A new breed of ‘challenger banks’ has risen up around traditional institutions in the last few years. This catch-all phrase doesn’t capture the breadth of different offerings that have emerged, from mobile only banks such as Atom and Starling, to digital contenders looking to capture even more of the value chain by exploring links between online banking and social networks – Fidor is a great example. With a digital-first mentality, the competitive ace that these technology businesses have to play is their agility. Unencumbered by legacy systems, they are quick to add innovative new products and services, often encouraging open collaboration with customers – as Monzo has done – to develop the product and offering.
These FinTech companies are incredibly nimble, though hanging on to this advantage will depend on how smart they can be as they scale. With a continued focus on innovation and a clear target customer value proposition – whether that’s migrants, freelancers, Millennials or students – there will be some tough decisions to make about which technology to keep in-house, and which to outsource. Will they choose to trade on the value of their proprietary systems? Or take the view that the value lies? in the front-end, and outsource the remainder?
One of the key challenges that traditional banks face is simply understanding the infrastructure that lies under the hood. Systems have been developed over so many years, by so many IT architects, for so many use cases and do not forget all the mergers and acquisitions, that it has become very difficult to untangle the technology wires that link business areas across Operations, Product, Customers and Channels.
The advent of Open Banking has thrown down both a lifeline and an intimidating gauntlet for large banks. A lifeline, assuming they have the opportunity to innovate, drawing on the advantages of trust and large existing customer bases to fend off digital rivals with new appealing product offerings. A challenge, in that they must now open up their systems to third parties, which brings both a competitive threat and a logistical challenge.
No such worry for nimbler challengers. Not only do they have the benefit of operating on new, lean tech stacks, but they have been born into a mentality of collaboration, and business model evolution. High Street Banks, by contrast, haven’t been tested in this regard historically, and are jostling to keep pace.
After a period of immense innovation in the challenger bank sector, the next phase will be a tale of expansion and consolidation – a battle that some will weather more successfully than others. Some have argued that those with in-house back-end tech will experience initial pain in scaling, due to the larger tech code base and infrastructure they must maintain. Others might counter that this will be offset by lower long-term operating costs per customer, and possibly greater flexibility in product development – which could make all the difference in the quest for customer wallets, hearts, and loyalty.
Operational management and innovation do not always sit comfortably next to each other, but young banks have a golden window of opportunity to future-proof their model. Smart, proactive, risk-based decisions will ensure that scale does not hamper the agility that propelled them into the spotlight in the first instance.
It’s more fun to count soaring customer numbers and glamorous media headlines, though, in my view, the winners will be those that take the time to unpick and monitor the systems that underpin their ability to create dynamic, responsive solutions. In this instance, good things will come to those who refuse to wait.
Hans Tesslaar, Executive Director at banking architecture network BIAN