Challenger banks: Part 2 - shaping the digital banking (r)evolution?

Straight roads do not make skillful drivers

Money 2020 Europe has definitively offered some valuable insights into the challenger banks` vision and purpose that are critical to achieving such business goals. Among the event highlights there was the discussion between Martin Blessing, CEO of Commerzbank and Ricky Knox, founder of UK challenger bank Tandem.

Commerzbank is a global banking and financial services company founded in 1870 with its headquarters in Germany. Tandem secured its banking license at the end of 2015 and is set to launch later this year. It is part of the wave of app-only banks, including Atom Bank, Mondo, Number26 and Fidor Bank, all driven by the ambitious endeavour to challenge the industry giants.

When you have a startup and a traditional bank sharing the same stage, the first question that comes to mind is the following: what aces does the startup hold up its sleeve in its attempt to challenge a bank with 145 years of history and 16 million customers? According to its founder, Tandem is trying to do something different from what banks are doing right now. More specifically, the aim is to re-invent the world of a bank by fixing some hygiene factors, such as banks` current inefficiency to help customers manage their finances. In this context, Tandem’s Knox places all bets on the customer experience as key differentiator in his approach: “We can actually maximize customer lifetime benefit, rather than customer lifetime value”.

As appealing as it may sound, the online-only model has been questioned by Blessing throughout the debate, as he strongly believes that branches are still key. “I want to know where I can physically go if there is a problem and ask where my money is. This is also part of the trust relationship”.

For the Commerzbank CEO, the further development of current services such as telephone and internet banking would definitely reduce the gap between new and traditional players, thus clearly making branches a differentiating factor.

Interestingly enough, as different as they may be, both players have their challenges to address on their agenda and no straight roads to follow, as Chris Skinner, the panel moderator, notes in his blog post:

“The old school bank has 1,000 branches and wants less, while the upstart bank has one branch (the head office) and wants more. (…) The old school bank has 60 million customers, and innovation has to bring them along at their pace; the customer sets the pace of change. The upstart bank has no customers and has to work out how to get any of the lethargic account holders to bother to switch.”

Old school to new school: transforming the bank account

One particularly spirited conversation at the event was centered on the bank account and the move towards digitalization. The panel featured executives from Danske Bank, Citi, Sberbank and challenger bank Fidor, who touched upon the role of bank account, its reinvention, customer engagement and what the future holds for the bank-customer relationship.

The buzzwords of the day: Digital. Disruptive. Innovative

Throughout the discussions, which inevitably sparked lively debates around buzzwords such as digital, disruption and innovation, an interesting point was raised by Matthias Kroner, CEO of Fidor:

“What is digital? What is disruption? People often throw around those buzzwords without truly knowing what they mean. There might be new processes, but nothing truly disruptive. Banks think about digital solutions, yet they still send out applications via a mobile app that customers need to print out and deliver to a branch. If you have a legacy core banking system and you call it digital because you create an app on top of that, well to me that’s lipstick on the pig”.

In Kroner`s opinion “digital” has to do with high-speed banking, real-time banking. “What is the fastest loan you can supply? Can you ship a loan in a second? If you can’t do this, you aren’t digital. If you can’t do this in a profitable way, you aren’t digital. If you can do this in a micro way, you are digital. If you can do this on a Sunday, you are digital.”

Tonny Thierry Andersen, Danske Bank, took the discussion further by stating that, in order to survive, banks do not need a digital strategy, but rather a business strategy catering for the digital world.

The dangers of getting the Silicon Valley envy

Kroner went on to define what it takes for a company to be the bearer of the innovation flag by emphasizing that being innovative is a cultural task. “What is the culture of that particular company? Is the company able to deal with innovation? Is the company really mentally agile or is it only talking about agile?” Furthermore, that particular player needs to be a high-speed developing company, since digital itself is not a strategy.

That was when discussions reached a tipping point, thus instilling a sense of European pride among the audience in the room. According to Kroner, there is a certain danger in getting the Silicon Valley envy: how to be like them versus how we start to innovate internally: “In Europe, I think that we are very strong in terms of engineering innovation and there is nothing to envy in Silicon Valley. We do have far more interesting concepts that one might find in the US, a country with a very specific market driven by extreme inefficiencies.”

So at the end of the day, it`s all about understanding what unique assets Europe has and trying to make the best of it. Kroner`s advice? Be strong in your European self-understanding, we have a lot of engineering brain and wisdom!

In conclusion

While challenger banks may not yet pose much of a threat to the industry giants, they have certainly come a long way in the past few years. Money 2020 Europe has created a good context for these players to share their strong vision and prove that they have the potential and determination to reinvent the industry and the role of a bank in customers’ lives. Let`s see what happens next.

About the author

Adriana Screpnic is Editor-in-Chief at The Paypers. Adriana has been actively involved in covering online payments-related topics for five years now, taking on diverse and challenging tasks ranging from news editing and market research to writing in-depth analyses and feature articles and becoming involved in large-scale, industry-specific research & contents creation projects.