Challenger banks have disrupted the industry by nipping at the heels of the incumbents. Now the big banks are biting back with start-up ventures of their own. 

Competition and innovation are what regulators wanted, and that is what they got. Ever since it became easier to set up a bank in the UK and other jurisdictions, new entrants have disrupted the market and challenged the dominance of the incumbent banks. Now, however, the old banks have learned some new tricks and are setting up ventures of their own.

“The opportunity for the big banks is to create greenfield challengers that will eat their own lunch. It is better they eat their own lunch than someone else eats their lunch,” says Anthony Thomson, a three-time founder of challenger banks.

[The big banks] are not founder-led and don’t have the same existential drive to succeed — they are unable to innovate and respond [in the same way]

Anne Boden, Starling Bank

JPMorgan Chase is one such incumbent that has created a challenger of its own. In January 2021, the US bank announced it would be launching Chase in the UK, a digital bank that its press release touted as a “completely new banking choice” that will be delivered “via an innovative mobile app”.

Not the first

It is not the first time a big bank has launched a new venture into the UK market. Back in 1989, Midland Bank launched First Direct — a 24-hour branchless bank — which, since it was acquired by HSBC, has been at the forefront of using the latest technology. First Direct has evolved from phone banking to SMS banking, before becoming one of the first to offer internet banking.

“First Direct is a fantastic example of a challenger bank for retail customers. With Chase, is that the next First Direct in a different world at a different time?” says Mike Ethelston, UK managing partner at consultancy Capco.


Anthony Thomson

Perhaps the hype around new entrants disrupting the market is nothing new, and it has been seen before? “It feels like it is a cycle just with ever bigger circles this time,” says Mr Ethelston. He adds technology is now faster and cheaper, and there is a large amount of investment in the financial system.

Take fintech Mambu, for example. Its ‘composable’ banking platform has removed barriers to entry for challengers and shortened the time to market. ABN Amro, for instance, used the platform to create New10, a digital spinoff that targets small and medium-sized enterprises. ABN Amro took just four months to create a minimum viable product (MVP), and 10 months to a full launch of the neobank in September 2017.

Similarly, mobile bank N26 used Mambu to create an MVP in under six months before it launched as a pan-European challenger.

Blazing a new trail

Although its technology beginnings augured well, N26’s challenge to the UK market was short lived and the bank pulled out in April 2020, citing Brexit as the reason. Other challengers have had more success, and Ian Hooper, partner and UK head of banking and payments at Capco, comments that Starling Bank and Revolut are standout examples of successful challengers that have “come from nowhere”.

Starling Bank, which was founded in 2014, is becoming a household name in the UK. CEO and founder Anne Boden says: “Starling set out to disrupt the banking landscape and we’re pleased that big banks are now copying us — it shows that we are succeeding. So we welcome competition. To date, the big banks have not had a great track record of creating challenger brands or building software in a cost-effective manner. They are copying our features, but they are unable to copy our cost base.”

Mr Hooper says the incumbent response to challengers has typically focused on providing a mobile banking app which, in terms of function, features and usability, have improved over the past three to five years.

Creating more user-friendly solutions is an understandable response, given the challengers’ mastery of user experience, but the big banks have still struggled to catch up. Challengers have typically used technology to improve the customer experience or to drive down the cost of banking, says Mr Thomson, who is a founder of challengers Metro Bank and Atom Bank in the UK, and 86 400 in Australia. Big banks are unable to compete because they are bound by physical real estate, an outdated management style and culture, and obsolete technology, he adds.

Buying in new technology is rarely successful for the incumbents, he says. “The challenge is not the availability of the technology, it is the ability to migrate the data from 20 or 30 obsolete systems,” he says. “Virtually every attempt to do this has failed around the world.”

Ms Boden says the big banks cannot effectively compete against the challengers because of their culture and the way they work. “They are not founder-led and don’t have the same existential drive to succeed; they are simply unable to innovate and respond to what customers want in the way that we can. When did you last see a big bank ask its customers what features they wanted it to build next?”

Devising side projects 

Given these challenges, many incumbent banks are considering starting over with new ventures. In Hong Kong, for example, all the major banks are believed to have a neobank strategy since the city-state launched its Smart Banking Initiative in 2017. This move by the regulator aims to bring innovation to the market and includes the granting of licences for new virtual banks — retail banks that are primarily focused on digital channels. Standard Chartered was one of the first banks to apply for a virtual licence to launch Mox Bank in September 2020.

Deniz Güven, chief executive of Mox, says when Hong Kong set up its Smart Banking Initiative, senior executives at Standard Chartered considered how to use the licences in a new way. At the time, he was working in Singapore as Standard Chartered’s global head of digital, and they questioned whether the bank could effectively expand its target market in Hong Kong with its existing operating model. Mr Güven explains that eventually Standard Chartered decided to create a future operating model by launching Mox.

“It is not just about the app or pricing or marketing activities. We try to create new operating models,” Mr Güven says. Although Hong Kong is a mature market, with a range of available financial products, he says consumers are typically underserved in terms of customer experience and digital solutions. With Mox’s new operating model, new services can be devised and launched more quickly.

Likewise, in the UK, Mettle is a challenger that has been set up by a big bank. Mettle’s chief executive, Marieke Flament, says the digital bank sits within the innovation hub of parent company NatWest, and targets small businesses and sole traders. She predicts the “liquid workforce” will increase as more people — spurred on by the Covid pandemic — will develop a ‘side hustle’ to augment their income.

Mettle fills a gap in the incumbents’ offerings, says Ms Flament, as the current solutions for those customers fall between the traditional retail and business solutions. “They are using a retail product, but they shouldn’t be. It’s a big opportunity,” she adds.

Part of something bigger

Mr Thomson says it can be difficult for bank-owned challengers to stay innovative, and the big question is whether the big bank will give its challenger offspring enough independence.

He describes a scenario where the chief financial officer, for example, wants to oversee how millions of dollars are being spent on the neobank. Then the global head of technology may have something to say about how the technology budget is being spent. Meanwhile, the chief risk officer (CRO) may also want to get involved, insisting the CRO of the challenger reports to them. “Very quickly the new bank becomes a subsumed version of the older bank,” Mr Thomson says.

So is Mettle at risk of becoming a subsumed version of NatWest? Ms Flament says: “I do not see the concern. It’s more about how we can help each other. When we learn things, we share them.” This may be how to attract different types of talent, implementing remote working, or working in small teams, for example.


Marieke Flament, Mettle

Another advantage of being part of NatWest, she says, is to experience a large bank at scale. “We can see where we need to be. I joined because of that,” adds Ms Flament, who joined Mettle in 2019 from payments fintech Circle. A further advantage is that Mettle has access to expertise in regulation, as well as fraud and financial crime prevention. “We have the best of both worlds,” she says. “Neobanks have shown the way for the best-in-class customer experience. [Incumbent banks] have been building the plane as they are flying ... Mettle has been building everything on the tarmac to make sure it is solid before it takes off.”

Mr Güven echoes the advantages of being part of a larger organisation: “Our parent company offered us the expertise and scalability about setting up a bank, which was invaluable for us when starting from scratch.” Also, he says, Mox can leverage the Standard Chartered brand, which has been built up over 160 years in Hong Kong. “At its very heart, banking is always about earning customer trust, and trust cannot be built overnight,” he says.

Mr Thomson notes the advantages that big banks have over independent challengers, however. “What they do have is capital and brand, and they have resources — all the things typically challenger banks do not have. The challenge for challengers is getting to scale. One of the biggest issues is access to capital; a number have failed because they do not have access to capital.”

The acquisition route

In Australia, which has encouraged competition to break up the dominance of the big banks, one challenger has already fallen by the wayside. In December 2020, Xinja announced it was discontinuing its accounts and would be returning its banking licence. Meanwhile, 86 400, Mr Thomson’s latest venture, has been bought by a big bank.

In January 2021, National Australia Bank (NAB) announced it would acquire 86 400 and combine it with its direct banking unit, UBank. “Bringing together UBank and 86 400 is consistent with NAB’s long-term strategy and growth plans, and will enable us to develop a leading digital bank that can attract and retain customers at scale and pace,” stated NAB’s chief operating officer Les Matheson in a press release at the time.

Mr Thomson says: “It offers great value to our shareholders, confidence and future to the people who work in the bank, and it’s good for our customers. It was absolutely the right thing to do. It is bittersweet because it had a great future as an independent.” Does this mean he is not wedded to the idea of his challenger being independent? “In my heart of hearts, I would have liked to see us take it further.” he says.

Even when start-up challengers fail to take off, or get gobbled up by larger banks, they still have a positive impact on the incumbents. Mr Thomson believes independent challengers — even those with a small market share — can change the way big banks operate. He gives the example of when he set up Metro Bank, which began with a single branch in central London.

At the time, many questioned how banking could be changed with a one-branch bank. “We said we believe the most important thing is putting customers first. You cannot put them first if you pay staff commission to sell them things. All bonuses were related to giving customers a better experience,” he says. He believes this puts pressure on the big banks, which have changed their practices as a result.

Everyone thought if you have a licence it is easier to raise capital, but it is not

Anthony Thompson

Such pressure has come from a regulatory drive to increase competition — a trend that started in the UK and has now spread to other markets, such as Hong Kong and Australia. Mr Thomson says: “They wanted to see better customer outcomes. You cannot regulate your way to better customer outcomes; competition is the way to do that.” As a result, UK regulators changed the framework to make it easier to get a banking licence.

Mr Thomson says this does not guarantee the success for a challenger. “Everyone thought if you have a licence it is easier to raise capital, but it is not. It has no value — you cannot sell it,” he says. Investors want to see a fully built operative bank with a clear path to profitability.

This may be easier for neobanks that have the backing of a big bank with a large capital base than for the independent challengers; however, it remains to be seen whether the big banks will eventually eat their own lunch, or someone else will.


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