Innovating at scale: to compete with fast-rising challengers, banks need to gain agility

Drawing lessons from challenger banks’ customer-centric success

Jo Howes from Crealogix considers how challenger banks have been able to take advantage of their small-scale beginnings, and how large established financial brands can draw lessons from their customer-centric success.

In a recent survey of UK current account customers (a survey of 2,000 UK consumers commissioned by Crealogix and published in January 2019) who bank with challengers such as Monzo, Tandem and Starling Bank, we found that people value ease of use above all other factors. Asked to describe in their own words what they like about their challenger bank accounts, respondents’ most popular themes by far were simplicity, control, and being able to get daily tasks done easily.

People did mention interest rates, customer service, and trust, but none of these conventional criteria are anywhere near as significant for the customers of challenger banks as ease of use.

According to these customers, the ease of use that keeps them happy with their new provider also leads them to recommend their mobile banking app to friends and family. Thanks to this word-of-mouth the challengers have experienced rapid growth characteristic of the viral effect of digital trends.

Our survey of UK banking customers revealed one in four under 37s have accounts with challengers, and up to a third of under 37s have two or more accounts with challenger banks.

Challengers succeeded against the odds

Compared to established banks – a short list of large corporations in the UK holding over 90% of retail customer accounts – challengers didn’t seem to have much going for them when most of them were starting up three or four years ago.

All the challengers started with no brand recognition or track record of customer trust, no proven business stability for depositors, or indeed profitability for investors, and no existing customer base to learn from or sell to.

It’s easy to see why high street banks never seemed to take the challengers seriously. But against these odds, the challenger banks are proving successful – some of them wildly so. This proves the power of delivering simplicity to consumers.

Delivering simplicity is a complex achievement

As any designer knows, creating something that appears simple and is experienced by the user as “easy” means an enormous amount of hard work and complexity under the surface. The challengers deserve a lot of credit for achieving such simplicity on the front end of one of the most complex and challenging business models there is, in a business environment that is by definition new to them, and in the face of extremely well-entrenched incumbents.

To achieve this, the challengers have benefited from three strengths which set them in direct contrast to incumbents:

1. An overriding principle of customer-centricity in product and service design;
2. Being new to the situation: taking a fresh look unencumbered by legacy technology or mindsets – or rather, being free to study and learn from mistakes made by those with a longer history;
3. Small organisational size allowing focused, holistic execution with the above two strengths of good design and free thinking.

In contrast, as a corporation, a bank traditionally benefits from commercial self-interest, conservative strategy, and scale.

It is those traditional corporate strengths which directly translate into weaknesses against a new species of competitor: the incumbents are dinosaurs while the challengers are a new species competing on totally different terms. Like an ecosystem in nature, conditions for surviving and thriving are not static. In banking things have become more dynamic and the conditions have shifted to favour a smaller, agile, more digitally appealing approach.

Scale brings challenges for new banks

For the leading challengers, exceeding the million-customer mark and passing milestones in capitalisation on the path to possible public offerings, the greatest threat is probably their own success. Greater scale threatens their organisational cohesion and clarity of purpose, which in turn favours more cautious strategy and technological choices, which in turn begins to put stability and manageability as higher priorities than customer-centricity.

In other words, they will start to suffer the exact strategic impediments as the established banks.

But even if the challengers can’t sustain their exponential rates of growth forever, the high street banks (and to a much greater extent, the longer tail smaller established banks and building societies of the UK) will not appreciate the arrival of competitors into their big league.

Established banks have maturity, know-how, and resources on their side, so are well placed – in theory – to tackle the technology and execution work needed to compete with challengers. But in practice, it’s extremely hard going, since leadership in banks are effectively navigating in ocean liners, not speedboats.

Building agility at scale means getting closer to the customer

While established banks cannot shrink to the size of a challenger, leadership can look for ways to gain agility in the sense of clearer product focus and tighter feedback loops in satisfying the customer. These agile principles in turn will lead to faster delivery of solutions which are more innovative and higher quality judged in terms of customer experience.

Taking the advantages of the challengers in mirror image, here is how digital leadership in banks can emulate the strengths of their agile rivals at their larger scale:

1. The customer experience must be put back as the guiding principle of product and service design and quality. This implies first getting to know customers better.
2. Although banks should not tear up proven products and processes, they need to overcome resistance to innovation. Change must be re-framed as necessary for survival; risk must be understood as something to model and manage, instead of a dirty word that can be used as an excuse for inaction.
3. Use organisational size as an advantage, breaking down siloes to combine multidisciplinary skillsets on large problems, and promote knowledge-sharing – the workforces of large banks are usually full of highly experienced and skilled personnel – it’s a matter of unlocking this through closer collaboration.

If a large corporate can work on its possibly stifling risk aversion (2) and multidisciplinary collaboration (3), then it has a far better chance of being able to get to know the customer better (1) and act on insights by creating new solutions primarily designed to help people in their real lives, rather than creating products to be sold in a siloed manner.

As well as agility, established financial brands need a sense of urgency

The longer established financial brands wait to change their strategy along these lines, the further innovative fintech challengers will pull away.

While incumbents have the experience and resources to rise to the challenge, the one thing they don’t have is time. Innovative challengers are pulling ahead, creating a customer experience quality gap that gets harder to close with each year of inactivity from technologically inactive brands.

Meanwhile, the expectations and tastes of the consumers themselves are changing in response to a growing choice of services competing to deliver value in a flourishing fintech space – which is due to be supercharged by open banking.

The best way for banks to regain competitiveness and exploit the potential of the new open banking ecosystem is to get to know their customers better so they can see more clearly how to make those customers’ lives easier and do so in more elegant ways.

The virtuous feedback loop of listening and execution is the essence of agility, and as many large-scale digital leaders in other industries have shown, this is not the sole preserve of startups. The question is, can financial institutions, which are often over a century old, change fast enough?

What motivates younger generations to sign up for new bank accounts? Read the new consumer banking market analysis from Crealogix here.

About the author
I head up marketing and sales at Crealogix in the UK. Crealogix has over 20 years’ experience partnering with leading banks and wealth managers to accelerate their digital transformation.

I’m passionate about innovation in the increasingly fast-moving world of financial technology, and I’m a keen advocate of financial inclusion, customer centricity, and assisting a progressive culture at the intersection of banking and technology.