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Challenger Banks are small retail banks which provide technology-driven solutions for a rich banking experience. Since 2014, challenger banks & neo banks (digital-only banks offering services on mobile & web applications) are on venture capitalists’ radar. According to a KPMG report, Britain’s Monzo raised US$93 million in November 2017, Atom Bank pulled in a total of $140 million and the digital-only Starling Bank raising $54 million in fresh funding.

The question may arise as to why we need challenger banks when we have traditional large-scale banks, which offer all retail banking services. Currently, the trend is changing from Conventional banking to digital-only, where customers want everything on their mobiles, tablets, and computers. The need to visit a physical branch or to call a relationship manager at home has reduced. With less infrastructure & resource costs, these new banks offer discounts & attract tech-savvy customers.

Categorization of Challenger Banks:

Name of Category Description Benefits
New banks (Also called as Large Challenger Banks) Full banking License & Operate individually
  • Predefined & targeted product set
  • No physical branch/ ATMs to save on physical infrastructure
Neo Banks (Also called as Small Challenger Banks) No banking license & operate with partner who has it
  • User-friendly mobile & web applications can be accessed from anywhere, anytime
  • No physical branch/ATMs to save on physical infrastructure
Beta banks Subsidiaries of large traditional banks & operate under parent bank license
  • Leverage existing customer base & market new offerings
  • Help parent bank reduce operational, infrastructure & resource cost
  • Leverage existing tech & ops teams

What are the Driving Factors for Challenger Banks?

Customers want innovative solutions to ease their financial wants & needs, and they look forward to their respective banking institutions. The rise of challenger banks are addressing these challenges with the below factors:

  • Challenger banks are faster in terms of delivering services to customers. With the aid of digital technologies, opening an account can take just 10 minutes, while the other processes become easy & painless.
  • Customization in services caters to a straight set of customers, thus reducing the cost of marketing & helping create a loyal customer base.
  • With reduced infrastructure costs & impressive features, challenger banks beat big banks in terms of interest rates & low fees
  • User-friendly state-of-art UX & front end pages with a modern design help the customer reduce on the cost of customer care services
  • As these banks target a set of customers, they have a well-defined product
  • Challenger banks have less regulatory changes & compliance issues compared to traditional banks

The above factors look promising, but there are a few challenges & concerns for these banks. The major challenge is data security. While conventional banks are fighting financial cybercrimes by improving their cybersecurity, they are still not able to achieve complete success. Challenger & neo banks will need to invest heavily on data security, at the cost of affecting profitability. The second concern is that when these banks share spending data with third party users to open up a more significant revenue stream, it may trigger a breach. Banking authorities will have to set strict rules concerning a customer’s consent.

The Future Roadmap

The banking market is becoming competitive day-by-day & innovations are moving at a fast pace. Small & large challenger banks are facing stiff competition from established banks. These beta banks are investing in new technologies like Artificial Intelligence, Machine Learning, Blockchain, Biometric Recognition, etc. The support from the parent bank is helping beta banks improve process efficiency, attract new customers and engage existing ones.

The use of the internet is growing at a rapid pace. According to the reports from Internet World Stats, 86% of Europe’s population, 88% of the US population & 69% of Australia’s population is using the internet. The internet penetration rate in Africa & Asia is exponentially increasing. Challenger banks possess agility, personalization & customer-centric products, and with technological advancements, they can fight the competition.

Established banks and traditional powerhouses have brands that signify trust. Established banks have augmented their channels with digital banking. Nevertheless, established banks are keeping a close eye on challenger banks given that in the next decade or so, as most of the population which uses banks actively is going to consist of millennials, challenger banks have technology-based solutions for various sections of society and for various needs. Challenger banks have to convince people to use their services before the established banks catch-up with the offerings.


About the Author

Subhasis Bandyopadhyay
General Manager, BFSI

Subhasis Bandyopadhyay heads the BFSI practice at Mindtree. He is responsible for offering leadership and direction for BFSI solutions, domain consulting, alliance management and domain competence building.

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