Customer demands are high, with digital natives setting the expectations for the banking industry – prioritising interactive experiences, insisting on service delivery across multiple touchpoints and regarding real-time access to information as a basic requirement. And this is the very minimum. To win and retain customers, banking providers need to build business models that allow constant innovation.

Challenger banks are in a great position to gain market share in this digital environment, fulfilling a need that either isn’t being met or isn’t being met fast enough by incumbent banks. Traditional banks’ legacy systems – built decades before our current digital era – lack the agility to support the delivery of customer-centric products and services. After all, they weren’t designed with apps and instant access to services in mind. Although banks are working to modernise these core systems, even the most efficient legacy infrastructure is no match for cloud-based platforms conceived and executed with consideration of our needs as digital consumers.

Playing catch-up

But that doesn’t mean the established players aren’t upping the ante. EY’s Global Banking Outlook 2018 report states that 85% of banks cited implementation of a digital transformation programme as a key business priority for 2018. So, while these banks aren’t able to ditch their legacy systems – and as a result can’t achieve the agility of the digital-first, digital-only players – they can throw significant resources at developing dedicated digital business initiatives. However, this doesn’t guarantee success.

The challenger edge is that digital really is first – the number-one driver of their business operations, not an add-on or after-thought. It’s an approach that’s delivering more of what we want from banking. Research shows that UK challenger banks are making a mark on the banking landscape, with Starling Bank and Monzo topping a 2018 British Bank Awards customer satisfaction survey table. Flexible, open, cloud-based systems are behind this, allowing challenger banks to operate more simply and cost effectively, adapt to customer demands faster and target new, niche segments with more agility than the big banks can muster. 

It’s no wonder that RBS – languishing in 15^th in the aforementioned banking league table – has engaged Starling to help develop a digital bank of its own. This proves that it’s the mindset not the money that matters.

Carving – and keeping – competitive advantage

Success rests on delivering fully integrated, end-to-end digital banking experiences, exactly as digital natives expect. For this, you need to:

1. Understand your customer to inspire loyalty. Game-changing functionality and features? We hear this a lot, but how often do we see truly original functionality in banking services? And is this really what dictates their satisfaction levels? The truth is, sometimes it’s the simple things that impress. In a Capgemini and Efma survey, the number-one factor influencing customers’ decision to stay with a bank was ease and convenience of use. The message: just make things work – well.
2. Focus on personalised offerings to differentiate your services. By leveraging data, you can get a deeper understanding of your customers and both their current and future needs. Developing this part of your business opens up opportunities to delight your customers. Save them time by offering them the services they need, when they need them. Position your brand as an anticipator of customer requirements. Be a trusted adviser that understands the pressures of modern living and provides relevant solutions to real daily challenges. It’s not just about tailored marketing, though. We could see a banking future where core products are customised – a modular approach to banking services, if you like, where customers choose the elements that suit their lifestyles and needs.
3. Collaborate with a technology partner that shares your vision for innovation and enables agile working in the cloud to support your digital operating model. Delivering highly personalised, tailored banking services demands a highly agile infrastructure. If we take the example above of customers selecting components of services, it makes sense that the infrastructure serving those needs must reflect that very same model: flexible, open, modular. This is the key to delivering both personalised services and a consistent end-user experience. This is what customers expect – and it’s how reputations are made.

There seems little doubt that challengers are in a strong position, but they need to capitalise on their competitive advantage fast in order to get the big customer numbers that will really make a dent in incumbents’ market share.