10 ways challenger banks can differentiate themselves

Based on a benchmark of the digital maturity of 160 retail and commercial banks from 20 countries, Accenture has identified what factors differentiate digital leaders from the rest. The researchers found that, as expected, digital leadership drives improved financial performance, and that a set of ten factors serve as a good gauge on whether a bank should be considered a digital frontrunner.

In retail banking, the disruption of challenger banks is visible across the value chain, from customer contact and lending to mortgages, payments and alternative financing. At the same time, the likes of Monzo, Starling and TSB have all recently announced they are launching a marketplace banking offering. Throughout the banking sector then, new challenger banks and FinTechs are attacking business models, with newcomers rapidly making inroads into the sector’s profits by offering agile, digitalised alternatives.

The challenger bank scene may also swiftly become a victim of its own success, however. As the first arrivals in the sector continue to prove challengers can eat into the market share of long-term incumbents, they are increasingly being joined by other similar newcomers, meaning the market may soon become over-saturated. Julian Skan is a Senior Managing Director at Accenture Strategy, as well as a leader in the firm’s Banking practice. According to Skan, challenger banks would do well to pay attention to 10 key areas of business, if they are to differentiate themselves from the rest of the crowded field.

Fee income

First, challengers should consider whether their bank is looking to income streams beyond traditional banking, in order to gain a competitive advantage from current customer relationships. In this case, challengers must be aware that digital innovations can compress traditional fee income streams like payment and overdraft charges. As a result, such banks should be willing to use their data and their elevated position in the transaction flow to tap other revenue streams, while helping customers with non-financial services purchases.

Skan explained, “The best digital banks are differentiating themselves by repositioning in their customers’ lives and rethinking their value proposition to go beyond the digital presentation of traditional bank products and instead be a trusted day-to-day advisor who can improve broader financial well-being. In many cases, this implies material self cannibalisation of short- term product revenue to secure long-term customer loyalty and value. It also means building extensive partnerships with non-financial services product providers to recognise that both payments and credit are likely to become more embedded and invisible in the future.”

Data-driven organisation

One area where digital challengers can make up for their decline in fee income streams is by making use of the reams of data they collect, leveraging it in insight generation and value-realisation activities. According to Accenture, leading digital banks increasingly host Chief Data Officers with broad remits, which can ensure that data permeates every aspect of an organisation.

“Banks have a privileged position in the economy in that they act as the scorekeepers and facilitators for everyone else’s business,” Skan added. “If data is the new oil, then banks have advantaged access to some of the richest fields. The best banks know not only where to drill but also how to refine and use the fuel that those wells provide.”

Innovative business model

Skan went on, “Some banks, unfortunately, are hoping that peripheral challenger initiatives will someday grow to a scale that they will absorb and transform the legacy bank. Yet, without challenging the technology approach, culture, banks’ FinTech and innovation initiatives – regardless of how press worthy they are – are likely to remain just gnats on the elephant from a valuation perspective.”

In other words, while challenger banks in Europe might attract encouraging valuations of multiple billions of dollars, their limited balance sheets and income streams often depend on payment processing fees that are continually being compressed. These mean such challengers are unlikely to demonstrate viability in the long-term, when competing with established players. As a result, it would be safest for challengers to look to mature into institutions with business models similar to the banks they are seeking to replace, but with far-improved, digitally savvy execution.

Talent war

To this end, a diversity of skills and experience is vital for challengers to not only realise rapid product innovation but also design customer and colleague digital experiences which set them apart from the rest of the pack. In order to adequately stock themselves with skilled staff, challengers face a great deal of competition however. This fight for digital talent will only intensify, so banks must differentiate themselves beyond the usual rewards to attract, engage and retain, while looking to draw talent from new pools.

Skan cautioned that even if challengers succeed at this, it is not a cure-all, though. He elaborated, “Building a great engineering culture doesn’t mean doing everything yourself. The best digital banks still leverage technology partners and systems integrators to accelerate innovation and change. They just use them in different ways and are increasingly replacing low-cost offshore workforces with higher cost technology partners that can co-innovate and provide surge capacity for critical initiatives.”

Lower wage spend

“We see that digital leaders have a significantly reduced cost profile for their operations, so digitising end-to-end processes should be a priority," Skan said. "The default processes should be data and analytics-powered, and use all available Automation and AI tools to minimise human touch-points, drive down the cost-to-serve, improve service levels and cross-sell ratios and enable the servicing of tens of thousands of retail and small business customers per employee."

According to Skan, then, challenger banks should drive home their digital advantage by using it to minimise the amount of labour hours involved in their businesses, and improve bottom-lines. Humans should only be required to intervene to deploy judgment that is beyond the capabilities of automated processes.

Integrated agility

Building the agility of an organisation is essential for the success of a challenger bank. However, Skan warned that while this is accepted, it is only acknowledged as “lip service” by a number of companies at C-suite level. The central challenge with building a digital-first culture isn’t just technology development and building a conveyor belt of minimal viable products – leaders in the market are those which are aggressively moving budgets from run-the-business to change-the-business initiatives.

Skan added, “The path of least resistance then becomes small peripheral projects that allow a declaration of success on enterprise agility without materially changing how the business operates. In contrast, leaders embrace enterprise agility as something that necessitates change in every aspect of how the bank is run and, hence, treat it as a revolution rather than an evolution.”

Mobile-first distribution model

Because of the importance of mobile-first to a challenger bank, it is something the majority of competitors have already embraced. What can differentiate one challenger from another is how it is complemented by human staff. According to Accenture, when designing for mobile-first, companies should ensure that non-mobile channels are staffed from top to bottom with people who understand and embrace the mobile-first approach, in order to help roll it out to customers whom it may be new to.

“With pure digital challenger banks signing up millions of customers, an outstanding mobile experience will be a prerequisite of future success for incumbent retail and commercial banks, but the best performing ones will also change the terms of competition by using other channels to make their app experiences even better,” Skan said.

Open Banking

Complementing a challenger bank’s mobile-first offering, such companies could also benefit from prioritising open banking – a secure way to give providers access to a customer’s financial information, which opens the way to new products and services that could help customers . Accenture suggests that rather than treating open banking as purely a compliance and regulatory issue, challenger banks should be embracing the opportunities it offers for competitive advantage.

Skan unpacked, “Challengers should be thinking about their technology and infrastructure approach with the mind-set of a trader rather than a protectionist. An open banking mind-set naturally leads to a 'platform-as-a-service' approach to core product and service capabilities that allows a bank to support both internal and external users through micro-services and APIs.”

Public cloud

Speaking on the benefits of public cloud, Skan said, “Default public cloud architecture drives a lot of positive behaviours around modern engineering practices; technology development approaches, data management and analytics, and is a clear indicator of a future-oriented mind-set that puts the burden of proof on status quo rather than change.”

While there remain clear data migration benefits to public cloud use, increasingly the most compelling element of the equation is access to data management and analytical tools provided by public cloud providers. While addressing regulator concerns about public cloud remains a challenge, leading digital banks are already working to make it their default data storage method because they realise they cannot afford to hide behind those regulatory concerns as a reason to slow their pace of change.

FinTech ecosystem

No bank is or should be the sole source of innovation, so challenger banks need to forge good relationships with a broader ecosystem. Leaders have already developed methods to filter, prioritise and monetise the good ideas of other institutions in order to stay at the forefront of the industry.

Concluding, Skan said, “While it is great to have innovation labs, venture capital investment stakes and consortium memberships, the real litmus test for a bank’s engagement with the FinTech community is whether it increases the metabolism of change for their customer-facing propositions.”