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Challenger Banks Have Arrived. Why? What’s Next?

Banking

As part of our series on the six banking trends to watch, we’re introducing trend #2: the rise of challenger banks. 

Challenger banks are typically defined as digital-only retail banks that “challenge” the traditional business model by charging customers low fees, offering faster services, and creating a better user experience through an always-available digital interface. The movement toward challenger banks began in Europe where there are far fewer big banks, and customers were quicker to adopt a digital-first approach to banking. 

But this trend doesn’t mean that traditional banking is on its way out. Read on to discover what challenger banks and legacy systems can learn from each other.

Challenger banks attract high stakes investments

Over the past couple of years, challenger banks have been making headlines and attracting huge sums of capital from investment firms around the world. In July of 2019, N26 and MoneyLion both raised $170M and $160M respectively.

Slowly, challenger banks are becoming household names, and an increasing number of them are starting to pop up all over the world. In the United States, players like Simple (a digital-only bank that was purchased by BBVA Compass in 2014), Chime, N26 (which came over from Germany and is backed by VC titan, Peter Thiel), and MoneyLion have begun to disturb the banking space.

Disruptive business models and faster transactions

The most important thing to note about challenger banks is that they’re creating new business models and improving the customer experience. A customer can open an account in a few minutes via a mobile app, the banks offer little to no fees, and in some instances, customers can receive their paychecks up to two days early. Because these banks don’t carry the burden of legacy technology or a large branch network, they’re able to do things more quickly to disrupt the status quo. 

Partnering with BaaS providers

It’s also becoming much easier for challenger banks to offer banking services with Banking as a Service (BaaS) providers, such as Cambr, BBVA Open, Green Dot, and The Bancorp. These companies offer solutions for managing banking and debit card accounts. BaaS providers take care of the regulatory and infrastructure pieces while the partners can innovate and create the next generation of financial products.

Challenger banks’ missing piece

Although challenger banks, which are especially attractive to millenials, are moving quickly in developing new customer experiences, they have one critical flaw: They don’t offer the full suite of products and services that millennials will need as they mature (e.g., retail and small business loans, financial advice). Most don’t even have a customer support number for live help, and the email support they provide is less than perfect.

As customers grow older and their financial services needs change, challenger banks will find it more difficult to compete against the more traditional banks. 

Traditional banks are catching up

Traditional banks are staying vigilant and are working to launch their own digital solutions. A perfect example is Goldman Sachs, the investment bank. In 2016, they rolled out Marcus, which is an online bank offering competitive rates on savings account, liquid CDs, and unsecured personal loans. Marcus, however, doesn’t offer checking accounts or debit cards for spending. In early 2019, however, Goldman Sachs partnered with Apple to make the Apple card available.

The trend will be to see more banks either build their own digital-first options or partner with challenger banks, such as Axos partnering with N26 or BBVA Compass partnering with — and ultimately purchasing — Simple in 2014. 

Meeting customers where their needs are

Over time, as millennials become more lucrative clients, traditional banks should invest in their digital transformation to meet those needs. In order to compete, traditional banks need to digitize their current business processes and begin to think about how they can partner with both traditional and non-traditional financial services players. Challenger banks may be on the rise, but they won’t be ready to supplant traditional financial institutions any time soon.

Need competitive solutions to give you an edge in the banking industry? See what Silverline has to offer.

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