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what 2020 holds for challenger banks

Challenging Times

Mobile apps are not just for sharing photos and playing games anymore. They have transformed the way much of everyday life is conducted. Even your bank most probably has an app now. And there are also new banks that have only an app and a website, that allow you to do all your banking digitally. 

The Digital Banks

They are called challenger banks, because they challenge the traditional banks either with the products they offer, with their user experience or the business models. Customers of challenger banks can perform all their transactions through digital channels without going to branches. This saves considerable cost to the challenger banks, allowing them to provide more affordable services and different useful tools.


Challenger banks began emerging and have been thriving in Europe as the regulatory landscape decreased the barriers to entry for new players. They have amassed a lot of funding, introduced some bold worldwide growth plans and attracted thousands of users.

There are more than 40 million users of challenger banks today, and it is expected there will be close to 100 million within the next five years.

The opportunity for challenger banks lies for the most part in emerging markets, considering their large unbanked populations, high mobile penetration, and growing middle classes.

However, they shouldn’t dismiss other markets. Research has shown that even though they seldom abandon their primary checking accounts, consumers “accessorize” these accounts by using fintech applications for savings, financial management, investments and mortgages.

How Do Challengers Make Money?

The FinTech sector has deployed $39 billion of growth capital over the past year, with over $150 billion projected to be invested in FinTech firms in the next 3-5 years, according to Finextra

Yet, they still mostly live off investor capital. So, how do they generate income? “The pressure is on to prove they can translate their popularity into sustainable businesses”, says Financial Times. A large proportion of revenues comes from the interchange fees received whenever customers use their cards, 

But, challengers additionally supply different monetary providers like insurance coverage merchandise, overseas trade or shopper credit score. 

“Digital banks’ most obvious difference is their lack of branches,” writes Financial Times, “but they are also looking for different ways to generate revenues through premium subscription services, in-app ‘marketplaces’ that offer products from third-party providers and international expansion.” 

Challenges Before Challengers

While challenger banks have the upper hand with the technological side of banking, and with keeping customer experience and customer satisfaction at the top, they face some challenges:

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In addition to this, the competition in the challenger banking space is about to heat up as new and potential future entrants are set to enter the market. These potential competitors include tech giants Amazon, Apple, Facebook and Google.

Furthermore, as the lines between banks and other consumer financial services providers are blurring, several alternative lenders and robo-advisors are beginning to offer banking products to their customers.

The Future of Challengers

“One strategy for challengers is to partner with other fintechs who offer complementary solutions, or move to acquire them”, says Birendra Agarwal, an entrepreneurial banking and financial services technology executive. In an interview for Sifted, Barclays’ Megan Caywoodagrees and in fact believes that in the future there could be a kind of collaborative utopia between challengers that poses a real threat to incumbent banks.

Citi’s Ronit Ghose sees the solution in merging the opposite sides. “Creating an incumbent challenger sounds like an oxymoron, but as legacy banks recognize the threat that new entrants into banking are posing to revenue and customers, they need to reinvent themselves and reimagine banking.

This involves legacy banks partnering with technology companies to create effective joint ventures as well as moving into more disruptive technology and business models to transform themselves into digital competitors”, says Ghose for Finovate. 

Expert Opinion

We talked to our two experts Tony Bach Christensen and Andreas Vennervald from Nets Group about the possible developments in the fintech area, especially amidst the coronavirus crisis, and about what challenges might come to challengers in 2020 and the near future:

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Tony Bach Christensen is Director of Strategic Partnerships at Nets Group, and this is what he said about the biggest challenges that alternative payment platforms face in 2020 and in the near future:

On a general level, the challengers need to find sustainable sources of income. Each challenger bank and alternative payment platform needs to establish a position in their market that provides long-term value to their clients. The Covid-19 crisis has taught us all one important lesson: you cannot survive on one source of income alone, like cheap FX for travellers and tourists, without running the risk of your market suddenly drying out.

The more established challengers acknowledge this need for a stable business and a stronger market position. Accordingly, they are moving towards becoming more like traditional banks by way of services offered – credits, lending, mortgages, insurance, small business banking, cross-border payments – but most have to do it in a different manner than the traditional players as they have neither the time nor the money to build new systems for entering these markets. 

So I believe that what we will see is more collaboration between different fintech challengers, each with their own strong niche position so that they may grow by servicing each-others’ customers. This way, each challenger can offer a full range of services without having to develop these capabilities themselves.

Finally, as the number of challengers increases, newcomers become a bigger threat to other challengers than to traditional banks. Traditional banks have traditional sources of income and a relatively stable, if diminishing, customer base, whereas the challenger banks may not all have a steady source of income yet and their customers may be more prone to switch to an even newer and fresher challenger service.

We also asked him to give his opinon on the future of banking and of collaboration between fintechs and banks:

The future of banking will become a much more diversified landscape to look at. Firstly, the personalized experience that we have all grown accustomed to and demand from all our service providers including banks will drive an ever greater diversity of niche services from challengers and traditional banks alike. Indeed, going into a physical branch may become a diversifier for a bank catering to certain generations and those seeking services with a more human-centric appeal.

This great variety of service providers on offer will drive certain market developments which we see unfolding already today. Digitization will become your License to Operate. If your business is not highly digitized, you cannot deliver a growing variety of services at the speed and with the efficiency and low cost required by modern day customers, and you will struggle to deliver a great user experience.

To meet these growing market demands and to take advantage of new market opportunities, traditional banks will be forced to team up with challengers who are experts in their niches to gain quick and cheap access to new services, capabilities and markets. 

In the same manner, challengers will team up to provide more complete service offerings towards their clients and we will see more convergence of services much like Uber, Lyft, and Grab which combine a transport service (and nowadays so much more) with a unique payment experience.

Why not have your current account, rent, holiday package and AirBnB account merged by your bank so that you can borrow money to travel while the bank ensures that your flat is for hire on AirBnB during your holiday?

"In short, the future of banking will be about so much more than banking, it’s about tying together coherent valuable user experiencesSo, the future of banking looks exciting. Never before has banking taken on so many different shapes and sizes – but it will no longer be the exclusive playing field of financial institutions."

The banks of the future will also face competition from non-banks such as retailers, big industry, and big tech companies such as Apple, Google, Facebook, Microsoft, and the Chinese giants AliBaba and Tencent. While the threat of the tech giants has been analyzed at length, not too many banks and challengers are concerned with the activities of retailers such as Lidl, who just launched Lidl Pay together with their Lidl Plus loyalty program, or traditional software vendors such as Tungsten, Tradeshift, and SAP Ariba, three procurement platforms for B2B commerce with plans to develop closed-loop payment rails for their customers, suppliers, and partners.

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Andreas Vennervald is commercial Business Analyst at Nets Group, and this is his opinon on the biggest challenges that the alternative payment platforms face in 2020 and near future:

I think the biggest challenge is actually Covid-19 – just like with everyone else. I think that if traditional banks manage the crisis without behaving in an obviously antisocial way, they will be better placed afterwards, as consumer behavior will likely skew towards taking less risk.

Also, fintechs are much more at risk of bankruptcy than established financial institutions.

There is also a huge number of alternative payment platforms, so the big challenge is to reach a profitable scale in the face of:

  1. Strong competition from other alternative payment platforms
  2. Competition from existing financial institutions
  3. Erosion of margins from the large number of other actors in the market (big tech companies, card schemes, etc.)

We also asked him to give his opinon on the future of banking and of collaboration between fintechs and banks:

The future of retail banking from my perspective lies in much better digital experiences for the end consumers for four reasons:

  1. One is the risk of churn of existing, though this is probably low
  2. Another is to keep up the inflow of new (young) customers
  3. And finally, as young customers become more valuable (they begin to accumulate mortgages, investments etc.), banks need to ensure that their expanded product portfolio stays with them
  4. Banks are under heavy pressure to cut costs, and digitized experiences are – initial investment notwithstanding – cheaper than physical stores, employees etc.

Generally speaking, fintechs are better at digital offerings than traditional banks, so banks need to up their game there

That could be achieved through M&A, partnerships with fintechs or internal investment. I suppose the first two options qualify as synergies between banks and fintechs.

As fintechs often focus on a narrow slice of the retail banking universe that they then optimize, partnerships are probably hard to avoid. It is hard to imagine that banks will be able to remain competitive with the best fintechs on everything