world and understanding what functionalities engage users and encourage them to take control of their own health, banks will be able to develop banking solutions which provide much-needed support during this pandemic and help them build good financial habits. 

The dependency of people on their banks has never been stronger, and banks now have a real opportunity to maintain the loyalty of their customers and stave off competition from the challengers. To succeed, they need to recognise the importance of shifting their value proposition and core product offering to focus on elements of digital banking, financial fitness and personal finance management.

Nowadays banking is closely interlinked with technology. It’s also no secret that digital banking is many people’s preferred method of interacting with their money. Changes to the way we bank over the last decade and our increasing reliability on digital platforms have led banks to change their business models. Controlling money through online services has created a seismic shift in the industry and those who haven’t adapted are struggling to stay relevant. Jean Van Vuuren, Regional VP for UK, Middle East and South Africa at Alfresco, examines how challenger banks have pushed the industry forwards.

Despite the introduction of challenger banks to the industry, many of us still rely on large, traditional banks to keep our hard-earned money safe. So how do these institutions take inspiration from the new emerging banks and put it into practice whilst keeping themselves relevant to a society that is increasingly reliant on technology? And what is next in the wave of digital transformation for financial institutions?

Using AI as part of the customer experience

Banks prioritising the customer experience has increased by leaps and bounds in the last 5-10 years, but it doesn’t just end with the launch of an app or the re-design of an online experience. The customer experience needs to be revisited regularly and continually play a core role in the adoption of the latest technology available.

For example, the future of AI in the banking world is very exciting and is completely transforming the customer experience. Voice banking, facial recognition and automated tellers can help create a completely personalised experience for each customer. Someone could walk into a high street bank, AI sensors at the door could use facial recognition to let the teller know who has arrived and they could automatically pull up all the information about their account without having to ask for their bank card or details.

The customer experience needs to be revisited regularly and continually play a core role in the adoption of the latest technology available.

As technology gets more sophisticated, this opens up possibilities for banks to focus on advising customers rather than spending time on transactions and processes.

Trusting the security of the cloud for confidential documents

The cloud has completely transformed the way in which we store information on our smartphones, computers and within the enterprise. However, as with any technology it comes with potential security risks. Trusting a third party with your data feels risky in most industries because you no longer feel in control of it, but banks are often trusted with our most precious data – not to mention our money. Therefore, maintaining confidentiality is of upmost importance to banks in order to maintain the trust of their customers.

Financial institutions should make sure that they are not relying on security embedded in cloud platforms to do the heavy lifting. Implementing governance services that provide security models, audit trails and regulate access – even internally, and confidently demonstrate that compliance is key for an industry with so much access to personal information. Whilst working in the cloud offers flexibility, it needs to be made secure with intelligent security classifications and automatic safeguarding of files and records as they are created.

This also brings up the issue of legacy platforms from a security and feasibility standpoint. Fund management companies find that legacy platforms are very expensive and not cloud ready. There is very little room for innovation and it is hard to adapt them to meet customer demands. Even if a fund management company has migrated to a Saas or Paas solution, quite often regulatory obligations and the potential dangers posed by hacking and data breaches mean that they sometimes go back to using an on-premises solution. Instead of backtracking, financial institutions should spend time to understand what the best cloud option for them would be and how they would implement it within the confines of governance and compliance.

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Going paperless

Discussing going paperless in 2020 may seem like going back to the past, but for many financial institutions making the transition to fully paperless operations is still a work in progress. This is also a key area where challenger banks which have never had paper-based processes have an advantage, they don’t have to adapt simply because they were born paperless. There is also a new generation of consumers that embrace and often expect paperless banking.

While the fintech industry is intrinsically paperless, banks are still adapting to phase out paper support, but this transition should be an integral part of updating the customer experience. The paperless movement involves moving from simply depositing checks via smartphone to a complete digital experience from end-to-end.

Going paperless also provides an added layer of security in accordance with a rising tide of regulations and government mandates. With digital records, automated management processes allow companies to set up rules around metadata to file records, put security procedures around them and also deleting personal information within retention regulations.

Keeping pace with challenger banks who are born of today’s technology

In recent years, the introduction of technological advances such as digital ID verification, e-signature and risk analytics are transforming the way financial service providers interact with their customers. New challenger banks build whole systems in as few as two weeks and automate as much as possible.

By their very nature, challenger banks are pushing their competitors to be more agile and they are growing exponentially, something which the high-street banks had underestimated when they first entered the market. Created for the digital first generation, challenger banks won market share by putting customer-centric products at the heart of their business. They are also able to improve the product and the user experience quickly according to customer feedback.

Customers are flocking to the disruptors in the market who offer exciting functionality. Challenger banks providing customers with new online features, ones that let them take control of their finances, are thriving in the market. In the modern day, banks need to embrace new technologies and digitise processes to create a customer-oriented business and, ultimately, succeed in the market.

From the moment they entered the market, challenger banks have been at the forefront of technology and innovation, rapidly scaling products to meet customers’ banking needs – winning them over by demystifying the complexities surrounding financial products and talking to them on their terms.

Traditional banks, in response to these new entrants to the market, have embarked on their own digital transformation projects, designed to further improve the efficiency and quality of their services and put power in the hands of the consumer.

Giving customers a new way to bank

By tackling some of the most irritating money management gripes, leading challenger bank Monzo established itself as a go-to bank for young professional. Its slick app interface and nifty features appeal to Millennial lifestyles in particular, and it wasn’t long before similar innovations followed from the likes of N26, Revolut and Starling Bank.

Elsewhere, brands like Nutmeg, Atom Bank and Wealthsimple have made names for themselves by supporting those looking to invest, while Tide and Anna are helping entrepreneurs manage their company banking with similar ease to the consumer challenger brands.

 How are traditional banks reacting?

The rise of new banks like Monzo has, unsurprisingly, forced traditional retail banks to consider how they present and deliver their services.

There is no doubt that challengers are providing consumers with an abundance of choice, which can only be a good thing, as it is putting pressure on the bigger banks to ensure customer experiences are at the centre of their digital transformation projects. Indeed, in a recent Experian report[1], we found that of all businesses undertaking a digital transformation project in the UK, almost 80% wanted to improve the user and customer experience.

The most successful FinTech features have been implemented relatively quickly, such as freezing a debit card via an app and instant balance updates when using contactless.

However, one of the biggest challenges traditional banks face, and one that is shared with many other companies undertaking digital transformation, are the legacy systems currently in place. We found that 36% of businesses ranked this as the biggest obstacle to change, and with millions of customers accessing banking services on a daily basis, ensuring that there is no disruption is a vital consideration when updating systems and adding new features.

Data-driven

Whatever its size or maturity, every bank depends on the quality of its data-sets. It doesn’t matter how innovative the tools are, if the data that powers them is incomplete, out-of-date or non-compliant, they are almost certainly doomed to fail. According to our study, as many as 70% of businesses see poor quality data as a barrier to digital transformation.

Addressing data accuracy issues is even more important in a world where AI is leveraged to speed up mortgage and loan approvals, while robo-advisors influence consumer decision-making.

The ease and speed at which these applications can deliver traditionally time-consuming services is remarkable – but it is the responsibility of all banks to put safeguards in place to ensure the right outcome. Of course, in a sector where data protection and security are paramount, this also means compliance with GDPR and FCA standards.

Unlike established banks, which have amassed vast quantities of data over the years, the new players will be more reliant on external sources of data to inform decision-making. It is therefore incumbent on them to use trusted suppliers, who obtain, store and cleanse data in line with the relevant legislation.

Accessing high-quality data will enable these new brands to play established brands at their own game, enabling them to grow their market share over the coming years.

Future forecasting

 Even before challenger banks rose to their current levels of popularity, the number of banks on UK high streets were declining. Now, they are disappearing from UK high streets at a rate of up to 60 branches a month.[2]

That is not to say that online banking has rendered physical banks redundant, since many customers still like the reassurance of face-to-face contact, particularly for more complex services – an area completely dominated by the larger traditional banks.

It is here where the challenger banks will need to come up with innovative solutions to target these customers. While they are unlikely to open multiple branches, they may choose to operate specialist-led boutique banks in key locations. However, it could be that the digitally-savvy Gen-Z is the first customer group to feel comfortable choosing banks with no physical presence – as long as the services provided meet their needs and are underpinned by a commitment to data integrity.

For more analysis on these figures, download the most recent DataIQ and Experian research report – https://www.experian.co.uk/blogs/latest-thinking/data-and-innovation/digital-transformation-research-report

[1] https://www.experian.co.uk/blogs/latest-thinking/data-and-innovation/digital-transformation-research-report/

[2] https://www.bbc.co.uk/news/business-44483304

Research by Triodos bank just a few years ago in 2016 indicated that over three quarters (77%) of UK adults supported greater competition from challenger banks.

According to Jamie Johnson, CEO at FJP Investment, such a confronting statistic suggests that alternative banks could offer certain opportunities that traditional banks lack. Below he shares more about the new and re-invested world of consumer finance.

Fast-forward three years, and today we are seeing floods of people opening accounts with newcomers like Monzo and Revolut. In fact, FJP Investment recently polled a nationally-representative sample of over 2,000 UK consumers and found that almost one in five (18%) have already made the transition from a traditional high street bank to a challenger bank. As one might expect, this number was significantly higher amongst millennials, with over a third (33%) claiming to have already made the switch.

The question beckons: why are UK consumers looking to challenger banks? And does this reflect a broader change within financial landscape?

Taking a wider view

Reflecting on the recent performance of the UK savings market more generally can offer valuable insight into why we’ve seen a notable rise in challenger banks. The market has undergone a fundamental shift in the last decade, particularly in the aftermath of the Global Financial Crisis of 2008 and, more recently, Brexit.

This climate of uncertainty has caused The Bank of England to be far more cautious in their decision making. Consequently, the interest rate below 1% for the past ten years, offering consumers little hope that their savings pots might grow. Meanwhile, the rate of inflation has been outstripping interest rates offered by most banks. Unfortunately, consumers are taking a financial hit, and seeing their hard-earned savings declining in value.

Indeed, the aforementioned FJP Investment research revealed that in the last 12 months alone, two fifths (38%) of UK consumers have seen the value of their savings decline.

Yet, the UK remains a proud nation of savers. Traditional savings accounts continue to be the bedrock of most people’s financial strategies, and will likely remain so for the foreseeable future: currently, over three quarters of UK adults (79%) hold some money in savings accounts. However, we cannot ignore the changing attitudes that have taken the market by storm – consumers are increasingly shopping around for alternatives that can better match their needs. Many are turning in the direction of challenger banks.

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Do challenger banks plug these gaps?

Startups like Monzo and Revolut are undoubtedly revolutionising the banking experience, with forward-thinking features and sleek app design proving to be increasingly popular among younger generations of savers. But apart from the attraction of a well-designed app, what else do challenger banks bring to the table?

For one, challenger banks typically offer better rates – of Britons who have joined digital-only banks, or intend to in the next five years, almost a third (31%) say this is why they made the decision. Other advantages, which influenced consumers to make the switch, include the ability to transfer money more easily (28%), free transactions abroad (22%) and the benefit of receiving real-time notifications about spending (22%).

For consumers who are keen to make their money go further, these digital banks offer convenient methods of financial management.

This last point is key: for consumers who are keen to make their money go further, these digital banks offer convenient methods of financial management. Many challenger banks offer individuals greater oversight over their finances and enable a better understanding their spending habits – and perhaps more importantly, digital banks also highlight ways in which they can improve their financial behaviour. For example, many of these apps come with real-time tracking of spending.

Beyond this, they also commonly include features which encourage saving. For instance, a consumer might utilise functions which round up expenses to the nearest pound, before depositing the remainder in a designated savings pot. For those with more long-term financial goals in mind, other functions might help users set monthly budgets and receive notifications if they are overspending.

The general point to note is that consumers are becoming savvier when it comes to saving, in turn making them less reliant on traditional savings methods that can fail to satisfy their needs. It’s encouraging to see more people seizing the opportunity to make the most of their money, and challenger banks are certainly helping.

Over 80,000 of their customers sought greener pastures elsewhere, incurring costs for TSB in excess of £330m, and putting them towards their first-ever loss. While the losses they experienced were intense, IT failures like this one will likely continue to plague banks, especially since external threats posed by cybercriminals are at an all-time high. Research from security firm Carbon Black found that over two-thirds of financial firms have reported an increase in cyberattacks in the past 12 months, as cybercriminals increasingly chase after high-value targets that are rich in personally identifiable information.

Challenger banks, which are free from the baggage of residual legacy IT systems that traditional banks have, are also still impacted by outages. Monzo and Revolut both fell foul of high-profile IT failures in the past few months, with customers taking to Twitter and other social channels to amplify their displeasure with the situation. And while neither bank has fallen out of favour just yet, customers won’t tolerate these IT hiccups for long.

Consumers have become accustomed to a high standard of service due to their experiences across multiple industries, so today’s banks are now expected to provide the same 24/7, always-on access to data.

Consumers have become accustomed to a high standard of service due to their experiences across multiple industries, so today’s banks are now expected to provide the same 24/7, always-on access to data. This means they don’t take kindly to IT slip-ups that affect their ability to access their money or financial information. The stakes to stay online are higher than ever before.

Traditional data backup and disaster recovery is no longer enough, as even a minute-long outage is not acceptable. Further, UK customers are looking to challenger banks to provide an outstanding level of customer service and convenience not available from the banking old guard. But, how can challenger banks avoid making the same mistakes as their more established counterparts?

Why traditional recovery fails for untraditional finance

The problem with traditional recovery is that is no matter how it is implemented, there will always be delays of some kind during the process of data restore. Conventional disaster recovery is based on recovery point objectives (RPOs), a metric which quantifies how much data a business can afford to lose, and recovery time objectives (RTOs), which measures how long it will take to recover data. This approach is workable for industries that can afford minor delays in getting data and systems back up and running again. But in the ultra-competitive world of today’s banking industry, organisations have no such grace period, with any period of downtime likely to be fiercely punished. Research shows that nearly half of IT professionals feel they have less than an hour to recover business-critical data before it starts impacting revenue.

Challenger banks have a lot to lose by failing to ensure full, instantaneous data availability, particularly if their competitors manage to do so

What challenger banks should be looking for instead

Challenger banks who want craft reputations for the quality of service and reliability need to instead look towards solutions that can provide true ‘continuous availability,’ where there are no interruptions to usability because data and systems are being replicated in real-time. However, they also need to be incredibly careful that the solutions they are exploring represent true continuous availability and are not just being marketed as such. Many of these imposter solutions use ‘manual failover’, which is when the switchover isn’t triggered automatically and can increase delays and expenses. Many of these solutions are also very narrow in their focus and only protect one or two platforms. Organisations instead need to pursue solutions that can ensure availability for all types of data, whether that data resides in public and private clouds, on-premises or in virtualised environments. They should also search for technologies that use a journal-based approach, which replicates data in real-time at the byte level, as opposed to the traditional snapshot-based approach most commonly found in backup and disaster recovery solutions.

 In the hyper-competitive world of modern UK banking, it’s vital that challenger banks are seen as nimble, agile and a reliable place to store consumers’ hard-earned money. This is a time of radical change for the industry, and many people are questioning their bank for the very first time. This means that challenger banks have a lot to lose by failing to ensure full, instantaneous data availability, particularly if their competitors manage to do so. If they want to positively differentiate themselves from the established competition, they would be best placed to explore solutions that allow them to sidestep the issue of recovery entirely. This will allow them to provide consumers with the constant access to their money, and their data, that they have now come to expect.

Bhupender Singh, CEO of Intelenet® Global Services, explores the competitive challenges that banks face from FinTech players.

The finance and banking sectors have experienced a radical shift, driven by mobile technology, Artificial Intelligence (AI), automation, and the emergence of new FinTech players entering the market. Traditional banks are now facing the challenge of high customer expectations, outdated technology, the pressure of regulation stemming from the financial crisis, and cultural resistance from those who are apprehensive or unable to utilise digital services.

With high street bank branches closing down, elderly people and those who do their banking in person, are at risk of making costly financial mistakes. In addition, a high proportion of customers maintain the desire for face-to-face interaction, particularly in the case of making major financial decisions, such as applying for a mortgage. Even in the case of common customer needs, such as the need to discuss overdrafts or the replacement of a bank card, face-to-face interaction is better equipped than a machine to efficiently handle the process from start to finish.

A major bank reported that 90% of customer contacts were through digital channels in 2016, an increase of 10% from the previous year. It is this shift in consumer behaviour that can be attributed to the increasing number of bank branches closing.[1]  In order to ensure customer satisfaction, banks will need to keep up to date with the latest technological advances, whilst also maintaining and providing new channels of communication to ensure that their customers are kept happy.

With the number of FinTech players and challenger banks slowly increasing, the need for banks to ensure their customers remain loyal has never been more important. Whilst the new breed of banks provide a mostly digital banking experience that can offer features such as real-time balance information, deep-dive spending data, biometric security, and instantaneous money transfers, the issue of trust still remains. Customers like to know that they can speak to another person when they need more information about a product or require help fixing a concern. In today’s automated economy, modern companies are conducting more and more business online, and so it has become increasingly important to not underestimate the importance of having a ‘face’ for your business. Relationships are built by people and based on these interactions and the level of customer service, customers will be more inclined to return.

Despite having the upper hand, in terms of a well-established customer base, the scale and speed of the digital revolution has left major players in the financial services sector struggling to keep up. Challenger banks actively seek to be different, and so to even the playing field, traditional banks must embrace technology innovations and employ next-generation tools. The technological revolution in finance is not a new phenomenon, yet, embracing this new landscape remains a challenge for most established financial institutions. Recent PwC research found that only 20% of finance executives feel their organisation is structurally ready to embrace a digital future[2].

In order to compete, traditional banks need to start offering a seamless blend of online and in-person banking which complement traditional services.  An effective omnichannel experience is one that will allow customers to benefit from the advantages of a physical bank branch, with the speed and agility available through a digital offering. Next-generation technology is heading in a direction where it will be possible to combine both the full benefits of online banking and face-to-face customer services. The future of branch banking, as we see it, could result in banks moving towards a mobile branch model.

One option could be a mobile advisor workforce, where customers can manage their services through a mobile app, and maximise the effectiveness of customer facing staff. By implementing this, banks could allocate mobile teams to nearby appointments. The next-generation technology available also has the potential to enable banks to connect roaming advisers to nearby customers, at any location and at any time.

One of the main advantages of a technology such as this, is that the high proportion of customers that prefer face-to-face interaction, will still be able to interact with banking staff – a service that banks are currently able to provide via the use of ‘micro-branches’. With market pressures to cut costs, and many providers being forced to reduce their front-end outlay, tools that allow banking staff to be mobile, are a step closer to modernising banks.

In the face of mounting competition against new players that are able to implement technological innovations quickly and effectively, it is essential for banks to overhaul their existing IT systems. Well established financial institutions tend to operate using outdated technology. These legacy technology stacks make it extremely challenging for them to compete with their more nimble competitors, as the aging technology obstructs the movement of data between silos, preventing the 360-degree view of the customer that is required to provide personalised services to customers anytime, anywhere. For this reason, we are witnessing a real desire from companies to work with experienced IT solutions partners, in order to adopt the latest technology and modernise their information security frameworks.

Legacy systems are one of the biggest barriers in keeping banks from imitating the digital experiences provided by the likes of the latest FinTech players. These companies deliver personalised services faster than banks can and are not hindered by aging systems. In order to start levelling the playing field, banks must first invest in the right partnerships. Banks must then look to provide a far more seamless omnichannel approach that embraces new technologies and will bridge the gap between their brick and mortar operations and their digital offerings.

The UK challenger banking sector is outperforming the ‘Big Five’ UK high street banks, however, the Large Challenger banks need to accelerate how they stand out in the market, according to a new KPMG report.

The new annual report, The Game Changers, analyses the full-year results of some of the largest UK challenger banks, grouped in three categories – the ‘Large Challengers’, ‘Small Challengers’ and ‘Retailer-owned’ banks.

The report makes reference to the 2014 results of the UK headquartered banks grouped as follows:

• ‘Big 5’ banks: Barclays, HSBC, Lloyds, Royal Bank of Scotland (RBS) and Santander.
• Large Challengers: BoI UK (Post Office), National Australia Bank (NAB), TSB and Virgin Money.
• Small Challengers: Aldermore Group, Handelsbanken, Metro Bank, OneSavings Bank, Shawbrook Group and Secure Trust Bank.
• Retailer-owned banks: Asda Money, M&S Bank, Tesco Bank and Sainsbury’s Bank.

The report reveals that while Small Challenger banks are securing stellar returns, key financial indicators of the Large Challengers such as the return on equity, are becoming very similar to the ‘Big Five’ – Barclays, HSBC, Lloyds, RBS and Santander.

Warren Mead, head of challenger banking and alternative finance at KPMG, said “Although the overall challenger banking sector is growing rapidly and securing greater returns, it is the Small Challengers who are driving its growth.

“Small Challengers are securing high returns and have better cost optimisation. If this trend were to continue, as the challengers grow and benefit from economies of scale, it poses an interesting question for the Big Five as to whether too big to fail, becomes too big to compete?

“Digital banking is a great example. Our report found that the mobile functionality of the challengers is at best equal to, but often worse than, the ‘Big Five’. For those challengers focusing on customer service or cost as a differentiator, this could be a major hurdle for the future.”

These figures paint a picture of the challenger banks picking-up the whitespace left behind following the financial crisis. This includes areas such as small business lending, second charge mortgages, invoice financing and unsecured lending.