Monday, 31 August 2015

What makes a challenger bank a digital challenger bank?

Let’s face it challenger banks are nothing new they have been around for a long time. In the UK there has always been a large number of challenger banks – the Co-op, Yorkshire Bank, Clydesdale Bank, Alliance & Leicester, Bradford & Bingley, Abbey National, Nationwide Building Society to name just a few past and present challengers. In Australia you would look at the likes of Bendigo, Bank West, BoQ as examples. However despite there being the challengers in the market, the share that the Big Four (in the UK) or the Four Pillars (in Australia) have not fundamentally been impacted by the presence of the challengers.

Over the last few weeks in the UK a number of the new challenger banks have been reporting their results. The UK’s Sunday Times produced the chart below: 
 
This shows just how the share price of some of the challenger banks has risen despite the stormy market conditions due to delivering a good set of results. Whilst the market share all three of these banks have picked up is good considering where they have started from, it is still tiny in comparison to the share of the Big Four banks. Even if they continued at the rate that they are growing at it would take years for them to have a significant share.
What each of these challenger banks have in common is that there basis for competition is entirely traditional and they are competing in exactly the same way, albeit providing a marginally better service, that the Big Four banks go to market, so why is there any surprise that their impact is so little?
Some of the other challengers will argue that they are providing customers with a better experience by providing customer lounges, opening longer hours, providing a debit card immediately in branch on opening an accout, offering drive through services or putting edgy images on credit cards. However these are cosmetic changes and are not fundamentally challenging the way that banking services have been procured for the last two hundred years.
For the challenger banks to make any significant impact on the incumbent players they need to become digital challenger banks.
What is a digital challenger bank?
The terms ‘challenger bank’ and ‘digital’ are continually bandied around with little common agreement as to what they mean.
For the purpose of this argument a digital challenger bank is one that fundamentally changes the way that customers experience and procure banking services, that acts in real time based on customer insight and demand, is available 24x7 and is accessible across any channel and most importantly is agile being able to rapidly adapt to changes in the way that the customer wants and needs to do business.
Taking each of these parts of the definition what does that mean for a bank wanting to become a challenger bank?
Being truly driven by the customer
For too long banking has been operating on a push model where the bank is in the driving seat pushing its products, operating its processes. While many banks talk about being customer centric they still take an inside out view of customers that asks the question what can the bank sell/do for a customer rather than an outside in view which is answering the question what does the customer want of its financial services providers. Without this fundamental change in thinking it will not be possible to be successful in the long term.
Real Time
The whole banking system is still upon a branch based architecture, even those without branches. The fundamental philospohy is that branches hold accounts (hence the sort code that each account has), that at the end of the day branches tally up their accounts (which is why they traditionally closed at 3pm so the branch staff could do this before going home) and then post those accounts to Head Office. Overnight the transactions between branches and other banks are reconciled and at the beginning of the day the cycle all starts again. However in the digital ages consumers expect their service provider to not only to be available 24x7 but also the information that they share to be absolutely current and accurate. While most banks simulate real time to more or less an extent their IT architectures are batch-based and historical. Hours of every night are spent reconciling accounts and establishing at one moment of time the financial position of the bank.
With the arrival of mature real time, high performance supercomputing platforms true real time banking has finally arrived.  This means that it is possible at any time to have a real time financial position.
Customers have grown used to expecting real time. When they search Google they don’t expect to see only search results as of last night. When they go on Facebook they expect to see their friends’ latest updates not as of two hours ago. They expect the same from their banks.
Without using supercomputing realtime platforms the digital challenger bank will not be able to deliver the experience that customers are demanding.
Driven by customer insight
Customers do not expect to have to repeat the information that their banks should already know about them every time they interact with their bank. When they go onto Amazon, Spotify or any other digital native business they expect tailored recommendations and therefore they should be able to expect the same from their bank. Underpinning the recommendations that these digital native organisations make is real time analytics.
Many banks have large and sophisticated analytics teams, however they are almost exclusively working offline i.e. not based on current, real time transactional data let alone the masses of amount of data that customers generate from their use of social media.
The digital challenger bank will be driven by real-time customer insight and predictive analytics that has drawn on structured and unstructured, internal and external, transactional and social data. This will allow them to provide a far better service than the incumbent banks can.
Available 24x7 365 days a year
Customers do not want to do their banking when the bank says they can. They want to be able to do it whenever they want to do it from wherever they are in the world. This means that banks need highly resilient, high performance IT infrastructures.
The costs to own, manage and run such an IT infrastructure is likely to be prohibitive for almost all challenger banks except for those with the deepest pockets. However the smart challenger will not look to own this, but rather give responsibility for delivering this to organisations whose core competence is delivering this type of service.
You only have to look at the hundreds and thousands of small businesses that rely on Amazon Web Services to host and manage their websites allowing the SME to focus on their customers to realise that ownership of IT is no longer an essential part of running a successful business.
Omnichannel
An ugly word and one that doesn’t encapsulate the full meaning of what customers want, however as it is in common usage the one that is used here. Customers wants to be able carry out their financial services transactions using any channel whether it be in a branch (yes some customers still want to use them despite what every Fintech evangelist says), Apple Watch, mobile or tablet. Not only that they want to be able to move around channels during a financial transaction seamlessly without having to re-enter data or waiting for one channel to catch up with another. The way that the experience of interacting on the channel is presented must be in the context of that channel. Too often banks believe they have achieved this when they have simply automated a form on a mobile device.
Without offering a functionally rich mobile experience a bank cannot be a digital challenger.
A digital challenger bank should have a contextual presence on all the channels that their customers want. However some digital challenger banks, for instance Atom (mobile banking), will choose to support only some channels  and so will dictate the customers that they will attract.
Agile
The one certainty in banking is that there is no certainty. Who could have predicted five years ago that largest taxi company in the world would own no taxis? The pace of change means that no one can predict how financial services will be delivered in five years let alone any longer than that. This means that for the digital challenger bank the most important competence is agility. Agility is a core weapon that a digital challenger bank needs to have to overcome the incumbent banks many of whom are saddled with legacy processes enforced by legacy IT.
One significant way of addressing agility is by the use of standardised software operating in the cloud. The reason that this aids agility is that whereas typically on premise software is updated once very eighteen months by half of customers, cloud software providers are able to automatically update the software as frequently as once a quarter or whenever needed. This means that a challenger banks that uses standardised software can adapt its customer proposition far faster than a similar organisation with an on premise solution.
The need for agility has a fundamental impact both the way that the business is run and how it is supported by IT. A unified, simplified business and IT architecture provides an advantage for a digital challenger bank. Picking best of breed solutions without the context of an overall architecture brings the danger of building a new inflexible legacy. Even with the benefits of an overall architectural framework it still means that there will be high amounts of integration effort.
CRAMS
The IT and consultancy industries are full of acronyms, but for a digital challenger bank to be more than a nuisance to the incumbent banks then it really needs to adopt Cloud, Real time, Analytics, Mobile and Social technologies.
While the incumbents can also adopt these for the digital challenger bank to succeed it must be a master of agility.

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