Ambitious Challenger Banks Are Fighting the Big Players

By David Mitchell, President at NYMBUS

The digital revolution in the last couple of years has been a hard pill to swallow for the big banks. With up and coming ‘new-age’ financial institutions (FIs)​ challenging the status quo, the major players have been forced to up their game or hang up their boots.

Customers are increasingly looking beyond just the services​ offer​ed​, searching for a more enjoyable and frictionless experience along the way. We’ve become accustomed to having everything at ​the​ touch of a button, with entire generations growing up not knowing the joyful experience that is the bank branch.

Not surprising then to see the presence of so called “challenger banks” growing stronger year on year. These smaller ​institutions are exploiting the opportunities where the main players are to​o​ slow to adopt. But what exactly are they getting right that the traditional FIs can’t seem to grasp?

There are two game-changing elements to this and the answer will often be categorized under one of them: IT and Customer Service.

IT is splitting the field

The biggest issue for traditional banks is their IT infrastructure. They are relying on old, out-dated legacy systems that simply cannot keep up. Technology is the main separator when it comes to the old and the new. ​So w​hy don’t they just implement new technologies?

The simple answer is that most of the old​ ​organizational infrastructures in use by long-established banks are too complex to change at the drop of a hat. So complex in many instances that even the employees working for these institutions don’t have a complete understanding of the system functionality.

This is clearly a problem. A reliance on legacy systems has caused many functions to be duplicated, wasting time and resources.

On the other hand there are a growing number of small and mid-size banks, including credit unions, who​ are​ not constricted by out-dated systems. They understand that customers want speed and efficiency. Additionally, they have the advantage of not having to dismantle an entire business infrastructure in order to implement ​new ideas.

Using ​fresh technology means ​these ​smaller FIs are proving easier to transact with, getting rid of the red tape that so often cloud the main players. This is attracting a new breed of client. Simpler means time effective which, in the long run, means cost effective.

Simpler is often ​also ​a key performance indicator whereby stakeholders measure a bank’s proficiency. An IT-enabled simplification means challenger banks are ticking more of the right boxes that enhance the cost/benefit ratio.

In order to keep up, the big banks will have to spend millions of dollars to update legacy systems to propel them into the modern age. This is not impossible but, in order to do so, will take up a lot of time in preparation and planning, using valuable resources whilst at the same time maintaining a smooth operation of the day to day business.

Traditional FIs therefore have to divide their attention between updating to keep up while still providing services to hold on to a dwindling client base. The challenger banks know this and are exploiting the opportunities that this has given them.

While the conventional banks are focused on transforming legacy systems, the smaller, more nimble banks and credit unions jump into the market with innovative and robust products. They can focus on their core technology to ensure that it’s adaptive and agile; hedging against the risk of swift changes in the market eco-system.

Modern alternative players in the banking industry therefore have the benefit of learning from the mistakes of their traditional counterparts and developing intelligent IT solutions that are adaptive to ​evolving customer preferences.

Superior service

Another way ​these ​”challenger​s”​ are competing with traditional organizations is by offering excellent new deals and providing an enhanced service. All through convenient channels like online and mobile platforms.

In the modern age it’s all about the individual customer.​ Financial institutions need to be able to develop products according to customer needs. However, many traditional banks still approach this the wrong way around. They develop products that they hope will fill their client​’s needs.

The issue here is that the established banks are too set in their ways. The inflexibility of the services on offer has not gone unnoticed with customers. It seems that the smaller ​institutions​ can more easily convert and adapt to new technology because they are not as big, and therefore, not stuck with the heavily installed mainframes.

It’s clear that a technology driven service is something customers are craving for. It makes sense as well. Online and mobile banking has grown significantly year over year, making the bank branch almost obsolete. Challenger banks are able to provide a fast and efficient service, all from the comfort of the customer’s home, office or wherever their busy lives take them. The traditional FIs are struggling to keep up.

​Challenger banks are also able to implement superior services through the utilization of big data. Banks hold vast amounts of usable data on each and every individual that transacts with them. The issue lies in transforming that data into usable information that enables the development of tailored customer products.

It can be very costly to achieve this with out-dated legacy systems.​ ​With new technology they are able to develop modern, adaptable systems including an infrastructure that is specifically designed to make use of big data in a cost effective way.​ ​By utilizing client data in a more effective way, they are able to up​-​sell specific products to specific customers. This will not only ensure that resources are not wasted trying to sell unwanted services to disgruntled patrons, it will also increase customer satisfaction by actually offering them products that might be of interest to them.

​Let’s not overlook security and transparency​ as additionally crucial customer service elements.​ Many customers have lost their trust in the major FIs. The challenger banks know this and are looking to exploit it. They ​are able to provide simple yet innovative products with increased security, removing the doubt that many of the conventional banks are now stigmatized with.

Transformational technology, coupled with the old legacy core systems used by traditional financial institutions, means challenger banks and credit unions will continue to bite at the heels of big banks. While legacy, reputation and a wealth of data are still very relevant and important attributes it would be unwise to ignore the fact that we live in the technological age where adaptability is key. Just as Apple took over the cellphone market by introducing the iPhone and offering seamless user interface and continuous technological growth, so will the challenger banks if the big players choose to ignore the needs of the consumer.