How much of an effect are challenger banks having on digital transformation in the sector? Seemingly, it’s not so cut-and-dry.
There is no such thing anymore as resting on your laurels, particularly in the banking space. Similar to government legislation, progress has been slow among the major financial institutions, or at least that was the case until the past few years.
The introduction of the Payment Services Directive 2 (PSD2) just a few short years ago has opened the door to challenger banks including ones that have no plans to ever open a brick-and-mortar store. As is the case with most things in business, it’s a matter of ‘innovate or die’, and now the big banks can no longer ignore the Revoluts, Monzos and Starlings of this world.
Some recent examples include Bank of Ireland promising some ‘Netflix style future of banking’, or AIB being the first out of the gate in Ireland to launch open APIs to connect other businesses and services with the bank.
Legacy issues
But while the focus has been primarily on how the big banks are reacting to digital transformation, it’s worth sparing a thought from the challenger side, too. One of those that’s been calling itself a challenger bank for the past few years is KBC, a Belgian, digital-first bank with operations elsewhere in Ireland and central Europe.
Among its most recent technological upgrades was to become the first bank in Ireland to allow its customers to view their balances with other banks within an app. Likewise, it recently went live with an API to allow third-party developers to integrate other services into its app. According to its director of transformation and innovation in Ireland, Kelvin Gillen, these types of innovation have yet to appear across established banks because they are “still suffering from the legacy of the global financial crisis” that started in 2008.
Pointing to the biggest global example, Gillen noted the unrivalled success of Tencent’s WeChat in China, where a messaging app based in China has transformed the payments and banking space. Not only does it let users send messages, but it also lets them conduct banking, book cinema tickets, check public transportation times and almost every other facet of everyday life.
“Things are built up over time, so there’s a very well-defined process about doing anything in a [traditional] bank,” Gillen said. “There’s no room for failure.”
With such a cautious attitude, however, the traditional banks can come across stumbling blocks that can have major ramifications down the line.
Easy to build over the cracks
“I really find the biggest challenge is there’s too much of a temptation to digitise the old bank as opposed to build a new digital bank,” Gillen said. “It’s an easier journey for an organisation to digitise what they have, rather than take the extra risks and extra investments about understanding what the customer needs and how can that be best answered or resolved with the current set of technologies.”
This opinion is shared somewhat by Alex Frean, corporate affairs chief of the UK mobile-only challenger bank Starling. Speaking with the Sunday Independent, Frean said that its business model would make it for it to establish somewhere new relatively quickly, such as Ireland.
“We are bringing genuine competition to a market that has been lacking it for so long by offering an app-based personal and business current account that is free and loaded with a host of smart money management tools,” Frean said.
“With no branch networks and no legacy IT systems to maintain, we have a much lower cost base than the legacy banks. They can try to copy our features, but they can’t copy our cost base.”
Not all rosy
Things aren’t all rosy for the newcomers, however. Earlier this year, Revolut found itself facing the prospect of losing its EU banking licence over alleged links to the Kremlin. Meanwhile, last year, Monzo announced its losses had quadrupled in the space of a year as it pushed hard to compete with the established banks.
But on the flipside, the biggest challengers are seeing major venture capital firms flock to them, with N26 alone raising $300m in funding in January, followed by Starling raising £175m in the space of a week.
Finding itself somewhere in the middle between established banks and these mobile-only challengers, KBC and Gillen see the growth of companies such as Revolut and N26 as the start of fintech finally starting to do what analysts and experts claimed was happening in the space.
“Two years ago, maybe we might have thought the fintech revolution was overplayed so far as we hadn’t seen any dramatic changing of the landscape,” he said. “We definitely are starting to see a ‘phase two’ in that they haven’t dramatically changed the landscape, but they have changed how everyone is now working within it. I think it’s fair to say that the fintechs brought a real change of focus to traditional banks in the innovation and customer experience area.”