N26, which has a European banking license, is still one of the smaller challenger banks in the UK, but on April 15 it will be closing around 200,000 UK customer accounts. It has stated the reason behind this is difficulties surrounding Brexit, as the “timing and framework” of the withdrawal bill has made it impossible to continue operating in the UK.

Thomas Grosse, chief banking officer at N26, said: "While we respect the political decision that has been taken, it means that N26 will be unable to serve our customers in the UK and will have to leave the market."

Finance Monthly also heard from Forrester’s senior analyst Aurelie L’Hostis, who said: “N26’s launch in the UK might have felt like a natural next step back in 2018. The challenger bank had successfully attracted half a million customers in 17 European countries, and it could then use its European banking licence as a parachute. Yet, Brexit was already looming ominously in the distance back then – and there were questions regarding the validity of that licence post-Brexit. Beyond that, N26 entered the UK market on the heels of fast-moving rival challenger banks Monzo, Revolut and Starling Bank. Catching up was not going to be easy.”

All N26 accounts in the UK will function until April 15 as normal but will subsequently be closed automatically. Any money that customers fail to remove form the accounts will be placed in a holding account by default. It said UK staff involved in the business will move into other roles.

Other challenger banks like Monzo and Starling have UK licenses, which is why they likely won’t be pulling out of the UK anytime soon.

In a recent interview with Finance Monthly, Dame Inga Beale discusses the current state of the insurance industry, drawing a contrast with the innovations occurring in banking.

“If you speak to some of the challenger banks, and you say, ‘who are your competitors?’ They say, ‘Oh, we don't really have any competitors. We're so unique, we're so different to the old banks that we don't really regard them as competitors.’” she said.

“It's interesting how they think they've created something so new and innovative that they don't even regard the old traditional incumbents as being a threat.”

It has been a memorable year for FinTechs, culminating in British challenger bank Starling pipping traditional firms to the title of Best British Bank. Business Insider Intelligence reported in October 2019 that 68% of consumers are using a checking or savings account with a challenger bank. 83% of those surveyed claimed they are likely to switch to a challenger bank in the next 12 months. Beale believes it is a focus on the consumer that has driven a revolution.

“Insurance I believe is behind banking. I think it's because we haven't been putting the customer at the heart of what we've been doing. They [challenger banks] have appealed to the young generation much more and have managed to brand themselves in a modern, exciting way. I think insurance has got a bit of catch up to do” she said.

“We [insurers] often traditionally look at things from our internal point of view. We segment customers according to the way we look at them; maybe by postal codes or something rather than the wants, needs, desires of the customers.”

“We often traditionally look at things from our internal point of view. We segment customers according to the way we look at them; maybe by postal codes or something rather than the wants, needs, desires of the customers.”

The insurance industry has also been slower to adopt the innovations of InsurTech firms. Usage-based insurance (UBI) is increasingly becoming the norm but the implementation of technologies such as Robotic Process Automation (RPA) has been slow to market. While 30% of companies adopted this technology to review claims in 2018, no insurers were using it to evaluate the risk of insuring a client in the underwriting process. Despite this, the market for underwriting improvements is set to grow to over 60% by 2020.

“Most of the insurers these days are investing in incubators or innovation labs. But to actually amalgamate them into your existing business is the tough call. There are not many [insurance firms] that have mastered that yet,” says Beale.

“If they don't learn how to amalgamate this new InsurTech and this new technology approach, the interaction with a consumer will suffer. Consumers want a different type of product that's more tailor-made, responsive. We need to think differently and incumbent large insurers, unless they adapt, will be left behind.”

A multitude of choice is available to today's insurance consumers. Beale pointed out the moves the industry has made to simplify the process.

“Consumers want to shop around and the price is important to them, so, lots of companies have responded by providing an online product where they're part of price comparison websites. That means the consumer can make instant decisions,” she said.

“Consumers want to shop around and the price is important to them, so, lots of companies have responded by providing an online product where they're part of price comparison websites. That means the consumer can make instant decisions."

Though price comparison websites have now serviced an estimated 85% of consumers, Beale believes they may already have peaked.

Beale says: “There might always be a place for comparison sites but I think this idea, that you will partner with a firm and they would be your financial support is much more likely to be the future. Therefore, you will have a strong affinity with that firm providing the customer service is up to it.”

“I think you'll shop around far less on price because we'll be using data triggers to feed in automatically, and you'll feel, actually, that pricing is fair because I only paid for the exposure I had on that day.”

Beale also admitted that there is a long way to go before customer loyalty reaches such heights to make a dent in the role of price comparison websites.

“We tend to have people buying insurance products that are very geared to specifics; so people will buy insurance for their car, insurance for their travel, insurance for their home. We haven't yet managed to package that up nicely so that the consumer's life is made simpler.” she said.

“We've got a long way to go to build that ecosystem around an individual and surround you with this nice bubble of the financial protection and support that you need in your life.”

Since leaving the demands of corporate life behind, Inga Beale has become a regular keynote speaker with the Champions Speakers agency, where she specialises in topics such as diversity and inclusion, insurance and business management.

As a result, they can provide products and services that are faster, easier, and/or cheaper than that which traditional banks can deliver, but what are the key elements FinTechs should consider in this offering?

Here Scott Woepke, Head of Financial Services Strategy at Acxiom, outlines four pillars of fintech-customer relationships that will help fintech providers grow their market share.

Fintech companies are disrupting the financial services industry because they’re not tied to legacy operations, traditional organisational rules and established structures. They’re thinking differently, experimenting, and exploiting data to develop products and services that are easier to use, convenient, and sometimes cheaper than those of traditional banks.

Like all businesses though, fintech companies must build and nurture relationships with their customers.

1. Usefulness

Customers don’t like to switch banks – only 3% of personal and 4% of business customers switch to a different provider in any year. They’re often risk averse and it’s difficult to convince them of the benefit. Historically, the common method employed to encourage people to switch banks is to offer a more competitive interest rate. However, for many customers, a competing offer of marginally more money or savings is unlikely to win them over. There is a zone of indifference where small price changes have little impact on perceived value.

So, it’s a tough sell and customers certainly won’t sign up to a new current account or move to an incumbent financial services provider simply because it’s digital. Having a shiny new website or phone app isn’t enough.

It’s important that fintech companies understand the problem they’re helping to solve, and that the solution fits into customers’ daily lives. Fintech products must make it easier for people to manage their finances and people will build relationships with businesses that improve their efficiency. Customers are attracted to fintech companies that help them manage their money better by, for example, helping them understand their income and expenditure or using AI to make real time recommendations. For the fintech-customer relationship to succeed, the usefulness of the product must be compelling.

2. Ease of use

All things being equal, customers are unlikely to switch to a new provider offering a similar banking experience. A YouGov’s study indicates that one in five (21%) Brits have considered switching current account but ultimately have not gone through with it. This was despite compelling cash incentives and the Competition and Markets Authority (CMA) promoting a seven-day switching service.

So, to encourage customers to leave behind the traditional products and services they’re used to, fintech companies must create alternatives that are easier to use and access. The user experience and customer journey must be better than those provided by traditional financial institutions.

To motivate a switch, fintech companies must deliver a compelling and differentiated value proposition that may provide better pricing, but delivers accessibility, ease-of-use, convenience, and loyalty programs. Some fintech companies have also been successful with customer acquisition by offering new tools that introduce discipline and management of savings that help customers reach their financial goals – like saving for a holiday or to buy a car or home. A well-designed and compelling financial fitness programme will not only attract new customers, but it will help build much deeper relationships.

To motivate a switch, fintech companies must deliver a compelling and differentiated value proposition that may provide better pricing, but delivers accessibility, ease-of-use, convenience, and loyalty programs.

3. Brand image

Only 55% of Britons trust banks, and only 36% think they work in their customers’ interest, so brand and reputation play important roles are intangible assets with economic value. A strong brand image will generate trust and establish perceptions of quality, value and satisfaction. Fintech companies must invest in increasing their brand awareness as customers are unlikely to open an account at a bank they’ve never heard of.

From a marketing perspective, it’s important to understand the importance of timing, offers, and channels for communication. In terms of timing, there are windows when customers are more likely to switch, for example, when they’re unhappy with their current provider. Lifestyle changes such as starting a family, moving home or getting divorced can also provide motivation for a change. The offer (or proposition) is very influential in the customer’s decision to switch providers. Finally, the channel of communication is critical and it’s important to remember mobile is the preferred channel for banking and content consumption.

4. Trust

Handling money and customer data are the bread and butter of fintech businesses, so earning customers’ trust is essential. Any perception of risk will negatively affect the adoption of new technology. The importance of trust can vary by product (i.e. borrowing vs. investing) based on customers’ sensitivity about the service.

To build trust, fintech providers must ensure they operate within the laws and regulations of the countries where they are based. New technology is breaking down geographical boundaries, but it’s vital for the fintech-customer relationship that customers understand their legal protections and can trust that their assets are safe.

In the UK, the government has played a role in the definition of the technology and has provided financial backing of the infrastructure, making fintech services more acceptable to potential customers. Since January 2018, PSD2 and Open Banking have forced the UK’s nine biggest banks to release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online.

While fintech companies represent a threat to the incumbent financial services providers, they still have a lot of work ahead to overcome the customer inertia that exists with their providers. Understanding customer perceptions and needs will be an important factor to success and help develop a long term, sustainable fintech-customer relationship.

Challenger banks such as Monzo, Starling and Revolut are built to scale, evolve and improve their offerings easily and quickly, and are doing great extending their customer base. According to Ian Bradbury, CTO for Financial Services at Fujitsu UK & Ireland, they are also now beginning to slowly move towards becoming a full service bank for their customers, as well as branching out their offerings to SMEs.

The way banks make their money is by keeping administration costs low, managing the lending risk and investing wisely to receive good returns. Other income avenues include offering “added-value” services, such as payments, for which they take a handling fee (particularly useful when market returns are under performing, for example in the case of low interest rates).

Four digital-led factors to disrupt banking

Four interrelated digital-led factors are fundamentally transforming traditional financial services: new distribution models; cloud native computing; data enrichment in a hyper-connected world; and exponential increase in the rate of change. These four factors create new ways for banks to operate, to do business and to enhance their offerings for consumers - but they have not fundamentally changed their money-driven banking business model – yet!

Regulators have recognised the value that can be bought by these four factors to banking customers, and have sought ways to encourage the uptake of them – often also encouraging new digital-native entrants into the marketplace. Regulators have also sought to ensure that high-margin services can be “unbundled’, allowing new competition to compete in these areas.

In theory, it should not be difficult for banks to not only survive the arrival of these four digital-led factors – in fact with their financial backing, existing customer base, technology assets and regulatory status they should be able to thrive in this competitive landscape.

This is especially true as other potential non-banking competitors have to overcome complex regulatory challenges – besides not being set up to offer the basic banking business model.

Legacy problems

In reality, traditional banks are struggling to keep up with how the market is moving. The reason for this can be summarised in one word – legacy. Legacy culture, legacy skills, legacy controls, legacy distribution models, legacy systems.

Slowly, this is changing, but until these legacy bottlenecks are removed, banks will struggle to keep up. Those that do not move quickly enough to deal with this challenge are unlikely to survive.

Assuming that traditional banks can overcome these legacy challenges and become the truly agile, low-cost, open-driven, customer-obsessed, data-powered, highly automated businesses promised by the digital-native challenger banks then their traditional banking business model may well also change.

The banks of the future

Banks currently operate a fairly simple two-sided marketplace – they take money from depositors and give it out to borrowers, generating trust in the process. But what they really do is provide a two-sided marketplace for ‘value’ – which is currently focused on money.

Digital transformation potentially allows for other ways to exploit this value-based marketplace, with the data-insights and enrichment coupled with new distribution models creating potentially new services.

Besides this, the notion of value is changing in the digital age, with areas such as data, identity, reputation, authenticity and even perhaps social purpose falling within it. These types of values can potentially be digitally stored, secured, exchanged and exploited in a marketplace - just like money. Maybe for example the banks of the future will become the custodians of your valuable data, both protecting it and helping you generate benefits from it.

It is forecasted that mobile banking is set to be more popular than visiting a high street bank branch within two years. And as the banking industry continues its digital journey, Mark Grainger, VP Europe at Engage Hub, says consumers are coming to expect more control over their data, greater convenience, and “anytime, anywhere” accessibility.

Mobile-first consumers

So far, most banks worldwide have handled the mobile era in exactly the same way, simply shrinking down traditional bank accounts and putting them on a smartphone screen without offering real innovation or engagement.

But simply pouring millions into innovation hubs and piecemeal digitisation strategies isn’t going to deliver the kind of results that will win over those tempted by the challenger banks. Traditional banks need to shift gears and use the valuable information they already have to provide customers with seamless interactions across different channels.

At the same time, banks need to understand that the digital banking revolution is more than a mobile app. It’s about creating an entire experience. The implications of failing to facilitate a seamless cross-channel customer experience – one that lives up to growing customer expectations – is huge. Today, consumers have more choice than ever before, thanks to the rise of fintech start-ups and digital-only banks, and if they do not get the level of service they’ve come to expect, they will not hesitate to take their business elsewhere.

Subscription service model

Using a service model patterned after Amazon Prime or Netflix may seem odd to many retail banks, but challenger banks are already experimenting. Would consumers pay a subscription to get the same service they do with Amazon and Netflix? The answer is yes.

Revolut is already showing itself as a front runner in subscription-based banking. The challenger provides a ‘freemium’ model, which gives users a free UK current account and a free euro IBAN account that offers no fees on exchanging in 24 currencies, up to £5,000 a month. Revolut also provides monthly subscription plans with higher thresholds for no fees, as well as instant access to crypto-currencies, cash back, travel insurance, free medical insurance abroad, airport lounge access and priority support.

Research shows that in the UK 57% of people would be willing to pay an extra monthly fee for additional services from their banks. Most consumers – 45% – would like additional media services such as Netflix and Amazon while 40% prefer earned cashback and 37% would pay for overdraft facilities.

Considering that at present, 72% of customers don’t pay any monthly fees to their banks it’s fair to say that there is a great potential for financial institutions to leverage these services and elevate their game when it comes to competing against challenger banks and unconventional financial services.

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Trust and value

Furthermore, traditional banks have a crucial asset compared to challenger financial institutions, and that is trust. Traditional banks have a much longer and seemingly more robust security record.

The paradox is that many people trust their primary financial provider but distrust the financial services industry overall. Therefore, banks that want to persuade their customers to adopt new models and pay a potential monthly fee have to prove that they have customers’ interest at heart.

One way to achieve this is through transparency. The financial services industry still lags behind other sectors when it comes to transparent policies, costs and customer data. This needs to change and they need to show that they are keeping pace with the market trends and customer expectations.

Another crucial aspect banks need to keep in mind when it comes to monthly subscriptions is the added value they would bring to customers. If they agree to additional costs, consumers will also expect extra benefits and not just the same things they used to get for free. Without additional value added, it will seem that banks are trying to simply make some extra money thus confirming customers’ distrust in financial institutions.

If they agree to additional costs, consumers will also expect extra benefits and not just the same things they used to get for free.

Bank of America, for example, learnt this lesson the hard way when they wanted to charge their customers a $5 fee for using their debit cards for purchases. The backlash was swift and strong, and the bank had to cancel the plan within six weeks.

To avoid such situations, banks need to focus on their customers’ financial health and create personalised and holistic value propositions that will provide a competitive edge against challenger banks and convince millennials that they can provide safe and innovative solutions for life’s complex challenges.

By understanding these strategies and embracing the changes in consumer buying behaviours, financial institutions will be able to create new ways to generate recurring value for their customers and new sources of predictable income.

Key skills

However, in order to transform their approach to digital transformation and subscription models banks will also need the right skills and capabilities.

A new CBI/TCS report highlights the UK’s rapidly accelerating digital talent gap as new technologies transform the way we live and work. Currently, the UK is losing out on £63bn a year as companies struggle to find people with digital skills. Areas of banking that need to be a focus for investment include the use of AI in customer profiling, money laundering detection and improving customer services. All of these investments require emerging technology to be implemented, and employees with the skills to manage it. Banks will need to implement training programmes, smart hiring strategies, and strategic digital transformation programmes to attract tech talent and implement a customer experience to rival challenger banks.

And whilst providing subscription services to their customers might require considerable resources and a significant shift in strategy and policies, engaging the new generation of digital-first customers is paramount if traditional banks want to remain relevant and fend off challenger financial institutions. Harnessing this opportunity will provide a critical competitive edge, inspire loyalty and make customers feel valued.

Many industries have already adopted this system and have reaped significant benefits already. It’s high time for traditional banks to challenge the current status quo as well and reap the benefits of a subscription model.

Channel director and finance expert at moneyguru.com, Deborah Vickers has the lowdown on a raft of innovative and exciting companies making their mark on the retail banking sector in 2019. So, if you’re thinking of making the switch, here are just some of the banks and their benefits.

1. N26

It’s surprising to think that N26 only launched in the US and UK last year, considering how popular they have become. Their three current account products appeal to customers looking for an equivalent to a standard or packaged current account, with easy options to save by creating ‘Spaces’ within the app.

Alongside their banking app, they also provide a desktop version called N26 Web, so customers can gain access to their account from practically any device. In addition, they’re working on an overdraft facility that should be available soon in the UK.

2. Revolut

Launched back in 2015, Revolut is one of the largest challenger banks in the market. In March 2019 they reported they had hit 4.5 million customers, with 1.6 million being UK-based.

They are one of the only challengers to allow customers to exchange money into cryptocurrencies and you can earn cashback with any purchase made on their Metal card. Their version of a savings account comes in the form of Vaults, which can be set up straight from the app.

3. Starling Bank

Having recently celebrated their two-year anniversary, Starling is a challenger bank going from strength-to-strength in the UK. They have recently developed Marketplace, making it easier for customers to access financial products from partner companies.

Despite not offering a premium current account, Starling offer an overdraft facility and a personal loan option, being one of the only challenger banks to do so. They became known for offering a portrait-style, teal debit card, but customers have flocked to the bank for other features such as saving money via Goals and analysing their accounts through Spending Insights.

4. Monese

Monese prides itself on being the simple alternative to high-street banks, built for customers who would like an easy route into managing their money. They have one free current account and two premium accounts that charge a monthly fee.

This hassle-free approach to banking appeals particularly to those who have emigrated from another country to the UK, as Monese doesn’t require proof of address or a credit history, making it much easier to apply and be accepted.

5. Cashplus

Cashplus are a challenger who have entered both the personal banking and business banking sectors, allowing those with a bad credit score to still benefit from a secure bank account that suits them.

Both of their current account offerings have a monthly fee, but don’t require a credit check, making it much easier to apply and keeping your credit score intact. Through the Creditbuilder feature, you can also start to make improvements to your credit score over 12 months, with no risk to yourself.

6. Monzo

Cited as one of the most popular challengers in the UK (according to the BACS switching statistics), Monzo Bank is now used by more than 2 million people, since their launch in early 2015. They pride themselves on being transparent with customers and have an active community forum with 40k users.

They have recently launched a premium account option called Monzo Plus, which is in early development but has started with a monthly fee of £3. You can then add on extras such as travel insurance, with many more options in the pipeline.

7. Tandem

Tandem focus on being a companion to your existing current account, helping you work in tandem with your finances. All you need to do is download their free app and start saving.

Unlike other major challengers, Tandem concentrates on offering savings accounts and credit cards to customers, alongside their money management app. Use of the app creates a seamless transition between your existing current account and a savings pot, which rounds up to the nearest pound using Autosavings and puts the change into a pot for later use. They are looking at implementing a full current account very soon, along with support for Apple Pay and Google Pay too.

8. Atom Bank

Atom Bank have entered the challenger space by providing savings accounts, mortgages and business loans to customers, all available by applying online and managing through their app. Like Tandem, Atom Bank are a challenger that you can use alongside your existing current account to help with saving for the future.

Along with providing competitive rates for their fixed savers accounts, they are also the only challenger in our list to provide mortgages, meaning potential homeowners can find an alternative to high-street banks when looking for funding.

Here Alpa Bhakta, CEO of Butterfield Mortgages Limited, explains what factors and characteristics brokers and borrowers need to be on the look out for when selecting a lender. As part of the feature, she'll also delve into how the rise of challenger banks has affected the prime property and mortgage markets.

Between 2016 and 2018, as many as 4,214 new products were introduced into the residential mortgage market. It’s a remarkable statistic, and one that reflects the broadening range of options available to homebuyers.

Today, mortgage lenders have larger product portfolios, with subtle variations in their terms and rates meaning they provide multiple iterations of what is fundamentally the same offering. At the same time, the rise of “challenger banks” means there are more and more new players entering the industry, in turn giving borrowers entirely new companies to approach.

One would naturally assume this is a positive trend, something to be welcomed and celebrated. However, in truth, despite the increase in the number of mortgage products available to consumers and investors, challenges still remain.

As with any market that expands steadily over a long period, the wealth of options to choose from can prove overwhelming. Indeed, filtering through thousands of potential mortgages to find the best product from the right lender is perhaps more difficult than ever.

The value of intermediaries

Earlier this year, Butterfield Mortgages Limited carried out an interesting piece of research delving into the UK’s mortgage market––or more specifically, the UK’s high net-worth (HNW) mortgage market––to establish borrowers’ opinions of the products available.

The independent survey of more than 500 HNW individuals revealed that even for the wealthiest members of society, there are still significant barriers to securing a mortgage. For example, one in nine said they had been turned down for a mortgage in the past decade.

Furthermore, 79% said they think too many lenders are currently employing overly restrictive “tick box” methods when assessing mortgage applications; 60% believe it is becoming increasingly difficult to secure a mortgage for a non-primary residential purchase; and 67% of UK HNWs feel banks do not adequately cater to the needs of property investors and buy-to-let landlords.

The results illustrate how the wealth of options available to mortgage applicants is not always a good thing. In fact, it means there are more unsuitable products and lenders that a borrower must filter though.

Enter the intermediaries. Brokers and wealth advisers have a more important role than ever in guiding their clients, such as HNWs, towards the best and most appropriate mortgage products. Indeed, the aforementioned BML research showed how 73% of HNWs rely on brokers to help them find mortgages.

The larger the mortgage market becomes, the more valuable expert help will be in connecting borrowers to suitable lenders and products.

Choosing the right lender

It’s nearing three years since the EU referendum, and as if anyone needed reminding, Brexit has dominated political and economic discourse throughout this period. In a word, the result of the on-going Brexit saga has been uncertainty.

A lack of clarity regarding what the UK’s financial and political future will look like has resulted in hesitancy among consumers, investors and businesses alike. In the mortgage market, this means further due diligence is required from borrowers and brokers to ensure they work with lenders who are not at risk of succumbing to the challenging conditions currently gripping the market.

Over recent months the likes of Secure Trust Bank, Amicus Finance and Fleet Mortgages have withdrawn from the lending market or frozen their activities. As FT Adviser reported in January, the combination of Brexit and increased competition has forced some companies out of the market, while other lenders are pulling out of deals at the last minute.

One of a borrower’s greatest fears is that he or she will choose a mortgage lender who enters financial difficulties and this, in turn, has the potential to compromise their own finances. To avoid this, one must establish the relative security of different lenders based on the strength and longevity of their funding lines, as well as their past track-record of weathering turbulent periods, such as the 2008 global economic crisis.

The number of products and lenders in the mortgage market is on the rise. Meanwhile, Brexit uncertainty has presented new challenges to both traditional and challenger lenders. Consequently, selecting the right mortgage from the right provider requires more due diligence than ever.

After all, there are specialist lenders with expertise in providing bespoke mortgages for even the most niche borrowers in the most unique situations. Finding them may take work, but ultimately the health of the mortgage market reflects the ever-present demand among both domestic and international buyers for bricks and mortar assets here in the UK, and this certainly is something to celebrate.

New entrants to the banking market — including challenger banks, non-bank payments institutions, and big tech companies — are amassing up to one-third of new revenue, which is challenging the competitiveness of traditional banks, according to new research from Accenture (NYSE: ACN).

Accenture analysed more than 20,000 banking and payments institutions across seven markets to quantify the level of change and disruption in the global banking industry. The study found that the number of banking and payments institutions decreased by nearly 20% over a 12-year period – from 24,000 in 2005 to less than 19,300 in 2017. However, nearly one in six (17%) of current participants are what Accenture considers new entrants — i.e., they entered the market after 2005. While few of these new players have raised alarm bells among traditional banks, the threat of reduced future revenue growth opportunities is real and growing.

In the UK, where open banking regulation is aimed at increasing competition in financial services, 63% of banking and payments players are new entrants – eclipsing other markets and the global average. However these new entrants have only captured 14% of total banking revenues (at £24bn), with the majority going to non-bank payments institutions. The report suggests incumbent banks will likely start to see a significant impact on revenues as leading challenger banks are surpassing the 1 million customer threshold and 15 fintechs have been granted full banking licenses.

“Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what’s been seen before,” said Julian Skan, senior managing director for Banking and Capital Markets, Accenture Strategy. “With challenger banks and platform players reducing traditional banks’ competitiveness and the threat of a power shift looming, incumbent players can no longer rest on their laurels. Banks are mobilizing to take advantage of industry changes, leveraging digital technologies and ecosystem business models to cement their relevance with customers and regain revenue growth.”

In Europe (including the UK), 20% of the banking and payments institutions are new entrants and have captured nearly 7% of total banking revenue — and one-third (33%) of all new revenue since 2005 at €54B. In the US, 19% of financial institutions are new entrants and they have captured 3.5% of total banking and payments revenues.

Over the past dozen years, the number of financial institutions in the US has decreased by nearly one-quarter, largely due to the financial crisis and subsequent regulatory hurdles imposed to obtain a banking license. These factors have made the US a difficult market for new entrants and a stable environment for incumbents. More than half of new current accounts opened in the US have been captured by three large banks that are making material investments in digital, while regional banks focus on cost reduction and struggle to grow their balance sheets.

The research appears in two new reports: “Beyond North Star Gazing,” which discusses how industry change is shaping the strategic priorities for banks, and “Star Shifting: Rapid Evolution Required,” which shares what banks can do to take advantage of changes.

The reports found that many incumbent banks continue to dismiss the threat of new entrants, with the incumbents claiming that (1) new entrants are not creating new innovations, but rather dressing up traditional banking products; (2) significant revenue is not moving to new entrants; and (3) new entrants are not generating profits. To the contrary, the reports analyze where revenue is shifting to new entrants and identifies examples of true innovation happening around the world that can no longer be dismissed. Accenture predicts that the shift in revenue to new entrants will continue and will start to have a material impact on incumbent banks’ profits.

“Most banks are struggling to find the right mix of investments in traditional and digital capabilities as they balance meeting the needs of digital customers with maintaining legacy systems that protect customer data,” said Alan McIntyre, head of Accenture’s global Banking practice. “Banks can’t simply digitally enable their business as usual and expect to be successful. So far, the conservative approach to digital investment has hindered banks’ ability to build new sources of growth, which is crucial to escaping the tightening squeeze of competition from digital attackers and deteriorating returns.”

“As the banking industry experiences radical change, driven by regulation, new entrants and demanding consumers, banks will need to reassess their assets, strengths and capabilities to determine if they are taking their business in the right direction,” McIntyre said. “The future belongs to banks that can build new sources of growth, including finding opportunities beyond traditional financial services. They can’t afford to blindly follow the path they originally set out at the beginning of their digital journey. However, as the report clearly shows, there is no single answer and each bank needs to truly understand the market it is operating in before charting a path forward.”

Trust, context, the story, the relationship; these and many more are the strategy picks of today’s challenger banks, and the weapons of choice in today’s battle for the high street consumer. Below Finance Monthly hears from Yelena Gaufman, strategy partner at Fold7, who explores the current banking landscape and the increasing dominance of social good.

There is an undeniable disruption currently occurring in the world of banking. Innovative and cost-effective fintech and 'neobank' startups such as Revolut, Monzo, Tandem, Starling and Monese, are offering a fresh spin on an old formula and winning customers across the UK and beyond as a result. These are digital-first banking brands boasting features borne from bold, utility-first strategies and, more recently, a drive towards social good, and it's predominantly these features that have won them such good press and such good custom.

There is still a catch, though. This disruption might be well-documented, but it's not a foregone conclusion. Even if they are the “banks of the future,” these challenger banks could still learn a thing or two from their brick’n’mortar forebears when it comes to building trust, and they should start by asking one simple question: What is it that makes a person commit to one brand over another? Something so powerful it can transcend convenience and commodity? Emotional connection.

These challenger brands might offer a convenient, forward-thinking service, and they certainly represent significant value, but they often struggle to communicate their value proposition to consumers, particularly outside their traditional audience of urbanite early adopters. They also might offer a compelling vision of a different kind of banking, but what they really need to develop if they want to sow the seeds of genuine, lasting displacement, is an emotional connection with consumers.

A foundation of trust

The most obvious hurdle facing our fresh-faced fintech brands is the legacy and authority established by the incumbents. Consumers are far more likely to place their trust in the hands of an institution with a proven history, especially when it comes to parting with their hard earned bucks.

Building trust takes time, of course. But fresh-faced fintech brands do have a pair of aces up their sleeves. They are still figuring out what they want to be, and, perhaps more pertinently, whom they want to be trusted by. The clay is still wet, and willing to be mold into a prism through which all future brand decisions can be made and understood. When building their brands, however, and forging an emotional bond with their consumer, they should take two things into serious consideration:-

• Consistency – upcoming fintech brands must find a way to rationalise their services via purpose-led initiatives, establishing exactly what the company is for, over what it can do. It must also do this in a useful and powerful way for a number of different audiences. Not just millennials who live by and for their phones.
• Authenticity – while most traditional banking brands will have effectively reverse-engineered a brand to suit the services they offer, fintechs have the flexibility to establish a brand first and then create services that reflect and empower that brand. This will help them achieve an authenticity that traditional banking brands could only dream of.

Growth, storytelling and worth

In order for new banking and fintech brands to truly demonstrate their worth, a compelling brand story and a brand purpose is an absolute necessity. It all starts with understanding the context of what you're offering and how it plays into the lives of your intended audience. Being a feature-led, innovative company is great, but what is it that defines your work beside it being new and convenient?

Making a brand feel like it's actually worth something is no mean feat though. One way of doing this is to underline the role that your brand's innovations can fulfil in our daily lives, effectively tying the business and its services together with a wider sense of purpose. This is a method ably demonstrated by one of our recent campaigns for Gumtree.

Aptly titled “Turning Points,” the campaign visualises, in a very bold and unique way, how the app can help users to seize opportunity from change. We see a young couple moving through various stages of their life together, with Gumtree a facilitator of the natural changes that affect a lot of us at “that stage in our lives.” The app is used to swap a bike for a crib and then that crib for a bunk bed, before the crib is finally shown being sold on to another young couple, ready to begin their own adventure. It's a snappy, visually striking idea that reinforces the power of using familiar emotions to bridge a brand to its potential customers.

We currently sit at an intriguing juncture in banking for both disruptors and incumbents, with the industry forcing older brands to think about how they operate and vice versa. If the startups of today can organically forge and nourish emotional relationships with their customers and build lasting legacies of their own, the banking landscape of the near future could look very different indeed.

Online research from Equifax, the consumer and business insights expert, reveals a lack of awareness of banking options among Brits. When presented with a list of digital banks 60% hadn’t heard of any of the brands and only 20% would opt for a challenger bank if opening a new account today.

The survey, conducted with Gorkana, showed 44% of Brits would choose a traditional bank, and when choosing which brand to bank with, they prioritise good customer service (41%), ease of managing money via a good app or online service (34%), and availability of a physical branch (32%). Media influence was least important; only 3% of people factor news stories about a bank into their decision.

Good customer service also topped the list of priorities for people who would choose a challenger bank (31%), followed by incentives such as a joining fee (28%) and a good app or online service (27%). Friends or family using the bank was the least important factor – just 5% of respondents would take this into consideration.

People who would opt for a challenger bank appear to be more value conscious; one fifth (20%) said better rates when using their card or withdrawing cash abroad would appeal to them, compared to 12% of people who would use a traditional bank. Over a quarter (27%) rate more competitive rates, for example on overdraft fees or loans services a contributory factor when choosing a challenger bank, versus 19% for traditional banks.

Jake Ranson, Banking and Financial Institution expert and CMO at Equifax Ltd, says: “Challenger and digital banks have been making their mark in the banking sector bringing attractive, consumer friendly services to market, yet many consumers are still unaware of these brands. The government has taken action to increase competition in the sector but there’s still a lot of work to do to encourage consumers to fully explore the options available to them and make informed decisions on selecting or retaining accounts.

“Open Banking is underway and is a huge advance for consumers. Services are coming to market that will help people get better value from banks, for example identifying sign-up incentives or better rates tailored to their needs. The next step is for the industry to work together to increase consumer awareness of the value Open Banking unlocks.”

(Source: Equifax)