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How to create a challenger bank …

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I realise I come across sometimes as a bit whiny, crotchety and grumpy, so decided to upgrade the dialogue with what is positive and what can be done.

After critiquing all last week, I do like the challenger banks’ ways of providing more analytics and real-time updates to my way of spending. I like getting an update on my iPhone every time I swipe my card in a store; I like getting proactive alerts when there’s account activity; I like getting offers relevant to me, based upon my account spending; I like getting detailed statements of where and when I’ve spent, and not just a truncated message; I like having a coral and metal card that people actually comment upon, and say it’s cool; I like lots of stuff.

But I wrote about a lot of this stuff ten years ago. When Digital Bank appeared in 2014, the theme was how to launch a digital bank. I didn’t use the phraseology I use today: born on the internet, platform-based, open in an ecosystem, inclusive. Instead, I talked more about being real-time, data-leveraged and Apple cool. All the stuff the challengers deliver today but, as I say, it’s not reinventing finance. It’s evolving it.

Six years later, if I were launching a challenger bank, rather than a digital bank, I would add some new bells, whistles and quirks.

First, I would still do all of the above stuff: digital and mobile first, open and inclusive ... but that's just a hygiene factor. That's the baseline. That's just being digital.

Second, I would make my bank stand for something up-front. I’d take a stance. I’d build a bank that begins with a purpose. I’d fixate on the audience I want to reach and, if it’s GenZ, then I’d ask Greta Thunberg to be my face. It doesn’t have to be the climate emergency. It could be inequality, the social divide, homelessness, the breakdown of community, the health of the nation, whatever you want. These are traditionally things that community banks and mutuals have done well, and big banks cannot take this stance.

Big banks are perceived to purely stand for shareholder return and profit. A challenger bank can stand for something that actually means something.

Third, I would challenge the thinking of money and finance. What does it really stand for? Could we provide financial accounts to those who are excluded? How do we do that? The risk and exposures involved, how can they be mitigated?

I always remember a really simple idea that mBank in Poland shared with me. Worried about the entry of payday loan companies into the Polish markets, they asked: how do we compete with 15-minute loans? Their credit processes were a lengthy form filled in in-branch with a wet signature. The process took days. How do you compete with a real-time payday loan process?

Simple, they re-invented the process. The credit algorithms were programmed into a real-time analytics engine that enables any mBank app user to apply for a loan with pre-approved limit available all the time, anytime, even though that limit may change every day based upon your balance activity.

Real-time, constant, account analytics is the key here but, more than this, challenging the legacy mentality. The credit risk manager believed the analytics engine was impossible ... until the tech team showed it to her.

Fourth, I would see what I could do differently to benefit the customer. Could I remove fee overheads and internal costs and pass those back to the customer? This is the point I made the other day about Nubank in Brazil:

New customers apply for a card through their mobiles, with Nubank checking creditworthiness online using its own algorithms. Nubank charges no fees — it estimates this has saved $1.5 billion in fees clients would have otherwise paid to traditional banks.

It’s about the clever use of technology to avoid the overheads that traditional banks are happy to pay, as long as they can pass the cost to the customer, whilst challenger banks can pass the savings to the customer and show their behaviours are different.

Where can we cut corners, save costs, improve service, reduce overheads, whilst continuing bullet-proof security and minimising risk?

Start there … then go further.

This leads to the fifth point: what else can be done?

Bearing in mind that South American, Asian and African nations are leapfrogging European and North American nations, in terms of innovation with technology for financial inclusion, what could we copy from their experiences?

The use of QR codes, the ability to save almost nothing but still invest it, the loan for a minute, the account for free that is not subsidised by those who borrow …

What I’m getting at here is the radical departure from industrial era finance to digital era finance:

  • Industrial era finance invented annuity products, because it was too expensive to deal with customers more often then every twelve months;
  • Industrial era finance could not service customers below a certain level of income, as it would not cover the overheads of branch buildings and their army of staff;
  • Industrial era finance demanded 400 basis points differential between deposits and loans to cover that overhead cost;
  • Industrial era finance created a complex process for high value versus low value payments; and
  • Industrial era finance demanded layers of vetting and checking to allow a cross-border payment to move through the network.

When we move to digital era finance the cost of a high value payment is the same as a low value payment. As there are no buildings or humans involved – just servers and algorithms – we can process an investment in a second, a loan for a minute, insurance for an hour. Due to the removal of buildings with humans, we can reduce our basis points differential from 400 to under 100.  Thanks to being global and born on the internet for the mobile-first generation, we don’t need to develop and do everything. We can be platform-structured and cloud-based, reducing our costs further and further.

This leads to the sixth point: can we reinvent our products and structures? Our products and structures should be people-obsessed, not just customer-obsessed. We need structures that augment our staff; inform, educate and support the customer; and deliver the right results for the business and the shareholder. It needs to have both equality and equanimity.

Finally, I would test the new bank build with one fundamental question that came to me during 2020’s lockdown pandemic: would our new bank build be effective if a lockdown lasted forever?

Ask yourself: What would the world look like if we locked down forever?

No one believes this scenario will exist, but in February 2020, we thought things would be back to normal by July; in March, by September; and now, by when?

In 2020, we have all moved to video conferencing, doing all of our work online, in the cloud, working from home. That all happened in just a few months. What if that lasted forever? What business would you build for that scenario? What would happen if we were building our structures for pure digital and remote rails?  If we started afresh, what would our world look like as a truly digital world?

In other words, if you want to build a truly digital bank, build one for a world where no one ever leaves home. That’s a good start.

In summary, here are the seven points I would put in front of anyone considering launching a bank today:

  • Be truly digital
  • Stand for something
  • Challenge thinking
  • Be customer benefit obsessed
  • Look for innovation
  • Reinvent and don’t evolve
  • Test: could our bank succeed in a permanent lockdown?


Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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