The New Wave Of Challenger Banks: How Will Digital-Only Banks Shake Up Financial Services?

One of the biggest disruptors to the banking sector is the significant growth of challenger banks.

Since 2012, 21 new providers hoping to rival the Big Five have been granted a license by the Bank of England.

The latest to be given the green light is Tandem Bank, a digital-only bank due to launch this year.  It will join Atom, the UK’s first digital-only challenger, which gained its license in June and which has recently struck a deal with Spanish Bank BBVA

Rather than a high-street presence, these digital-only providers aim to take advantage of the increasing popularity of mobile and online banking by providing their customers with what Tandem bank describes as a “slick, intuitive mobile and web experience.”

This new wave of challenger banks is rapidly gaining momentum, and there is no doubt that digital-only providers such as Atom and Tandem are set to shake up the UK financial services industry. Anthony Thompson, founder of Atom, has even claimed that it can be “as disruptive as Uber”.

So what does the future hold for digital-only banks? Can they really compete with the Big Five?

Our research suggests there is already significant consumer confidence in these digital-only providers. A third (31 percent) believe that a digital-only bank would offer better mobile and digital banking services than a traditional bank. Additionally, 14 percent say they would trust a digital-only bank more than their traditional bank, and 16 percent believe digital-only banks will have fewer security problems than their traditional counterparts.

This is hardly surprising, given more customers than ever use digital channels as the primary way of managing their finances. The latest data from the ONS shows that 56 percent of UK adults regularly use internet banking, and this trend is rising year on year. In addition, recent research by the BBA found UK customers will use mobile banking 895 million times this year, double the number of branch interactions.

According to a recent survey by Interim Partners, more than three quarters of banking sector executives believe challenger banks have a significant technological edge over high-street rivals. Digital only challengers are uniquely able to innovate digitally since they do not have to work around the legacy systems prevalent in larger banks. As a result, they are more agile, and can cater to this increasing appetite for digital money management, providing customers with more innovative tools and channels.

Plus, incumbent banks are still recovering from the reputational damage they suffered during the 2008 financial crisis. In contrast, these digital challengers are setting up their reputations from scratch. Atom intends to rely on word-of-mouth instead of standard promotional tools to generate new customers. The aim is to build a customer base who appreciate it for its ease, reliability and most importantly trustworthiness.

Despite this, there are certainly challenges ahead for digital-only providers.  Andrew Bailey, chief executive of the Prudential Regulation Authority, said he fears ‘institutions overreaching themselves with balance sheets that don’t necessarily support their growth’.

There is an undeniable difference here between the larger banks and the challengers. Britain’s biggest banks typically have balance sheets of £500bn and above, whereas the biggest challenger has no more than £40bn.

Regulation poses another threat. According to Paul Lynam, chief executive of challenger bank Secure Trust, recent Basel proposals which could be imposed on the UK by the EBA would favour what he describes as the “Too Big to Fail Banks”. He therefore argues that a Brexit would benefit the smaller players.

There is no doubt that these new comers still have work to do to establish themselves in the market place. But, by focussing on the customer, and on the experiences they provide, digital-only offerings are likely to garner trust.

Banks that are willing to embrace customer-centric digital and mobile models will not only cut costs but offer engaging and relevant propositions to a group of customers which is largely unsatisfied by an industry that is not keeping up with the pace set by others around them.

As a partner of Atom, we are hugely excited about the innovations it and others plan to bring to customers in the future. For example, Atom has recently revealed that it will be using face and voice recognition rather than passwords to keep accounts safe. The challengers will ultimately compete with larger rivals through a superior digital led customer experience.

What is certain is that the introduction of digital-only banks will shake up the personal banking sector. More competition, more choice and an increased focus on mobile and banking services guarantee that digital-only banks entering the UK market will be a big win for consumers.

Simon Cadbury is director of strategy and innovation at Intelligent Environments.

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