Should Challenger Banks be Worried About Traditional Institutions Catching Up?

The rise of challenger banks has been a particular hallmark of the fintech industry over the last decade. Created to disrupt the traditional banking sector, challengers are full to the brim with innovative, often digital offerings aiming to serve customers in a variety of ways. With the customer taking centre stage and new found cooperation with incumbents,this month we explore some of the classic attributes of challenger banks and their efforts to stay one step ahead of the industry.

Challenger banks have made a clear footprint in the financial industry. However, with so much innovation also comes increased competition as the incumbent banks look to catch up with the ‘new kids on the block’. In light of this, we asked those in the industry whether challengers really need to be worried about the traditional institutions catching up. 

Consumer interests
Julia McColl, chief product officer at Chetwood FinancialJulia McColl, chief product officer at Chetwood Financial
Julia McColl

Julia McColl, Chief Product Officer at Chetwood Financial thinks it’s all about the customer. She said: Banks – challenger or not – should always be on top of customer trends – making sure we’re listening to our customers and that we’re building towards the future. But, challengers do this in a much more agile way than traditional banks can. At Chetwood, we’re always developing the next product. We’re always looking at gaps in the market that we can solve – and it’s something we’ll continue to do as fundamentally, that’s our business model.

“One of the biggest advantages we have over traditional banks is that we’re small enough and nimble enough to change and adapt quickly. As long as businesses like Chetwood are consciously driving that behaviour, we should continue to have that advantage over traditional banks. There are lots of examples where traditional banks have tried to be innovative, or drive change through a new brand, or side business. But problems set in when they try to integrate this back into the main business because the underlying platforms aren’t compatible. When this happens, they’re left with the choice of either keeping this innovative project open as a side business, which potentially creates a drain on business resources, or closing it having spent millions on what essentially becomes an experiment. As long as this is the case, challenger banks have nothing to fear when it comes to traditional banks ‘catching up’.”

Core differentiators

Vinay Prabhakar, VP Global Marketing, Volante Technologies, said: “Challenger banks, indeed all banks, should be worried about competitors catching up, whether those competitors are traditional institutions or other challengers.”

He continued: “The key though is not to react to competitive behaviours, but to focus on the basics: what are your core differentiators? How “sticky” are they? Can you give prospects a good reason to join you, and customers to stay with you? If you’re finding that your bank is losing ground to the competition, it’s not because they’re doing your job better than you are, it’s because they’re doing a better job of being themselves. Every financial institution, challenger or not, has a differentiated value proposition: find yours and the rest will follow.”

Mike Kraus, Principal at CMFG Ventures added: “Yes, the megabanks are spending billions on technology. Chase alone is spending $12billion each year and employs 50,000 ‘technologists.’

“While larger financial institutions have legacy technology and more bureaucracy that may slow them down, they have tremendous resources to innovate. We’re also seeing standalone “challenger” banks pop up at traditional banks along with “challenger-like” user experiences and features. HSBC, for example, has its own challenger bank, First Direct. It’s a race for banks to satisfy their existing customers, especially the younger demographic, before challengers take more market share.”

Running a different race
Jehan Sherjan, Insights Director at SRM Europe, Jehan Sherjan, Insights Director at SRM Europe, 
Jehan Sherjan, Insights Director at SRM Europe

Jehan Sherjan, Insights Director at SRM Europe, thinks that there is no direct competition between the two sectors.

“In the early days of what we now consider to be challenger banks, traditional banks believed that there was a need to catch up, and then keep up, with them in order to maintain market share,” he said.

“Indeed, RBS sought to address this scenario with the creation of Bó – its own ‘challenger’ brand.  However, after a period of internal beta testing, Bó was active in the UK banking sector for just six months before the decision to close it down.

“The reality is that when an established bank dabbles in approaches more commonly associated with fintech pioneers, it simply doesn’t resonate with their customers.  Those with an interest in that offer had already jumped ship as the early adopters of the challenger brands chose them exactly because they were different!

“So, whilst there may have initially been a sense of needing to catch up and keep up, traditional banks have largely come to realise that they’re simply running a different race, and continue to enjoy their broad customer base, who continue to stick with their historical provider through thick and thin, satisfied that they have largely addressed their digital shortfall required by post-pandemic customer expectations.

“That said, big banks have, in the most part, lost sight of the customer and continue to grapple with the challenge of how to best articulate and deliver on their purpose.  However, consumers largely don’t trust that banks will have their best interests at heart anyway so it’s perhaps a race which is unwinnable anyway.”

  • Polly is a journalist, content creator and general opinion holder from North Wales. She has written for a number of publications, usually hovering around the topics of fintech, tech, lifestyle and body positivity.