How Challengers are Forcing FSPs to Upgrade Digital Strategy in Finance

In the past, banking was a fairly simple activity that would consist of checking deposits and basic loans. But today, even traditional financial service providers (FSPs) are rethinking and building a comprehensive digital strategy to expand their digital capabilities as fintech startups and challenger banks continue to gain popularity. They are building their brand identities with new competitive smartphone apps, increasing online investment facilities, and developing other technologies through partnerships within or outside the finance industry.

To compete, banks and other financial service providers must create an effective digital strategy to keep up with newly created fintech startups and challenger banks that offer greater convenience without requiring a physical branch location. Financial service providers must also work to offer digital services, digital solutions via applications, and upgrade their overall digital presence. To do that, they will need to up their digital capabilities independently or forge partnerships in the digital ecosystem and bridge the gap in customer experience expectations for enhanced digital engagement.

Digital transformation comes with new opportunities for growth and a new business model that has revolutionized the way people go about their day-to-day banking and financial operations. Ease, flexibility, and user convenience only scratch the surface of what digital challengers provide. Unmatched customer experience, top-notch security, and tailored digital tools personalized to meet customers’ needs and goals are the real catch.

Fintechs driving innovation and improving access to financial services

Digital disruption is at the heart of the fintech revolution as financial service providers explore new technologies that can drive innovation and deliver an improved customer experience. Fintech started as a concept with companies solving industry pain points. As the industry matured, it shifted its focus to innovation to drive business growth and create long-lasting value by engaging customers with next-generation technologies. This has birthed a variety of emerging fintech companies challenging existing financial institutions. This transformation has also led to opportunities for startups to disrupt the financial services industry and smaller traditional financial institutions.

Over the past decade, we have witnessed comprehensive technology-enabled changes across the financial services sector. In this new environment, banks are no longer the final authority in conducting transactions. Technology has effectively empowered customers to pursue financial transactions on their own through both online and mobile channels. Today, fintech companies are trying hard to disrupt banking by providing innovative financial products and improving existing ones.

What are digital challengers?

Challenger banks, originally coined as ‘challenger brands’ by Jim Stengel (former global marketing officer of P&G) in 2004, are a new breed of banking institutions that aim to compete with larger, and usually older, banking institutions. These start-up banks source funding to provide high-quality customer services through lower fees and easier access than their competitors. Essentially, they want to change the game.

Digital challengers are always facing off with the world of financial services in some way, shape, or form. These new entrants are looking to shake up the status quo maintained by the traditional banks and provide something fresh to customers.

Digital challenger banks, usually with small to medium retail operations, are ushering in an exciting era in finance for customers. They were founded to compete with larger and more established banking institutions by offering better services at a lower cost. Their success can be attributed to competition. Existing banks like Barclays now offer current accounts completely free of charge with no charges for overseas transfers and cash withdrawals, thanks to their newfound competitors: digital challengers such as Starling, Atom Bank, Monese, and Tandem. Banks such as Monzo, Tandem, and Fidor offer current accounts and banking services that are strictly focused on mobile capabilities with modern design aesthetics.

The financial services industry is seeing an influx of startups aiming to challenge the status quo and shake up the current financial sector. Most people assume startups such as BlueVest, Metro Bank, and Atom Bank are disrupting existing banks. However, closer examination reveals that these organizations and such digital initiatives can be classified as ‘Challengers’ rather than ‘Disruptors’.

How are challenger banks challenging traditional FSPs?

Challengers are often characterized as ‘new age’ banks that have lower fees and more innovative features. Challenger banks continue to bring much-needed diversity to the financial system, improve the customer experience, and provide services that only the most agile businesses can. These digitally native financial institutions are deconstructing the banking value chain and pushing the industry's boundaries. Growing fast, these new competitors are taking over significant chunks of the market share.

These digitally native banks are a new breed of companies challenging long-standing banks and changing the face of the industry. These are no longer limited to fintech entrepreneurs. This new category is characterized by scaling up much faster than traditional challenger banks, increased risks, and higher entry barriers. They have been able to find regulatory loopholes and sidestep more onerous regulations. This protects consumers but stifles competition. But how do we classify these digitally native banks? Is there anything that differentiates them, compared to the old digital-first banks?

Digital challengers have been capable of achieving better performance in financial services as they reshape and form platforms within and across the traditional banking ecosystem. They also offer customers more service channels, deeper insights, and more developed personalization capabilities to fight for customer economics. They move alongside the speed of new technology, evolving business strategy, and digital marketing capability to create a competitive advantage that traditional banks cannot provide.

1. Digital Challengers are taking a customer-centric approach in product and service models

Challengers stand out from the rest of the pack in their use of data. They collect client datasets in various ways such as affordability checks, individualized insights, and tailored products. The ‘human element’ is not overlooked—neobanks invest in an extremely high level of quality customer service, which cannot be undervalued. These human-centered practices and cleverly crafted digital strategy serve in multiple ways to bring about a consummate experience for the end client.

To digitally challenge the financial space, banks are continually investing heavily in bettering the customer experience. Leading challengers are investing their gains and revenue into R&D and customer service. Over the years, challenger banks have adopted artificial intelligence (AI), voice control, chatbots, simple digital wallets, avatars, predictive analytics, and advanced security tools. Banks and credit unions are exploring new technologies to stay ahead of the competition. All the while, they continue to innovate to create an experience that is more personalized than ever before.

2. Digital challengers are redefining customer experience

Digital challengers aren’t just nibbling at the heels of highly-established financial industry giants—they’re taking full-power bites right out of their business and digital strategy. Digital challengers are leveraging the internet’s potential to provide consumers with a better user experience in emerging markets such as mobile payments and peer-to-peer funding. Digital challengers such as Chime, Commonwealth Bank of Australia, insurance giant Root, among many others are also shifting the landscape in auto insurance, small business banking, and investment services.

Financial service providers have been facing an ongoing change and are trying to figure out how to avoid losing their traditional customer base. They have to simultaneously offer a more efficient and cost-effective service to the digitally savvy customers of today. Digital challengers coming from the wealth management industry like Betterment, Schwedagon Invest, other fintech loan companies such as Better, Blend, and Point, and stockbrokers like Robinhood have been disrupting incumbents and their strategies with their cutting-edge customer service approach. Investors are now trading on mobile apps where you can execute any operation in under one minute and rates are cheaper than ever, thanks to new technologies used by competitors (API-based pricing).

The digital shift offers a dramatic opportunity to redefine the customer experience. With growing expectations of seamless and sophisticated access to financial services, holding on to current customer bases by firing off new features is simply not enough. Going digital will fundamentally help banks and financial institutions tangibly improve their business models, and therefore, their overall performance, in four ways:

• Serving their customers better
• Expanding their businesses with new offerings
• Enhancing their operational efficiency
• Capturing more value

Stripe, PayTM, and Google Pay are examples of online-only financial products and payment gateways that have ushered in revolutions in the financial sector by offering clients a smooth and personalized experience.

3. Digital challengers are bringing personalization to the financial forefront

It is no longer a secret that several low-cost fintech start-ups are rolling out next-gen digital solutions to help customers manage their money better. These digital challengers are wielding non-traditional ideas and business models and challenging the status quo maintained by older banks serving this segment for years. Being online first, these challengers connect with users directly via their apps, apart from an excellent digital strategy that helps them reach consumers through social media and websites.

Here are a few ways that digital challengers are distinguishing themselves from the competition:

1. Spending and saving analysis, control options, and account activity push alerts are all part of this smart money management system.
2. Data gathering, applied analytics, and AI are all being utilized to increase customization and respond faster to customer activities. Everything from fraud and risk detection to real-time credit or balance transfer offers based on customer behavior is covered.
3. A combination of decreased operating costs, revenue from open banking solution partners, and a stronger focus on interchange enable lower or no-fee models.

What does the future of digital finance look like?

Next-gen banks will tap deep into consumer behavior and unearth more personal insights, helping them to offer services that serve financial needs with a fitting experience. With this in mind, digital banks are surging forward by completely revamping the way they engage their customers today, using AI and NLP to move to the next level of digital retail banking.

To better understand how your financial services business can compete with digital challengers in the current financial landscape get in touch with us at marketing@altudo.co. Our financial technology experts will help you chart the right digital strategy roadmap to take your business to the next level.