In 2020 we experienced a rapid surge in challenger banks entering the market, driven initially by low-tech incumbents not meeting customer needs, and accelerated by the pandemic fueling customer preferences for digital-first options.
While challenger banks are still relatively small compared to traditional financial institutions, there is no denying they are disrupting the banking industry in a big way by uprooting the fundamental and antiquated experience we’ve come to expect.
In Deloitte’s “DNA of Digital Challenger Banks” report, “challengers have developed a product offering and channel experience that targets the points of the value chain where incumbents’ weaknesses are most exposed and often not easy to fix.” This year, we’ve seen challengers set themselves apart by specializing in niche areas that are often underserved — like small businesses, millennials and underbanked individuals.
Digital-first banks specifically serving the business community have delivered a complete financial experience with advanced tools and features (including working capital, accounting integrations, digital wallets, and payment scheduling) accessible from a laptop or smartphone — without the processes, complexities or red tape that incumbents are known for.
As we head beyond the pandemic, we see a wide open market with plenty of opportunity not just for challenger banks but for financial technology as an industry to set themselves apart from incumbents to gain market share.
This year we saw an unprecedented level of investment in financial technology. The opportunity for growth within the payment and banking industry is driven by a number of factors. There are clear problems and tech-forward solutions readily available that are fueling excitement and intrigue from the investment community. Venture capital firms and banks are eager to fund innovative, agile products and services that improve on the speed, accessibility and transparency issues that are widespread throughout traditional financial institutions.
Now more than ever, firms are starting up and scaling operations regionally around the world — with challengers in the UK., U.S. and Australia rapidly expanding — while offering a global experience. This trend further proves that physical branch locations are not as important to today’s customers. Rather, account holders are craving digital-first experiences that prioritize convenient and faster services, rather than feeling frustrated by establishment services that have been too slow or inaccessible in comparison.
The growth we are seeing from challenger banks is substantial. And while the industry is still in its early stages, the winners will be determined by how novel their offering is. In order for the leaders in the space to survive against incumbents and against each other, challengers will need to focus on ensuring their services are more innovative and different compared to what exists today. If the service is going to yield minor incremental changes, it won’t be enough for the challenger to truly take off. The services that will do well are the ones providing a fundamentally different and forward-thinking customer experience.