Business & finance Science & tech

Challenger banks: making the most of digitisation

As challenger banks continue to disrupt the banking landscape, they are harnessing new technologies in a way the incumbents can’t match. But where are they making the biggest investments and why? Abi Millar explores.

 In April 2018, Metro Bank announced the release of an industry-first feature – a money-management service powered by artificial intelligence. The feature in question, Insights, will be able to analyse users’ spending patterns and spot trends and irregularities in their finances.

This might involve alerting customers to an auto-renewing subscription (so they can cancel it if need be) or flagging up a duplicate transaction (such as when you’re charged for the same cup of coffee twice).

As Metro Bank’s head of digital, Alex Park, tells EMEA Finance, the feature will go live this summer on their personal banking app.

“Insights really has two parts to it,” he says. “One is a retrospective part where you’ll be able to look back and drill down into how your money’s been spent. The other side is a prospective future-looking side, where we analyse your spending patterns in real time, and give you tips and alerts for better ways of managing your money. That’s where the AI comes in.”

He adds that the system will able to learn and improve based on its users’ input. You’ll have the ability to rate the ‘insights’ it generates, and see more or less of them depending on your ratings.

“We recognise that there’s a consumer demand for personal financial management tools, and we think this is groundbreaking, because nobody in the market has got anything like this out at the moment,” he says.

Metro, of course, is not the only challenger bank to be exploring data-driven insights. Tandem Bank has also begun to offer personalised recommendations based on customers’ spending habits, and others including Atom, Monzo and Starling are investing in similar technologies. Where Metro has the edge, claims Park, is in terms of its accuracy and sophistication.

“Typically a lot of the forward-looking stuff in the market is based on standing orders and direct debits, but we don’t think that catches everything. Insights includes your general spending patterns too,” he says.

Metro Bank’s announcement is just one example of a larger trend in banking – specifically, the dominance of challenger banks when it comes to digitisation. Famously agile and fast-moving, they tend to be singularly well-equipped to make the most of new tech.

To give a few more recent examples: Monzo has introduced a feature called ‘Nearby Friends’, which allows you to transfer payments seamlessly via Bluetooth. Starling now enables customers to use Google Pay within its app. The Revolut app lets users exchange cryptocurrencies, and has also introduced disposable virtual cards to safeguard against online fraud.

On top of this, there is clear scope for challenger banks to capitalise on the so-called ‘open banking revolution’. The UK’s open banking laws, which came into force in January, enable data sharing between banks and third parties, following the consumer’s consent.

Imran Gulamhuseinwala, trustee of the organisation overseeing Open Banking, has said: “It is difficult to overstate just how revolutionary open banking could, and should, be. New products will emerge from incumbents and entirely new entrants will join the market.”

Park says that Metro Bank is ‘definitely looking hard at the possibilities’, and points out that, unlike some of the incumbents, Metro Bank has had no issues with compliance.

“We were able to be compliant because we’ve got really clean systems and best-in-class technology – we use Google for our API layer,” he says. “We look at open banking as a really great opportunity for a bank like ours because we can move quickly, we’re not mired in legacy systems, and we can try out innovations quickly with third parties.”

This much has been true of challenger banks since the outset. Since challenger banks aren’t burdened by outdated IT systems, they are able to be more data-driven in their approach, and to set up cleaner-looking apps. And since the majority of these banks are digital only (Metro Bank being one of the rare exceptions), they can invest heavily in digital technologies without needing to funnel resources into their branches.

For some challenger banks, the perception of tech-savviness is part of what sustains them. Monzo, for instance, has always positioned itself as a mobile-first bank, and some three quarters of its users are under 40. The Guardian has asked whether the company might be ‘the Facebook of banking’.

For other challenger banks, however, cultivating this kind of image has never really been a goal. According to Antti-Jussi Suoninem, CEO of Holvi, digital tech is only important insofar as it can solve customers’ problems.

“I like to classify us as a financial services company because our mission is to help entrepreneurs in whatever they want to accomplish,” he tells EMEA Finance. “We are laser-focused on what their problems are and how we can solve them through technology. Our customers are typically not interested in new technology per se – they’re just interested in technology that helps them focus on their business.”

As a business banking service for freelancers, small businesses, and entrepreneurs, Holvi bills itself as ‘banking for makers and doers’. An online-only service, it incorporates paperless bookkeeping and invoicing into its app.

Suoninem thinks there’s actually nothing to stop the incumbents from releasing products of this kind – it’s simply that it isn’t their focus.

“Holvi’s parent bank, BBVA, is doing some really beautiful service design, so it doesn’t necessarily mean a big bank couldn’t do what we’re doing,” he tells EMEA finance. “If a big bank wanted to focus on a micro-entrepreneur segment and create some top-notch digital services for them, I’m sure it could.”

He adds that many traditional banks are being forced into a defensive posture, which may dampen down their enthusiasm for new technologies.

“The banks are the kings of the hill right now – they have a lot to lose so many try to protect their turf,” he says. “When you’re protecting instead of attacking, the psychology is such that you tend to feel that you’re losing all the time because someone’s taking small slices of your cake. Since banks are spending a lot of time defending themselves rather than trying to create new business, this takes their mind away from doing the sort of things we are.”

Another bank targeted at small businesses is Tide. Since launching last year, the service has grown rapidly – already, it accounts for one in twelve business current account openings in the UK.

“Tide is a varied sort of product, which is not at all just about basic banking services – it’s about finding smart ways with software that helps us to save small businesses time and money on top of a banking capability,” CEO George Bevis tells EMEA Finance.

While Tide is not shy about its ambitions – the bank wants to have 50 million small business clients globally in ten years time – it remains very much a niche product, serving a particular subset of customers.

The same is true for Holvi, and for many other challenger banks. Rather than offering a similar proposition to traditional banks (and therefore competing for the same pool of customers), they aim to capitalise on a certain area or target a specific demographic.

“Traditional banks deliver to a number of customers, and with the sheer size of the operation it’s difficult to focus on any one given customer group,” says Suoninem.

One particularly interesting example is Monese, which launched as Britain’s first mobile-only bank in 2015. It immediately set itself apart from the competition, both incumbents and fellow challengers, by enabling users to open a UK bank account in minutes without needing a UK address. This gave the bank an automatic customer base – expats and immigrants – who would otherwise have struggled to establish themselves in the UK.

Monese has now expanded to 20 countries across Europe, and (unusually for a challenger bank) does not tend to share its customers with other banks. A full 70% of its accounts are full-time primary bank accounts.

Challenger banks, then, are a varied mix, each with a slightly different customer proposition. Of course, what they lack in cumbersome legacy systems they also lack in longstanding customers, meaning it can be tough to convince people to make the switch. And while technology is central to their offering, it has to be something that will demonstrably help their users – there is no place here for bells and whistles.

One example might be the ways that users are asked to authenticate their identity. This process needs to be as secure as possible without being too complicated or time-consuming. Park believes that Metro Bank could be onto something that could help.

“We think biometrics are really interesting, and we’re about to embark on a programme to build something that’s market leading for our customers,” he says. “That’s an interesting space because reputation is forged on how secure the bank is, so there’s a great scope opportunity to be market leaders. New technology is enabling identity and authentication to actually become a proposition in its own right.”

Holvi, meanwhile, is looking to ride on a shift in the way work is organised, and help the growing army of freelancers throughout Europe.

“Over 70% of new jobs in EU are created in companies of less than 10 people, and according to one report there are over 60 million independent workers in the EU,” says Suoninem. “Our strategy is to give them significant time savings by digitising and automating their business banking. We want to provide this service across all EU geographies over time.”

Bevis, at Tide, believes that digital technologies are set to become ever more important as time goes by, with mobile-only banking services likely indicative of the way the market is going.

“I think the future of banking rests entirely on digital products – there’s no good reason why people would find it desirable to waste time talking to a human banker,” he says. “It will make banking faster, easier to use and cheaper, and I think we’re right at the forefront of that.”

This article appears in the August-September 2018 edition of EMEA Finance

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