Banking Fintech

The changing face of digital banking

The changing face of digital banking. Image: Designed by Kreativkolors - Freepik.com
Written by Gopal Iyer

Gopal Iyer considers the changing face of digital banking, looking at neobanks and challenger banks.

I still recall that as a young teenager, I used to accompany my father to the bank, as he wanted me to have an understanding of banking transaction procedures. When I look back and see how things have changed due to the digital revolution, and the distinct differences between how I bank and how my parents did, it makes me realise how far we’ve come.

I no longer walk into a bank for any of my needs, whether they involve cash deposits, fund transfers, bill payments or product purchases, including insurance and loans sold by banks.

Another industry where I see such radical transformation is transportation, thanks to Uber and Blablacar disrupting these traditional industries. At this stage, it’s quite certain that digital technology will continue to disrupt the fintech space, to increase the convenience and pleasure of banking for customers in the long run.

The banking industry embracing the digital phenomenon has two distinct models, neobanks and challenger banks, both of which are trying to reach out to customers with an attempt to smoothen and enrich the banking experience.

Neobanks

Neobanks offer an enhanced experience to customers. Although the financial products are standard (including current accounts, debit cards and cheque books), these banks distinguish themselves in their service offering. For instance, neobanks have the ability to forecast cash flows, or encourage savings through a virtual piggy bank account.

In a nutshell, neobanks have the potential to offer far better and more customised services than traditional banks. Prominent players in this space include Moven, Simple and GoBank, which aim to disrupt the banking services industry. However, neobanks do rely on partnering with a real bank to provide banking services. Simple, acquired by BBVA, has banking services provided by Bancorp (Trieu, 2016).

Neobanks are essentially becoming the favourite targets of traditional banks, as they can learn from the user experience of a neobank and merge it with their existing clientele. Whereas traditional banks tend to be established with a large client base, neobanks face challenges in terms of acquiring customers. Therefore, they rely on partner banks for infrastructure as well as costs (Trieu, 2016).

Challenger banks

While neobanks such as Moven and Number26 offer a first-hand mobile banking experience in collaboration with traditional banks, a new breed of upstart institutions called ‘challenger banks’ have applied to the regulatory authorities for banking licences.

In the UK, the FCA and PRA authorities have already approved banking licences for multiple startups. Prominent names in the challenger bank category include Tandem Bank, Mondo, Atom Bank and Fidor Bank (Bouvier, 2015).

This new breed of bank relies on technology-focused initiatives, and has an edge over traditional banks for the following reasons:

  • A startup institution that doesn’t rely on a traditional bank can fulfil customers’ needs from day one through data tools. These amazing, new institutions are in a position to advise customers to pick and choose the products and services that are most appropriate to them.
  • The ability to bridge the gap quickly between the need and its fulfilment ensures strong engagement between the client and the institution, something customers are usually dissatisfied with either at a branch or through an online platform (Bouvier, 2015).
  • Challenger banks have the benefit of technology from the initial phases, which in turn allows them to gain a superior edge to benefit from powerful data hubs. This enables them to analyse, monitor and act on data in a holistic fashion, unlike traditional banks that are dormant and clueless on how to utilise data in the case of mergers and acquisitions.
  • Finally, challenger banks’ ability to offer dynamic rates and competitive pricing enables them to secure high levels of customer satisfaction during their interactions or banking relationships.

Traditional banks struggle to achieve these successes, as their back-end and front-end technology platforms are designed in silos. Putting their data in silos makes it difficult to gain a holistic view of their customers’ needs (Bouvier, 2015).

Going forward, digital banking will revolutionise the way we consume banking services and products. The fintech space is certainly going to be disrupted by this new age of institution, which promises to transform the face of lending and borrowing mechanisms.

References: You’ve Heard of Neobanks, Now Get Ready for ‘Challenger’ Banks (Pascal Bouvier, 2015). Disruptive Finance and Fintech (Huy Nguyen Trieu)

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Designed by Kreativkolors – Freepik.com

About the author

Gopal Iyer

Gopal Iyer is a strategist at UK software company Hedgehog Lab.

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