The changing face of banking - Big banks, challenger banks & neo-challengers



With NatWest investing £50.4m into fintech Vodeno Group just a few weeks ago as a strategic move to offer embedded finance solutions to their corporate customers, and JP Morgan recently agreeing to acquire payments start-up Renovite in a bid to tackle threats from fintech companies such as Stripe and Block, it's clear that the world of banking has now been well and truly disrupted by fintech.

Reportedly, there are over 1,600 fintech businesses in the UK alone, with 42% of financial services partnering with fintech firms to provide services, including; digital banking, peer-to-peer lending, payment gateways, micro-loans and digital wallets.

Traditional banks – Investments, partnerships & acquisitions

The traditional big players in the banking arena have seen how fintech solutions can solve specific problems for corporate and retail customers and offer them superior service. As a result, the Big Banks have wanted to get in on the act by either investing in partnerships and acquisitions with fintech companies to modernise their offerings from within – such as Bank of America & Zelle, Barclays & Flux and ING & Minna Technologies – or investing in building their own fintech arm such as Chase, the digital bank owned by JP Morgan. 

Not only do the Big Banks want to offer these improved tech services to their clients as an added feature to differentiate from each other, but most now feel that they must offer digital solutions to compete with the many fintech companies that are now becoming challenger banks as they are increasingly granted banking licences. Challenger banks such as Monzo, Revolut and Starling Bank are gaining market share as customers look for innovative ways to manage their money. Millennials and Gen Zs often feel that traditional banking is irrelevant to them in the digital age.

With the potential loss of customers on the horizon for traditional banks, the fastest way for many to bolt on fintech services is through partnerships and acquisitions. Not only does this save time, but it also can be cheaper than creating in-house digital solutions. However, for those who want complete ownership of their operations, some banks are choosing to build platforms from scratch to retain control and potentially save costs in the long term. The downside of this is that it requires some pretty hefty investment at the start and takes time to get up and running, with time being something the Big Banks may not have if they want to remain competitive in the present.

Challenger banks being challenged

So challenger banks are the future? You could argue that mainly 'yes 'is the answer to that question, but perhaps somewhat surprisingly, challenger banks are suddenly being challenged themselves. There is no doubt that challenger banks seem to be making significant gains for all the reasons already set out above, but as with all innovation, there is always someone waiting to come along with the next new thing and in this case, that 'thing' is the emergence of neo-challenger banks.

Challenger banks have always prided themselves on using fintech to solve a specific problem or streamline a particular service and build up from that platform to create a fully digital banking offering which is convenient, accessible to all and based on improved customer experience. 

The newest version of this goes further as neo-challengers focus on hyper-personalisation to attract their clientele. Driven by ever-evolving customer demand, these neo-challenger banks offer services tailored to individuals by lifestyle, profession and even religion. 

For example, Daylight, which caters to the LGBTQ+, offers bank cards with the account holder's chosen name regardless of what their ID says. BankMD, a US neo-challenger built for doctors, offers loans for those looking to start their practice. Fardows, aimed at Muslim customers, has accounts designed to allow for borrowing money in an entirely halal-compliant way. There is even a bank for musicians called Nerve, which not only has tailored financial features targeted at the unpredictable life of a performer but also syncs with Spotify to show streaming and follower data and offers a networking feature to aid discovery and collaboration.

This is more than marketing a brand to a particular audience. The neo-challenger banks feel that offering these genuinely unique features helps them to appeal to different communities, making it easier for them to become profitable, as supported by recent research from Deloitte suggesting that customers are willing to pay up to 20% more for hyper-personalised financial products.

With the original challenger banks being driven by tech and innovation, the likely outcome is that challengers and neo-challengers will work together to create solutions that further benefit the customer, building on the stronger foundations of the existing challenger banks incorporating the hyper-personalised features of the neo-generation.

Non-financial business challengers

Finally, there is another area where the banking industry is being further challenged, and that is within non-financial businesses that have realised that they can embed financial products into non-financial spaces allowing almost any company to gain access to banking products for their customers, such as loans, cards, virtual accounts, insurance, cross-border payments and foreign exchange.

According to recent research, 75% of UK, Germany and Belgium retailers are already using embedded finance. Its success again lies in hyper-personalisation based on customer spending data which can provide essential information about the potential client's needs.

The future

So traditional banks have much to work on if they want to compete in the evolving financial services market. Even established challenger banks need to ensure they are staying ahead of the game by creating hyper-personalised offerings or collaborating with those already using them.

However, in this time of financial uncertainty, with the cost-of-living crisis and recession-battered global economy, it will perhaps be interesting to see whether people revert to the trusted stalwarts of banking as a more stable option for where to keep their money or if we are too far past the point of no return, with established challenger banks, and their even newer counterparts, continuing to disrupt the world of banking and grow even further in popularity as the way forward for the future of banking.

One thing that is clear is that the Big Banks must innovate to keep up in the fintech age.

If you are looking for a new challenge in fintech or need top tech professionals to join your team, contact McGregor Boyall today and find out how our expert recruiters can help you.