What Banks Can Learn From the Top 10 Challenger Banks

April 28, 2017

 

 

It’s no secret that the fintech industry is shaking up the banking sector. Nimble fintech firms are using the latest technology to solve complex banking problems, often faster and more efficiently than legacy institutions can. And this disruption is generating incredible new revenue. Just last week, the UK treasury announced that the British fintech sector is worth more than £7 billion and employs some 60,000 people.

While some fintech companies are reinventing specific services within the banking industry (like payments and customer support), others are challenging the very idea of what it means to be a bank.

Within the past few years, several new, mobile-first banks have sprung up and are challenging traditional banking models.

What is it about these new banks that’s shaking up the banking industry? And what lessons can incumbent banks learn from these challengers?

Here are the top 10 challenger banks and what banks can learn from them.

1. Starling Bank

Starling Bank is a UK-based, digital-only challenger bank that was founded in 2014 by former Allied Irish Banks COO Anne Boden. The company is a full-service standalone bank, having received a UK banking license this month.

Starling customers can instantly open a checking account through the bank’s app (currently available on iOS, with Android launching next month) by snapping a photo of their driver’s license or passport. In addition to instant account opening, Starling offers real-time account activity updates, biometric authentication, and 24/7 customer support.

Starling was built from the ground up, and is committed to the open banking movement. Last month, the company held a hackathon to launch the Starling Developer Platform, making them the first licensed UK bank to have an open, public banking API. Starling’s open banking platform enables them to seamlessly integrate with other financial services. The company recently partnered with fellow London fintech TransferWise to enable customers to make cheap, easy international money transfers.

What banks can learn:

Embrace open banking APIs. Be a fintech hub, and let other services integrate with yours to provide customers the best possible experience.

2. Monzo (formerly Mondo)

Monzo is another UK-based, mobile-first challenger bank that made headlines this month after receiving an unrestricted banking license, which enables the company to offer full checking accounts with no deposit limits.

Monzo was founded in 2015 by Tom Blomfield, former CTO of Starling Bank. The company began by offering a pre-paid Mastercard connected to a money-tracking app, but plans to roll out current accounts later this year.

The company offers real-time spending notifications, absolutely no fees (even when traveling abroad), simple budgeting tools, and 24/7 customer support.  Like Starling, Monzo supports the open banking movement; the company has released a prototype API and actively supports developers working on the platform through hackathons and community forums.

Monzo has developed a powerful persona as the “bank of the future,” and customers have responded. According to 11:FS CEO David Brear, “Monzo is not another card I have in my wallet. They have done everything possible, as their customer over the last year, to make me love them and their brand, and I do.” And the strategy appears to be working. As of January 2017, the company has over 100,000 active customers.

What banks can learn:

Challenger banks are successful because they combine useful products with excellent customer service. Don’t just acquire customers; win advocates.

3. Simple

Simple is an American mobile-only challenger bank based in Portland, Oregon. Founded in 2009 as BankSimple, the company launched in 2012 as a limited beta and was acquired by BBVA in 2014 for $117 million. Unlike Monzo and Starling, Simple is not a fully licensed, standalone bank. Simple provides customers FDIC-insured checking accounts through their banking partners, Bancorp and BBVA Compass.

Like Starling and Monzo, Simple has no brick-and-mortar branches. Instead, customers use Simple’s sleek online and mobile app interface and Visa debit card to manage their money. The company also provides visual expense tracking, financial planning and budgeting tools, and a Shared Accounts feature that lets any two people easily manage their money together.

After its launch in 2012, Simple was initially well-reviewed and won incredible support from customers. However, recently, the company has received considerable negative press because of poor account migration after being acquired by BBVA. The company failed to transfer all existing customer accounts to BBVA before their contract with their former partner bank ended, forcing them to close those accounts that didn’t make the cut. Understandably, many customers are unhappy with this turn of events.

What banks can learn:

Learn from Simple’s mistake: don’t mishandle customer accounts. When partnering with fintechs, make any necessary transitions easy and painless, or you’ll lose your customers’ trust.

 

4. Atom

Atom is another UK-based, app-only challenger bank. It was the first of the big four UK challengers (Starling, Monzo, Atom, and Tandem) to launch, having received a restricted UK banking license in 2015. Like the others, it has no physical branches and 24/7 customer service.

Atom uses biometric authentication (face and voice recognition) to quickly and seamlessly verify user identities in the bank app. The company currently offers digital mortgage services, predictive expense forecasting, and savings advice, with current accounts launching soon.

What banks can learn:

Seamless identity verification is the way of the future. Biometric authentication using voice and face recognition make secure logins instant and friction-free for customers.

5. Tandem

Tandem is the fourth of the big four UK challenger banks. Like the previous three, it is a mobile-only bank with no physical branches, although the company does plan to open a call center for customer support.

Tandem takes its name from its commitment to working in partnership with customers. In addition to offering loans, savings accounts, and credit cards, Tandem also promises to alert customers to rival banks’ deals, saving them up to £2,500 per year.

The bank has generated mass Millennial appeal through non-traditional funding and marketing initiatives. The bank was funded in a record-shattering 2016 crowdfunding campaign that took in over £850,000 in ten seconds (that is, before the site crashed; the entire 8-hour campaign brought in a total of £1.8 million from 1,000 investors). The company places a heavy emphasis on community, calling each of its thousands of investors “co-founders,” and giving them a personal stake in the company. Tandem has also released a series of tongue-in-cheek marketing campaigns designed to highlight the poor customer service of traditional banks.

What banks can learn:

Work with your customers, not against them. Be a customer ally to boost your bank’s adoption, engagement, and revenue.

6. N26

N26 is a German mobile-only challenger bank. Founded in Berlin in 2013 (as Number26), the company has received overwhelming support and earned the backing of renowned venture capitalist Peter Thiel. The company received its banking license in 2016.

N26 is Europe’s first mobile bank, offering two types of customer accounts: a free standard N26 account and N26 Black, a higher-tier account that costs €5.90 per month. Both accounts come with a Mastercard, but the Black account gives customers additional perks such as waived foreign and domestic ATM fees. In addition, the company offers insurance, overdraft accounts, investment opportunities, real-time spending categorization and notifications, and MoneyBeam, a Venmo-like instant money transfer service. Customers can open an account via video conference with an N26 representative in as little as 8 minutes and can switch their Mastercard on or off instantly within the N26 app.

Like Starling, N26 operates as a “fintech hub,” partnering with other banks and fintechs to offer services beyond checking accounts. Most recently, N26 partnered with TransferWise to give customers in-app access to cheap international money transfers.

What banks can learn:

Customers want more control over their finances. Give it to them to establish a banking relationship built on trust and mutual benefit.

7. BankMobile

BankMobile is another US-based challenger bank. Founded under parent company Customers Bank in 2015, the firm was acquired by Flagship Community Bank this year. The company provides a wide range of products and services, including checking and savings accounts, personal lines of credit, loans, and personal bankers.

BankMobile has built services designed for younger market segments, especially Millennials. BankMobile Vibe is an account designed specifically for students, providing free ATM access, money management tools, and built-in rewards for good school performance and financial behavior. The company has also launched financial literacy initiatives to improve customer outcomes.

What banks can learn:

Millennials are an important customer segment with unique needs. Build products and services tailored to their experiences to win their lifelong business.

8. Chime

Chime is another American challenger bank designed to make banking simpler, easier, and more appealing, especially to Millennials. Founded in 2013 by Chris Britt and Ryan King, the bank aims to be “the bank account that has your back,” offering customers useful money management tools that make it easy to spend and save smarter. Chime is not a full-fledged bank. Instead, the company has partnered with Bancorp to provide accounts and card services.

Chime gives customers a Visa debit card, a spending account, and a savings account with an automatic savings feature that rounds up every transaction to the nearest dollar and transfers the extra change to savings. Chime boasts no monthly, overdraft, or foreign transaction fees and requires no minimum balance to open an account. In addition, the company offers cash back rewards on bills and purchases, real-time activity updates, and instant mobile payments.

What banks can learn:

Ease of use is the name of the game. Build simple and seamless services that automatically help customers improve their financial standing.  

9. Monese


Monese is another UK-based digital-only challenger bank, but one with a unique purpose. Founded in 2013 by Estonian immigrant Norris Koppel, the bank is dedicated to helping European immigrants obtain banking services who otherwise wouldn’t be able to.

Typically, to open a bank account, customers need a local credit history and proof of address, usually in the form of utility bills. But immigrants who’ve recently arrived in a new country usually don’t have these things.

For Monese, this isn’t a problem. The bank uses a unique mobile onboarding process that lets immigrants instantly open accounts with just a selfie and a passport photo. Monese uses these photos to verify the customer’s identity and address and to weed out instances of fraud and money laundering. If further verification is necessary, the bank conducts a review of the applicant’s social media profiles and schedules a Skype interview.

Unlike other challengers operating as full-service banks, Monese has not applied for a banking license; the company is classified as an electronic money institution. Monese provides customers a current account mobile app, cheap global payments, and a Visa debit card.

What banks can learn:

Traditional banking often leaves migrants and other underbanked segments without the products and services they need. Use innovative technology to meet these customers’ needs and earn their business.

10. Moven

Moven is another American challenger bank. Founded in 2011 by prominent fintech influencer Brett King, Moven is not a full-service, standalone bank. Instead, the company provides customers FDIC-insured accounts through the Moven mobile banking app and a Mastercard debit card.

Moven accounts are fee-free and require no minimum balance. The company also provides simple money management and spending visualization tools, as well as seamless peer-to-peer payments, even to non-Moven customers.

Since its founding, Moven has shifted from a purely consumer-facing business model to one that includes partnerships with banks. These strategic alliances give the company access to the massive infrastructure and footprint of legacy banks. Moven’s partner banks license the company’s popular digital banking platform and offer this service to their customers. Currently, the company has partnerships with TD Bank Group and Westpac, but plans to partner with US banks in the future.

What banks can learn:     

Partnerships are a win-win for fintechs and banks. Consider partnering with a fintech to gain access to innovative products that improve your customer experience.

What do all these banks have in common?

If you think all of these banks sound pretty similar, you’re right. All of them offer similar features because they’re all working towards a common goal: making banking easier, smarter, and more fair for customers. By building digital-first, customer-centric banks, these challengers are streamlining the user experience and building practical solutions to real financial problems. And their adoption rates prove that customers are taking notice.

Conclusion

Challenger banks exist because there’s a gap in the market for simple, useful, and customer-centric banking services. And these challengers aren’t going away anytime soon; more and more will come on the scene to lure customers away from unsatisfactory incumbent banks.

Unless traditional banks learn important lessons from these challengers now, they’ll be playing catch-up for years to come.