Lesson from challenger banks: Customer centricity really works

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Lesson from challenger banks: Customer centricity really works

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In 2010, when Metro Bank became the UK’s first new high street bank in 150 years, little did we know that floodgates were being opened. Today, there are more than 20 banks in various stages of license application and a backlog of 86 peer-to-peer lending companies awaiting authorization to operate from the Financial Conduct Authority. It is clear that challenger banks, and others, are striving hard to lure customers away from the top 4 – Barclays, Lloyds Banking Group, HSBC and Royal Bank of Scotland, which have long dominated the UK banking sector and today control 77% of the consumer market and 85% of the SME market.


Challenger banks are differentiating themselves  through innovative digitized services and tailored customer experiences. In short they are trying to revolutionise banking. As expected, this has generated a lot of interest, especially amongst the millennials, who seek something unique and very different from the traditional practices. According to McKinsey, up to 2,400 bank branches in the UK could close over the next 5 years and 15%-30% of mortgages will be sold digitally by 2019. Clearly, banks need to change.


These challenger banks are a diverse group including Atom Bank – a digital / mobile only bank leveraging biometric security and AI layered app, Fidor Bank – following a community based approach to deliver what its customers want,  Starling Bank – promising personalized financial insights based on analytics from customer lifestyle, Mondo – offering app based control over current account and spending habits, Monese – allowing account opening over mobile especially for migrants, Tandem – online only mobile focused bank using smarter money management services, Triodos Bank – serving organisations involved in organic farming, renewable energy, recycling and nature conservation, Aldermore – leveraging human underwriting to take considered mortgage lending decisions, Shawbrook – accepting savings directly from individuals but offering commercial mortgages only through intermediaries. Interestingly, each of these challenger banks has positioned itself as a customer centric bank by taking one aspect of traditional banking and using technology to innovate their services around it. Also, most of them focus on a specific customer segment that finds their innovative approach a strong reason to change.


Despite their success so far, it will not be easy for challenger banks to gain market share from the traditional giants. As per a survey report by the UK’s Competition and Markets Authority, just 3% of bank customers switched their main accounts last year. It was reported that 57% of UK bank customers have been with their account provider for more than 10 years and 37% for more than 20 years. There have been efforts to make this switch simpler including the 7 day switch service rule. However, some regulatory changes and new taxes also threaten to stunt the growth of new banks. The tax surcharge being levied on UK focused banks, will dent the ability of small banks to lend to small businesses. Top banks have their own models which allow lower capital to be set aside as compared to challenger banks, which use a standardized approach as they do not have lots of historical data on robustness of their lending. But realizing the urgency to create more opportunities, the regulator is working out ways to make it a level playing field in terms of capital requirements for the category of loans which are especially relevant for challenger banks.


From a customer viewpoint, a recent report from Opinium Research mentions that 90% of consumers would consider having a financial product with a challenger bank and 82% of consumers think that greater competition from challengers should be encouraged. They cited reasons such as better interest rates, lower charges and cash incentives for their interest in switching while competitive products, superior customer service and personal feel were rated the top expectations from challengers. They key criteria for enabling this push to challenger banks include innovative price points, exceptional service experience, targeting niche segments, flexible credit decision making, enhanced user experience, accommodating regional preferences, distribution over non traditional channels and transparency to foster trust.  While the challenger banks were not saddled with the costs of the financial crash, they have built their business on fresh IT ecosystems, which enable them to reduce the costs of running the bank and have kept the operational costs low due to their focus on digital services.


It is evident that technology has played a central role in making the concept of challenger bank a reality. Whether it be the complete digitization of services, launching personalized offerings quickly or automating the credit decision making, innovative technology solutions are the key. The ability to be more agile than established institutions while delivering more convenience, better insight and increased value to customers becomes much easier when you do not have the baggage of legacy systems. Fine grained and dynamic pricing for servicing are challenges that traditional banks struggle with because their IT is designed in silos which means that they cannot take a complete customer view and struggle to leverage the power of data-driven analytics.


The fact that despite the availability of options, customers have not actually switched accounts in large numbers probably indicates that customers are waiting for the trust factor to be more established.  It is interesting to note that this phenomenon of shift towards customer centric banking is not just restricted to the UK and is fast evolving in other parts of the world.  It might take a slightly longer time for challenger banks to make a significant mark, but it is imperative for the traditional financial institutions to take notice of the changing customer landscape and act fast. Once the inertia to switch bank accounts is taken care of, the customer centric approach being followed by the challenger banks will help them win over customers. So, there is a small window of opportunity for traditional banks to change and focus more on customer needs. Once the challenger banks get going, it might be too late for the traditional players to make the change.

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At Nucleus Software we are committed to providing efficient, modern yet proven software solutions for the global Banking and Financial Service industry. We have been pioneers in developing Retail Banking Software, Corporate Banking Solutions, Transaction Banking, Cash Management and Internet Banking Software since 1986. Our success spreads across more than 50 countries, and we serve our customers globally through our direct and partner operations across US, Europe, Asia-Pacific, Africa and the Middle East. We are known for our world-class expertise and innovation in lending and transaction banking technology. Our two flagship products, built on the latest technology are: FinnOne™ and FinnAxia™.