For well over a decade there has been a growing trend towards digital banking.  The rise in digital-only providers and a growing number of branch closures has many wondering whether traditional banking will become obsolete?  Yet despite popularity with a new generation of tech-savvy consumers and the changing habits of SMEs we are still some way from mass digital adoption. So, what does the future hold for the banking industry?

The competition is certainly hotting up so we take a look at how recent events have further impacted the market.

What is a challenger bank?

Smaller, digital-only challengers emerged recently on the scene, after the 2008 global financial crisis. They compete directly with the longer-established banks by disrupting or ‘challenging’ the market using modern financial practices. 

How challenger banking gives institutional banking a run for its money

Challenger banks differentiate themselves from big banks by their use of modern financial technology. They have moved away from the historic, bricks and mortar, centralised banking to offer digital solutions and online, app-based services. The result of this cutting edge fintech means that challenger banks are more mobile and highly adaptable.  They are not burdened with sluggish and inflexible legacy systems that the high street banks suffer.

Not only that, but by forsaking face-to-face transactional banking they avoid the soaring costs associated with running and staffing premises. Challenger banks are, therefore, more cost-efficient than the big banks. And the savings made go back into innovation, allowing digital banks to offer a wider portfolio of services to SMEs and pass returns back to their customers.

The problem challengers face is the weight and prestige more traditional banks hold in the banking sector – with an estimated 87% of current accounts in 2017 and 88% of main business accounts in 2019.

Nevertheless, trust is building, and the big bank market dominance is coming under pressure all the time. The rise in millennials has seen a growing tendency towards challengers increasing their market share.  A 2018 survey reported that in the UK, one in four under 37s have at least one account with a challenger bank.  

And it is not only consumers that are open to switching- new and smaller businesses are developing new attitudes towards these new banks. A 2019 study by the British Business Bank, found that amongst those who had contacted finance providers other than the ‘Big Five’, 20% had contacted a challenger bank.

Are challenger banks more vulnerable to the impact of current events?

There is an argument that challenger (neo-banks) may be more vulnerable to the effects of Brexit and the pandemic because they haven’t been around long enough to experience and endure an epidemic or economic downturn. The benign credit conditions of recent years have not truly tested their performance.

However, challengers would like to argue that the opposite is true and that given they are less likely to have big back books# and legacy systems, neo-banks may come out of the Covid-19 pandemic on top.

“We don’t really have anything of scale that’s going to give us trouble.” (Chris Sparks, CRO, Atom Bank)

Challenger banks are seizing the moment to outmanoeuvre traditional banks in the current conditions, especially in areas such as SME lending. Opportunities have arisen from small business owners losing confidence in the UK’s big banks, frustrated with their lending experience and treatment during the pandemic. New research from payment specialist Marqeta, reveals 67% of the UK’s smallest businesses are increasingly tempted to move across to digital challengers. 

Open banking is instrumental in offering more opportunities for businesses, and in many cases, challengers and fintechs have evolved to focus on niches or specific products to broaden their appeal. Some UK examples include GBB specialising in property development finance, Oxbury a bank entirely dedicated to British agriculture and the Shariah-compliant Gatehouse Bank.  In this way, by focusing on the customers’ needs, the new banks are offering competitive alternatives to further disrupt the market.

The trend towards digital has undeniably gathered momentum during the COVID-19 pandemic as people have had to become more accustomed to banking online and this is the arena that these fast-growing firms excel in. Without the burden of big bank bureaucracy and with more flexible working agendas perhaps challenger banks will lead the post-pandemic recovery.

How can challenger banks manage risk more effectively?

Despite their digital-heavy demeanour, challengers are very much real working banks, that must be regulated and authorised.  Many employ robust models of risk management and business continuity plans to develop resiliency for rapidly changing times, just like these.  This doesn’t prevent them from being accused of not managing risk effectively and particular concerns are surrounding their immaturity and fast growth.

To stay on top of risk, challenger banks need to keep up-to-date, keep challenging themselves and striving for better. Advanced technology is their forte and they can further embrace this by employing cutting edge software solutions to improve risk and compliance management.

Predicting the future

This is a pivotal moment for banks, and the competition has intensified! All banking firms will have to learn and adapt and stay relevant in the post-pandemic world. It is still too uncertain to say who will come out ahead in all this, but competition is certainly a good thing for the banking industry. With challengers spurring on traditional banks to innovate, and high street banks inspiring neo-banks to deliver humanity in high-stress situations, the battle still rages. For SMEs and the consumer though, the diversity this rivalry has produced undoubtedly provides plenty of possibilities.

For well over a decade there has been a growing trend towards digital banking.  The rise in digital-only providers and a growing number of branch closures has many wondering whether traditional banking will become obsolete?  Yet despite popularity with a new generation of tech-savvy consumers and the changing habits of SMEs we are still some way from mass digital adoption. So, what does the future hold for the banking industry?

The competition is certainly hotting up so we take a look at how recent events have further impacted the market.

What is a challenger bank?

Smaller, digital-only challengers emerged recently on the scene, after the 2008 global financial crisis. They compete directly with the longer-established banks by disrupting or ‘challenging’ the market using modern financial practices. 

How challenger banking gives institutional banking a run for its money

Challenger banks differentiate themselves from big banks by their use of modern financial technology. They have moved away from the historic, bricks and mortar, centralised banking to offer digital solutions and online, app-based services. The result of this cutting edge fintech means that challenger banks are more mobile and highly adaptable.  They are not burdened with sluggish and inflexible legacy systems that the high street banks suffer.

Not only that, but by forsaking face-to-face transactional banking they avoid the soaring costs associated with running and staffing premises. Challenger banks are, therefore, more cost-efficient than the big banks. And the savings made go back into innovation, allowing digital banks to offer a wider portfolio of services to SMEs and pass returns back to their customers.

The problem challengers face is the weight and prestige more traditional banks hold in the banking sector – with an estimated 87% of current accounts in 2017 and 88% of main business accounts in 2019.

Nevertheless, trust is building, and the big bank market dominance is coming under pressure all the time. The rise in millennials has seen a growing tendency towards challengers increasing their market share.  A 2018 survey reported that in the UK, one in four under 37s have at least one account with a challenger bank.  

And it is not only consumers that are open to switching- new and smaller businesses are developing new attitudes towards these new banks. A 2019 study by the British Business Bank, found that amongst those who had contacted finance providers other than the ‘Big Five’, 20% had contacted a challenger bank.

Are challenger banks more vulnerable to the impact of current events?

There is an argument that challenger (neo-banks) may be more vulnerable to the effects of Brexit and the pandemic because they haven’t been around long enough to experience and endure an epidemic or economic downturn. The benign credit conditions of recent years have not truly tested their performance.

However, challengers would like to argue that the opposite is true and that given they are less likely to have big back books and legacy systems, neo-banks may come out of the Covid-19 pandemic on top.

“We don’t really have anything of scale that’s going to give us trouble.” (Chris Sparks, CRO, Atom Bank)

Challenger banks are seizing the moment to outmanoeuvre traditional banks in the current conditions, especially in areas such as SME lending. Opportunities have arisen from small business owners losing confidence in the UK’s big banks, frustrated with their lending experience and treatment during the pandemic. New research from payment specialist Marqeta, reveals 67% of the UK’s smallest businesses are increasingly tempted to move across to digital challengers. 

Open banking is instrumental in offering more opportunities for businesses, and in many cases, challengers and fintechs have evolved to focus on niches or specific products to broaden their appeal. Some UK examples include GBB specialising in property development finance, Oxbury a bank entirely dedicated to British agriculture and the Shariah-compliant Gatehouse Bank.  In this way, by focusing on the customers’ needs, the new banks are offering competitive alternatives to further disrupt the market.

The trend towards digital has undeniably gathered momentum during the COVID-19 pandemic as people have had to become more accustomed to banking online and this is the arena that these fast-growing firms excel in. Without the burden of big bank bureaucracy and with more flexible working agendas perhaps challenger banks will lead the post-pandemic recovery.

How can challenger banks manage risk more effectively?

Despite their digital-heavy demeanour, challengers are very much real working banks, that must be regulated and authorised.  Many employ robust models of risk management and business continuity plans to develop resiliency for rapidly changing times, just like these.  This doesn’t prevent them from being accused of not managing risk effectively and particular concerns are surrounding their immaturity and fast growth.

To stay on top of risk, challenger banks need to keep up-to-date, keep challenging themselves and striving for better. Advanced technology is their forte and they can further embrace this by employing cutting edge software solutions to improve risk and compliance management.

Predicting the future

This is a pivotal moment for banks, and the competition has intensified! All banking firms will have to learn and adapt and stay relevant in the post-pandemic world. It is still too uncertain to say who will come out ahead in all this, but competition is certainly a good thing for the banking industry. With challengers spurring on traditional banks to innovate, and high street banks inspiring neo-banks to deliver humanity in high-stress situations, the battle still rages. For SMEs and the consumer though, the diversity this rivalry has produced undoubtedly provides plenty of possibilities.