Why banks are innovating through new brands and spin-offs instead of changing from within.
When JP Morgan Chase launched Finn in October 2017, their aim was to create a mobile-first bank built around their younger customers’ needs.
Like Monzo, Revolut, and other neo-banks, Finn could be accessed from a smartphone app. There were no monthly fees. And the app was packed with features — such as auto-saving and spending limits — designed to address younger consumers’ financial challenges and expectations.
As Chase’s CEO of Digital Bill Wallace explained it:
“When it comes to money, millennials told us they don’t want to feel like they’re being judged. So, we designed Finn to put them in charge, no matter where or how they’re spending.”
Sadly, Chase’s gamble didn’t succeed, mainly because it did not seem to offer any value proposition they could not get elsewhere.
Over 18 months, it acquired a mere 47,000 customers — in comparison, market leader Ally had 1.5 million. As a result, Chase announced it would be shutting it down in 2019.
But while Chase’s foray into mobile-first banking didn’t deliver the results they were hoping for, this hasn’t stopped other traditional banks from launching their own digital offshoots.
If anything, this strategy is increasingly becoming the norm.
From challengers to challenged
Banks may be thought of as laggards in today’s fintech world. But throughout their history, they’ve been at the forefront of technological innovation. Barclays made banking location-independent in 1967 when it launched the first ATM. And the Nottingham Building Society ushered in the era of online banking in 1983 with Homelink, a system that was so advanced it even lets customers compare prices and shop online.
This all changed when Lehman Brothers crashed in September 2008. Having been blamed for the biggest recession since the Great Depression of 1929, banks spent the latter part of the 2000s and the first half of the 2010s dealing with the fallout. And this meant innovation had to be put on the back burner.
In the meantime, the proliferation of smartphones and continuous simplification of the regulatory environment allowed technology companies to enter and disrupt the market in a profound fashion. By the mid-2010s, the likes of Monzo, Revolut, and N26 had won over millions of customers and achieved unicorn status.
More to the point, customer expectations had shifted. Where many traditional banks still relied on outdated processes and systems, neo-banks kept setting the bar higher and higher, making banking faster, simpler, more convenient, and more personal.
Hitting the mainstream
According to research by Accenture, challenger banks will have 35 million customers in 2020 — triple the amount of customers they have today. Meanwhile, banks will be growing their customer base by less than 1%.
1 in 4 people under 37 now uses a challenger bank. And the lure of mobile-first isn’t attracting only Millennials. 14% of consumers across all age groups — yes, including Baby Boomers — have at least one mobile only-provider. The unicorns have shown customers a new, better way to bank, and a growing number of consumers are loving it.
Reinventing traditional banking
With challenger banks’ star on the rise, traditional banks have an existential choice to make — adapt or face irrelevance. Citi’s CEO for global consumer banking Stephen Bird puts it in these terms:
“We think of it as we are living through an extinction phase. It’s not an incremental thing, it’s an epochal shift.”
More and more banks are waking up to this. But they’re not reacting by changing themselves from within. Instead, they’re opting to create separate, stand-alone initiatives in a bid to outperform the challengers.
Let’s have a look at some of the mobile-first products banks have created and discuss how they’re pushing the envelope.
Owned by NatWest, Mettle bills itself as “the business account that helps you get ahead today.”
Sole traders and limited companies can open an account in minutes by downloading the Mettle app. But what sets it apart from a traditional business bank account are features such as invoicing, bookkeeping, payment tracking and performance forecasting, which are designed to help small businesses take control of their finances more generally.
NatWest’s Chief Executive of Commercial and Private Banking Alison Rose explains it this way:
“The premise for Mettle lets our customers focus on ‘forward-looking’ finances, combining technology and proactive insights so SMEs can make better decisions and run their businesses more successfully.”
Mettle isn’t an original concept. Another UK-based startup, Coconut, also offers business accounts that let sole traders and limited companies invoice, categorize expenses automatically, and even calculate how much tax is due in real-time.
But while, as a startup, Coconut has had to monetize, NatWest’s status as one of the Big 5 UK banks allows them to offer Mettle’s full set of features for free.
Launched by Goldman Sachs in 2016, Marcus offers mobile-first savings accounts and unsecured loans.
What stands out most about Marcus is that, where Goldman Sachs is best known for servicing high net worth individuals, Marcus targets the opposite demographic.
Marcus’ main draw is low fees on loans and the fact that you can get industry-leading savings interest on balances as small as $1 — features that would attract low to middle-income earners.
Unlike Finn, whose offering was so similar to Chase’s own that it ended up confusing customers, Marcus has been a resounding success for Goldman Sachs. In the fourth quarter of 2018, it racked up $35 billion in deposits. Even more impressive, the UK accounted for $7 billion of those deposits. This means that barely 8 months after launching in the UK, it had already surpassed established challengers like Atom Bank.
This success seems to have whetted Goldman Sachs’ appetite for retail banking, eventually leading it to collaborate on developing the Apple Card. This only serves to show how off-shooting new brands can help the incumbent banks to branch out in unexpected business lines which would have otherwise not been possible.
Atom Bank specializes in mobile-first mortgages, business loans, and savings accounts. Unlike Marcus, which is owned by Goldman Sachs, Atom Bank isn’t a traditional bank’s offshoot. It is backed by Spanish banking giant BBVA, which has invested £130.4 million (about $168 million) and has a 39% ownership stake.
Atom Bank differentiates itself in three ways. Firstly, there’s the speed. You can open a savings account in under 10 minutes. Secondly, it has low fees and low-interest rates on loans. Thirdly, the mortgage process is fully transparent. Customers have access to independent mortgage advice. And they can track the status of their application in the app, and get real-time updates.
By contrast, getting an update on your mortgage application from a traditional bank usually involves ringing them up and spending several minutes on hold.
As part of its wider strategy, BBVA has also invested in Holvi, a Finnish startup that offers a business account and features such as book-keeping, invoicing, and expense management.
The case for launching standalone brands
As these examples show, banks have woken up to the need to change, building initiatives aimed at challenging the challengers. But why create a new brand that, ultimately, will also compete for market share instead of changing their own systems from within? There are three chief reasons for banks to do this: legacy, experimentation, and survival.
The Problem With Legacy
Where challenger banks have started from scratch, banks have decades of legacy to contend with. The largest banks have hundreds of offices and thousands of employees spread across the world, meaning it’s simply not possible for them to be as agile and adaptable as fintechs.
At the same time, banks’ core business relies on old systems that might not easily integrate with innovative features. And ditching these systems isn’t always easy or straightforward.
Research from Temenos found that, for 32% of banks, legacy is the biggest obstacle to adopting new technology. In this context, spinning off affords banks the best of both worlds.
On the one hand, they can leverage their data, reputation, and client-base to give the new project a head start. On the other, they can start fresh, without the technological challenges legacy creates.
It’s easier to experiment
Separate brands afford banks the luxury of experimenting in a self-contained environment, without having to worry about legacy issues. Once the kinks have been ironed out, it’s easier to make wider changes across the whole organization.
HSBC has done this with its Connected Money app. The bank has argued that they’re not a tech company, nor do they want to be one. Rather, HSBC UK’s Head of Digital Raman Bhatia explains:
“The goal was to explore how open API technology could help customers in new ways by connecting their different financial products and service providers in one place”
With that goal achieved, it was time to start implementing their learnings into the bank’s core infrastructure.
The Quest For Survival
Gartner reckons that by 2030, up to 80% of traditional financial services firms will struggle to stay relevant, because of digitalization. Instead of trying to be something they aren’t, banks are reacting to this by choosing “self-disrupt.”
Their new mobile-first initiatives might poach customers from their traditional business. But those customers will stay within the group instead of moving to other challengers.
NatWest’s Head of Innovation Andy Ellis reasons that:
“You can have a passive, steady decline, or you can go bold. It requires the ability and attitude to listen to customers and evolve with them. And it requires that you hold your nerve, develop new capabilities and think in a different way.”
Looking ahead: the future of digital banking
Launching digital offshoots is becoming increasingly popular amongst traditional banks.
But will it be enough to help them thrive in the digital age?
Finn’s failure suggests that it isn’t. In order to succeed, banks have to understand what their customers want and deliver products that not only meet these expectations but deliver more value than their traditional offering.
Ultimately, the key to this may be a collaboration with the very businesses they compete with — fintechs. Traditional banks have data, powerful distribution networks, financial know-how, and established customer bases. In comparison, while fintechs’ grasp of infrastructure is improving, their biggest strength is that they’ve perfected the customer-facing experience.
Partnering together means banks and fintechs from both sides of the divide — that is fintechs on the retail site and also innovative fintech vendors on the solution supply side — can take advantage of each others’ strengths, ensuring their continued survival and creating products that give customers a faster, simpler, more convenient banking experience.