In my first blog for Accenture, I discussed some of the large-scale changes facing the banking industry in Europe. One of the biggest of these is the rapidly evolving nature of the competitive threat that European banks face. Overseas banks are receding in importance, as non-European banks have tended to refocus on their core markets and redefine their core businesses. Traditional banking competitors remain a factor, but the biggest emerging threat for European banks is from so-called “challenger banks.”
In a survey co-sponsored by Accenture and Temenos, more bank respondents (22%) cited challenger banks—loosely defined as banks based on digital delivery channels with a focus on improving the customer experience—as the top competitive threat, outpacing technology vendors (20%), existing large incumbents (20%) and fintech start-ups (16%). What’s more, the perceived threat from challenger banks has been growing, with 11% of respondents citing challenger banks as the top threat in 2015 and 16% in 2016.
Challenger banks have many of the advantages of traditional banks, including the right to undertake activities that require a banking license and the consumer trust that derives from being a regulated institution. But, they tend to be more focused on the customer journey, and by operating without cumbersome legacy IT systems or the “brick and mortar” infrastructure that drives up incumbent banks’ costs, challenger banks can compete effectively while offering a customer experience based on digital innovation.
Some banks are responding by offering their own challenger brands—such as Leumi with Pepper and BNP Paribas with Hello. These entities are, in effect, parallel universes for legacy banks. If they are successful in establishing a digital framework with a lower cost structure and an attractive customer proposition, they may be able to move their own customer base to the new entity over time or generate new clients through that channel. In the meantime, however, the legacy banks are running parallel institutions, dividing their time and attention, and adding cost and complexity.
Challenger banks have also found that the banking industry is not as easy for new entrants as they might have thought. The Financial Times has reported that capital demands for challenger banks are higher than anticipated and that the competitive marketplace is pushing UK challenger banks to offer riskier loans at low rates. As some of these challenger banks come from outside the industry—from areas such as telecommunications and retail—those constraints might prove a difficult hurdle to overcome.
The environment remains incredibly dynamic: Some banks buy challengers banks outright; others partner with them to offer new services; and still others team up with fintech providers to create new offerings. The introduction of Open Banking is another factor that will reshuffle the cards, providing new opportunities for start-ups and for alliances between innovators and established players. In my next blog, I will look in more detail at how established European banks are approaching digital transformation in this changing landscape.