Before COVID-19, challenger banks faced many choices for building a digital-first business model. Charge upfront fees or rely on third-party revenue? Pursue a new regulatory license or partner with a chartered bank? Now, those choices are more urgent, as the no-touch economy drives more competition into this space.
To explore what’s working in different markets, Flourish managing partner Tilman Ehrbeck on July 22 moderated a discussion at the Global Fintech Fest with three leaders of challenger banks in the US, UK, and India:
- Ricky Knox, CEO, Tandem Bank
- Nnenna Nnoli, CFO, Aspiration
- Alok Mittal, Co-Founder and CEO, Indifi Technologies
A summary of the discussion is below, and you can watch the session on YouTube.
Get Specific With Market Segmentation
Alok, who’s also an angel investor, finds challenger banks an attractive proposition because there are so many untapped markets. “I think there is an opportunity to pick market segments, such as low-income consumers or education lending,” he said. “If entrepreneurs can pick one, and build around that segment to cover their banking needs, that would be extremely exciting to me.”
Indifi is doing this with its target segment: SMEs in retail, travel, and ecommerce. They started by asking these customers what financial help they need. Based on that input, Indifi is looking to expand into services beyond traditional baking, such working capital management, liquidity support, and treasury tools.
Similarly, Aspiration has been successful in the United States by focusing on values-driven consumers. “The US environment is hyper-competitive,” Nnenna explained. “To scale, you really have to be thoughtful around market segmentation. Who is your target customer?”
The Three Imperatives of Neobanking
Once you’ve identified a target market segment, you can start building a value proposition and a brand around that customer. Alok proposed three imperatives for neo-banking, that all begin with the customer:
- Have visibility into the full range of the customer’s financial behavior
- Use that data to drive customer engagement much higher than traditional banks would see
- Build affinity with your brand
In the UK, where Tandem was the second challenger bank launched, open banking has made the space more competitive. The 2018 regulation requires large banks in the UK to provide fintechs and others access to customer transaction data.
“Banks, despite having a monopoly on this data, have been using very little of it,” said Ricky. “It’s highly complex and requires a lot of processing.”
As a digital-first player, Tandem has been able to use data to enable new services for customers, such as pay-upfront revolving credit to cover troughs in cash flow. “That product didn’t exist,” said Ricky, “and in fact we could not have offered it with systems in place just a few years ago.”
Each imperative leads to the next. By building strong affinity with its brand, Aspiration has realized strong cross-adoption of its financial products. So have Indifi and Tandem. Driving engagement, in turn, generates richer customer data.
Win on Trust
Challenger banks must compete on customer trust before they compete on price, because incumbent banks have the capital to replicate specific fintech products or functionality. So the opportunity is in the relationship, where the customer trusts the brand to really meet their needs.
Meeting these imperatives calls for different approaches in each market. In the U.S., debit interchange rates are high enough to support free transaction accounts. In the U.K., challenger banks need credit to make the economics work. India is a white space market, and is why Alok said challenger banks are exciting. “Not because they are the new version of the bank, but as a set of services unbundled from the bank and re-bundled with other business models.”