Challenger banks attack the very core of what retail and commercial banking has been for hundreds of years. They question everything – from the necessity of a branch, to the efficacy of checks, cash and ATMS, to the sustainability of traditional revenue models. They go directly after consumers by offering a technology-enhanced and customer service rich banking experience. They offer a breath of fresh air in an industry that has failed to innovate at the pace required by today’s consumers.
At Narmi, we always challenge ourselves and our customers to be forward thinking – we anticipate and build the future of banking, instead of waiting for it. This ideology is critical when RCFI executives handle the threat of challenger banks. While RCFIs may not have customers closing accounts today for challenger banks, they must proactively address this possibility.
1) How do existing customers feel about other banking options that offer better technology and lower costs?
2) Why is the RCFI not attracting new members (especially those under 35 years old)?
With respect to #1, customers expect their financial institution to innovate on their behalf. This is part of the reason they trust their institution with their financial well-being. Any RCFI executive who believes he or she can afford to be behind the technology curve is playing a dangerous game. More often than not, existing customers do not want to switch financial institutions, but they do want to see their banking experience evolve and be on par with the latest technology. If RFCIs overestimate their stickiness with consumers and technological innovation does not occur, challenger banks quickly become very appealing alternatives.
#2 – an arguably much more important problem – has massive long term ramifications. Generally speaking, the average RCFI’s customer age rises every year. Institutions need to start thinking about how to attract younger account holders to boost growth and ensure their deposit base remains stable in the future. Younger consumers have no problem exploring other options and making quick decisions if they are not satisfied with their banking experience. The key is to avoid this situation all together and be forward thinking with respect to technology.
Challenger banks are not without their near-term obstacles. Regulators have not and will not give them an easy pass, but that will likely change. Their path to profitability, especially with their bare bones products, requires massive consumer scale, but also gets a lift from an inherently lower cost base. Regardless, RCFIs must ensure they are prepared when challenger banks overcome these obstacles.
Fortunately for the 10,000+ RCFIs in the United States, the majority of activity around challenger banks has been in Europe. Regulators abroad are more open to new bank charters and embracing the latest technology trends in financial services.
However, despite the uphill climb challenger banks face in the United States, the U.S. is not far off from following Europe’s footprint. A few digital-only banking alternatives have partnered with larger financial institutions to offer better user experiences and a mobile-first approach to banking. Outsized investment is also expected to flow into the industry via venture capital and international financiers.
Recently, The Wall Street Journal published an article which stated that lawmakers and regulators are more open to creating new community banks. In fact, the FDIC has planned a roadshow across the country this year promoting bank startups and a more transparent bank application process. This could potentially transform into new, federally insured, digital-only banks.
Irrespective of what the actual outcome of the roadshow is, the United States as a whole – both the government and consumers – is quickly becoming more amenable to banking disruptors. It’s no secret that bulge bracket banks are not well liked and mistrusted. This presents RCFIs with an opportunity to shine by proactively addressing the threat of challenger banks through the right and timely application of innovative banking technology.
Seem like a recurring theme from us? Strong financial technology is core to Narmi’s thesis on the industry’s future and we see it as crucial to any institution’s success. One question you should ask any vendor you partner with is “what is your five-year plan?” If you hear crickets or a mediocre response, this is a major red flag.
Ultimately, banking is a commodity. If a consumer requires a loan, a checking account or an insurance policy, he or she can visit any RCFI to obtain these products. Consumers do not leave institutions because, simply put, switching a bank account is a pain. No one wants to do it, so why give them a reason to leave?
This is where existing financial institutions have the advantage – they have incurred their customer acquisition cost (both in terms of time and money). While the thought of switching to a challenger bank may pique a customer’s interest, people quickly realize that the vast majority of challenger banks are extremely limited in their product offerings. Many challenger banks do not even offer credit cards, loans or commercial products. Given this, the main reasons a customer may switch quickly become confined to: better technology, a better brand or better service. RCFIs generally excel at the third, but need to invest in the first two.
This is especially important for attracting younger customers. If you are an RCFI executive, think about your Board of Directors, management team and executive team. How many people are under 30 years old? 40? If the answer is very few or even zero, how do you expect to fully understand what the younger generation requires from their financial institution? You can rely on your vendors, but only a handful proactively address this problem. Taking the necessary meetings with innovators in the industry and doing the right reading also helps tremendously.