The changing face of challenger banking – what does the future hold?

There is no question that challenger banking, especially in the UK, has revolutionised the way we look at financial services. The simplicity of transactions, transparency of fees and the ability to connect with your peers have helped millennials, as well as millennial-minded older generations, adopt challenger banking apps and websites to handle basic banking – especially around traditional products such as current accounts, savings and loans.

Much has been talked about why challenger banking has evolved and how well it handles the on-demand behaviour of the smartphone generation. What we need to understand deeper, however, is what this space will develop into in the future and what changes are already under way.

Customer acquisition is getting trickier and more expensive

43% of all challenger banks around the world offer only basic products

There have been over 20 challenger banks already launched just in the UK, and several more are in the licensing process. The products being offered by these challenger banks are fairly similar. Research undertaken by the team at Burnmark has shown that 43% of all challenger banks around the world offer only basic products such as current accounts and savings accounts. This means that a substantial number of them are competing with each other, targeting similar segments of the population. The rest of them offer a set of financial products including mortgages, SME lending, children’s savings and insurance – still focusing on traditional products. As the number of competing banks increases in this space with similar offerings, customer acquisition will become increasingly difficult and more expensive.

Consumer data owners will compete with challenger banks

Google, WeChat, Facebook, Uber and so on are, in a way, challenger banks themselves: they already have financial services underneath their core offerings. It’s possible to handle payments on Facebook, and Uber offers loans to drivers. The power and monetisation potential comes from “owning” the consumer – being the first destination for consumers’ needs and owning as much of the consumer data as possible – and this group is way ahead of the challenger banks in utilising consumer data (and masses of it) to offer well segmented financial services.

Millennials may no longer behave the way we expect

the future of challenger banking could be highly dependent on how this group evolves to handle banking and financial needs

The millennials of today (usually defined as born after 1980) have been the biggest adopters of social media, the biggest downloaders of apps and music, and the best proponents of open sharing. However, some research suggests that Generation Z (those born after 2000) may behave slightly differently. This is turning out to be a population that values trust and privacy immensely, much more than their older millennial peers. What if this generation chooses to not share their personal data with non-trusted apps and service providers? There hasn’t been a large-scale research project yet on this topic, but the future of challenger banking could be highly dependent on how this group evolves to handle banking and financial needs.

The demographics and economics in Europe are changing fast

The nature of consumers in Europe, and the economic conditions, are quickly changing. The potential impact of Brexit and the demographic changes from mass immigration are still not clear, and these are areas we will delve deeper into at Burnmark in the future. Changing interest rates, the nature of smartphone use, venture capital availability, tax and regulation policies, and trust issues with banking will all contribute to major changes in challenger banking. Whether this will help or hinder new banks coming up remains to be seen.

Read more about this in Burnmark’s challenger banking report.

Reprinted from