The challenger bank playbook: A deep dive
Finextra reports on the rise of the challenger bank economy in Asia, as Money20/20 prepares to open its doors to a new wave of disruptors and innovators in Singapore next week.
As challengers – established firms – and neobanks – digital mobile outfits – are not burdened with legacy technology, they are able to disrupt the status quo. These organisations have taken off in the UK because of the traditional industry having adopted digital banking from the late 1990s.
According to KPMG’s global head of banking and capital markets Judd Caplain, this phenomenon has expanded immensely and there are now more than 100 challenger banks operating worldwide. Caplain lists Asian players such as China’s MyBank backed by titan Alibaba, WeBank launched by conglomerate Tencent, Digibank of India, Vietnam’s Timo, Japanese outfit Jibun Bank and South Korea’s K Bank and Kakao Bank as success stories.
While new initiatives are being established by traditional players, the entry of non-banks and challenger banks in this space has resulted in a shift. Challenger banks are disrupting the banking model, scaling to build retail propositions in this region and are expanding into lucrative spaces such as SME banking.
Caplain stated that “because most don’t offer a full suite of services, they’re also less hampered by regulatory requirements. All of this means that challengers and neobanks are moving ahead faster in developing countries such as China and India, where established brick-and-mortar are relatively rare.”
In addition to this, the Asian landscape is seeing tech giants leverage their core customer base to move into financial services and the incumbent banks are fighting back with their own digital-only subsidiary launches.
“Right now, the established players enjoy the best of both worlds, having augmented their full-service models with digital banking. They’ve created innovation and fintech groups — consisting of young employees often located outside the orbit of their mainstream culture — whose ideas get embedded
into the traditional business models.
“Still, established banks are paying close attention to the challengers and neobanks, with the understanding that within 10 years, millennials will drive the delivery of banking services. They have much to learn from these digital game changers,” Caplain added.
The new incumbents
Money20/20 refers to neobanks as “incumbent challenger banks” and as Drew Graham, having worked in fintech strategy for several global banks and built multiple financial technology companies, explains: “the emergence of the very term ‘incumbent challenger’ as a contradictory misnomer shows how they’ve evolved.”
Graham continues: “A challenger is meant to challenge, is meant to disrupt, and not all incumbents are comfortable with this concept. To truly be a challenger, it has to be attacking new markets or developing a new value system and at the moment incumbent challengers in general are going after existing, or possibly overlapping, markets with largely the same value system.
“They are mostly technology innovation plays, commonly bolting a new frontend onto the existing product engines and occasionally rethinking the system through to the core. Much more can be done to innovate on the business model, which itself is a function of the culture that leads true challengers to stand apart.”
In Europe, after the financial crisis, a new space opened for fintech startups to attack this market and while as Graham says, more could be done in this arena, at the time, Western banks were paralysed with lawsuits, fines and regulatory requirements.
Europe vs. Asia
In an interview with Finextra TV, Pat Patel, Money20/20’s global content director, said that “if you look at Asia in particular, we’re starting to see not only fintech challenger banks – and there’s a few of those, probably not as strong or as credible as what we’re seeing in Europe – we’re also seeing some of the tech giants, or Internet giants, launching challenger banks themselves.”
Referencing Tencent’s WeBank and Ant Financial’s MyBank, Patel highlighted how fast these companies are scaling. Kakao Bank is a special success story after garnering over 40 million users over the past two years; “they’re leveraging customers from its core business and providing a variety of services in a cost-effective way,” Patel said.
Patel also added that there are interesting movements occurring in Hong Kong with more and more banking licenses being granted and there could potentially be a few exciting announcements being made at Money20/20 Asia. Alongside this, with Standard Chartered, HSBC, UOB and DBS having announced the launch of digital banks, this creates an interesting dynamic between the three entities: traditional players, challengers and neobanks.
But how do Asian players compare to the European challengers? Patel said “if you look at the likes of Monzo and Starling Bank, their equivalence in Asia is probably still in the early days and there’s a few of those. There’s a company called Volt Bank in Australia that recently got its banking license, and then you’ve got a bank called Neat, but they’re still quite a bit behind the curve compared to Monzo and Starling.”
A look to Australia
However, Australia remained relatively unaffected by the financial crisis and the trust issues that impacted banks in other countries took longer to become transparent. In conversation with Finextra, co-founder and CEO of Volt Bank Steve Weston, highlights that in Australia, because the lack of noticeable problems in the banking sector, there wasn’t the same desire to bring more competition to the market.
“Australian banks thought they were better behaved than banks in other countries but in the last couple of years it has become apparent that this wasn’t the case. Like occurred in the UK, this has seen the Government intervene to introduce new competition into the banking sector in Australia.
“It wasn’t until May 2017 when the Government copied key banking competition initiatives from the UK that it was possible for Volt Bank to get a banking licence. These initiatives included the call for an open banking review.”
Weston explains that in order to form his neobank, he learned from what European challengers had done well and from what they hadn’t done so well. “The world has changed incredibly in the last few years and technology capability has come along in leaps and bounds particularly with cloud-hosting, and the cost of that technology has come down massively.
“Also, the use of data analytics and machine learning has progressed a lifetime in recent years so when starting a digital bank today, you’re making very different decisions to what you would have a few years ago. Around the world and particularly in Australia, there has been a loss of trust between banks and the community that they serve and there has been a push for more competition.
“In the UK, neobanks are getting really good customer traction. We expect the same to occur with the Australian millennial population, who research shows are the most likely millennial population of any Western country to switch banks. They won’t do what mum and dad did: have a groan or a grumble about their bank, but not change.”
Constructing the Asian neobank
Graham expands on this point and explores how there is a path for neobanks, which he defines as those without a banking licence, to evolve into challengers in Europe. “Monzo, Revolut and N26 all went down this route. There is no similar trodden path in most markets in Asia, and so the Asian neobanks have a bit more uncertainty which acts as a friction point for fundraising and, therefore, all the downstream activities.
“Some are going down the platform route, some down the banking partnership route, and some down the European-style route hoping for eventual regulatory approval. Because of the trodden path in Europe, neobanks per-se can move quicker and can be perceived to be ahead, but that’s only a slice of the overall market.”
Graham adds that “the act of actually building a bank from scratch is hard, but not impractically so. The technology required is progressive, but not cutting-edge. The architecture and development techniques already exist as common best-practice. The patterns for CX are well known. Many regulators are comfortable with cloud.
“The challenges are mostly financial, legal and cultural. Banking remains a capital-intensive business. The conversations around compliance and risk models have been framed by the incumbents which mean applying genuinely innovative solutions is a challenging conversation.
“Banks have spent a long time making profitable products which iterate minimally on the previously profitable products. It’s understandable, but merely throwing concepts like ‘innovation’ and ’digital’ into the existing processes won’t lead to different outcomes.”
The future is platform
As a final note, Graham explains that in Europe, “unbundling will be followed by rebundling and consolidation as the overall winners will start to emerge in the consumer retail banking space. In Asia, banks as consumer-facing entities will become slowly, and then suddenly, less relevant as the Alibaba-, Tencent- and Softbank-backed platforms start to monopolise the consumer digital experience.”
The platform ecology model will be one of the main themes at Money20/20 Asia because the dominance of the likes of Tencent and Ant Financial in China has driven a new type of business model, which is now moving from the B2C to the B2B space.
Chinese tech giants are now becoming technology providers to banks and this superapp model for banks will replace core banking infrastructure.