From jumping through regulatory hoops, securing funding, establishing and marketing a new brand and building the infrastructure to manage transactions, data and information there is a huge amount to consider. Even so, competition is heating up, particularly when it comes to innovative products and services.

Developments in consumer behaviour, technology, regulation and investor sentiment mean that the outlook for financial services has changed significantly. More discerning and better-informed customers are raising the bar, and with it, expectations. Demands on products, flexibility, convenience and customer service are higher than they once were and these are all over and above the obvious point of differentiation: price.

Among providers – both new and old – there is also an increasing awareness of how digital technology and innovation is helping to underpin commercial success and a great deal of strategic thinking is now dedicated to interacting with clients and structuring organisations effectively. Many of the new challengers feel they can do this as well if not better than the traditional market incumbents, often adopting a digital-only strategy to help them get to market quickly and keep costs down.

A number of major hurdles still need to be cleared, though, not least the burden of regulatory permissions and obtaining funding. Robust and flexible systems and processes need to be in place to counter risk, while at the same time reducing operating costs and driving an efficient and effective customer experience. Achieving scale is also critical. Anyone wanting to set up a bank will require a significant amount of funding. New banks require potentially huge sums of capital before being given permission to trade by the regulator and it can be difficult for new entrants to prove sustainable and robust business models at the outset.

To ease some of these burdens, new entrants may choose to outsource to external providers to help smooth the process of getting to market. This provides the advantage of being able to utilise existing technology and processes making entry easier and more immediately scalable, notwithstanding the invaluable experience that comes from a third-party supplier that's dealt with these issues with other similar ventures many times over. Some may also look to develop their own in-house technology while also partnering with a third party for post-completion administration support, seeking to get the best of both worlds. Regardless of the approach, external support can enable new entrants to get to market more swiftly and efficiently and this is where third-party service providers come into their own.

Understandably, many businesses want to maintain ownership of key elements of their customer lifecycle. One proven approach here is to deploy a shared service model utilising the same processing platform. This hybrid strategy provides all with consistent and current data, business intelligence support enabling informed decisions, process efficiencies and seamless hand-offs between the outsource partner, the business and back again.

This kind of business model innovation may turn out to be one of the greatest innovations of all. Working with the right outsourcer can be transformational, enabling lenders access to progressive technology, smart processes, predictable costs, market insight along with operational and regulatory expertise and the ability to rapidly bring new products and propositions to market. It can also keep market entry costs low by reducing fixed-cost overheads – such as staff, technology and premises – along with investment in key servicing infrastructure.

Put simply, challenger banks need to choose where they want to excel – and then find partners who are great at the rest. Getting this right can solve major headaches, enable the business to be more flexible, more innovative and, ultimately, lead to superior and sustainable profitability.