Banking Fintech

Consolidation of challenger banks may shape the future of the industry

Written by Devie Mohan

It’s an interesting time to be a challenger bank, with mixed fortunes in an industry that’s grown and matured. Devie Mohan believes consolidation is the key to future success.

The challenger banking world has seen some tremendous ups and downs in the past few months. Last year started off very positive, of course, with several new players obtaining banking licences, and seemingly daily announcements of new players announcing the desire to enter the fray. And there were several announcements of new funds coming into the industry as well. Over $850m in funds have gone into the challenger banking industry.

Then we started seeing the small issues: early challenger banks were taking far too long to see profits. Metro Bank expects its first year of profits in 2017 after being in operation for over seven years. There was also the failure of challenger banks in meeting the lofty expectations placed on them. According to the Competition and Markets Authority, only 3% of customers with traditional banks switched their personal banking accounts last year.

There were also issues that seemed to threaten the very existence and future of the challenger banks. Some asked customers to close their accounts when they withdrew too much cash, for instance, while others lost their licences when their funding didn’t come through as planned.

In the last few months, this space has seen another shift in direction. We’ve seen several fintech firms, who earlier focused on niche fintech segments such as payments or lending, have now announced their plans to be challengers. Just a few days ago, Swedish fintech firm Klarna received its banking licence, thus becoming the largest European fintech firm to enter the fray. SoFi, the fintech firm that has captured the lucrative student lending market in the US, has recently applied for a banking licence, so too lending firm Zopa in the UK. TransferWise has announced its plans to start offering borderless accounts on its existing licence, and Revolut, BABB and FairFX have also announced their interest in the challenger banking space.

B2B challenger banking

This interest is clearly a sign that the industry has grown and matured, and has definitely come a long way since the report we did at Burnmark on challenger banking just seven months ago. The need for further segmentation has become increasingly important in this crowded space – for us to watch, analyse, understand and guide the developments in the space.

The challenger banking space is highly crowded, and is seeing new entrants every week. Image by Burnmark

The term ‘challenger bank’ originated in the UK, and the vast majority of challengers are still in the UK thanks to a friendly regulatory environment and the traditionally strong fintech and entrepreneurial ecosystem (what happens after Brexit is a different discussion to be had!). However, the number of challenger banks globally are now almost on par with those in the UK, and our definition of ‘challenger banking’ has expanded to include any primarily digital bank that challenges existing products or processes in a traditional bank.

B2B challenger banks. Image by BurnmarkWe have also seen the emergence of a B2B challenger banking segment with significant global appeal. These include challengers that provide banking-as-a-platform services to traditional or other challenger banks. The amount of collaboration between challenger banks has also been an inspirational sign, with partnerships already announced between Starling Bank and TransferWise, TD Bank and Moven, and WSFS Bank and ZenBanx (which SoFi later acquired).

We’ve also seen highly niche segments emerging in the space, with some banks clearly targeting heavily underserved segments such as small and medium businesses, freelancers, immigrants, refugees and students. These are usually segments traditional banks never gave much attention to, or found profitability with.Image by Burnmark

One of the key questions we asked in the report was how all the challenger banks are going to compete in the same market and try to acquire the same customers. That question, unfortunately, still remains. My research firm, Burnmark, conducted a survey of existing challenger bank users to understand:

  • why they use a challenger bank
  • whether they would shift back to their old bank
  • how comfortable they are using a fully digital channel to operate their bank accounts.

The findings from this research has brought on some interesting stories, as well as data on where we think the industry is headed. We have seen in our research that there is significant potential for traditional and challenger banks to work together. We believe consolidation may be the future of this industry. These findings will be presented and published at Money20/20 Europe next week, and we’ll publish another blog right here on BankNXT with more details. Please keep an eye out for it, and I’ll see you in Copenhagen!

READ NEXT: The great filter for digital challenger banks

Main image: IvanRiver,

About the author

Devie Mohan

Devie Mohan is a fintech industry adviser and analyst based in London. She is the co-founder and CEO of Burnmark, a fintech research company, and is a panel member on the ING group Think Forward initiative on better financial decision making. Devie is actively involved in the fintech community and has been listed in CityAM's Top 10 Fintech Powerlist, and in Innotribe's Fintech Power Women list.

1 Comment

  • All true, unfortunately. Definitions and trend change very rapidly, but the key issue stays the same. How to get a profitable business model with high acquisition costs and thin margins? And even if today’s technology is much cheaper, sustainable scale is still too high and will push first wave and more recent challengers towards more cross-selling, which needs banking license. And license brings in huge compliance costs. Consolidation among challengers could happen, but I rather expect M&A with incumbents as a more effective exit strategy for VC funds

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