What is a challenger bank for?
Six reasons for an incumbent bank to launch a challenger brand
The last couple of months have seen JP Morgan close its digital bank Finn, as well as BPCE close the UK arm of its digital bank, Fidor. This has led to a lot of speculation about whether it’s possible to run a disruptive business within an incumbent organisation. But, it also raises a simpler point. When does it make sense to launch a challenger bank?
The rise of the challenger bank
Challenger banks are definitely in vogue. In the aftermath of the financial crisis, regulators sought to introduce more competition into their domestic banking markets. One of the most progressive was the UK regulator, which lowered capital requirements for start-up banks as well shortened the application process, leading to a influx of new competitors. But many jurisdictions, including the UK, also introduced Open Banking legislation, which obliges banks to share customer data with third-party providers, also increasing competition.
In addition to the regulators’ efforts, technology has also lowered barriers to entry. Infrastructure services like AWS have reduced start-up costs while smartphones have opened up distribution at the same time as making possible new digital features, such as remote, paperless customer onboarding.
The result has been an explosion in the number of new companies offering banking services — 17% of all companies having been created since 2005, according to Accenture.
Different business models
But digital banks are not just banks without branches. They are offering something different. Part of this is about customer experience — they have built their offerings from scratch…