Are Digital Challenger Banks the face of Future Banking?
2 min read
Arguably one of the most disruptive changes happening in the BFSI industry is the emergence of Digital Challenger Banks. Digital challenger banks are banks that only exist digitally – they have no physical branches. You heard that right, these banks DO NOT have a physical presence. They have recently become popular in the UK. Some of them are Atom, Revolut, Monzo, N26, and Starling.
These banks are extremely agile and pride themselves on excellent customer service and experience. These banks are primarily targeted towards millennials who are reluctant to deal with legacy banks that require you to fill long physical forms to just create an account. In contrast, Revolut, a UK based digital challenger bank lets you create an account with just 24 Clicks, that too within their own app. Amazing, isn’t it?
So, let us see how they differ from traditional banks apart from their digital only presence. Digital challenger banks have a very lean cost structure so they are able to transfer the cost savings to their customers by providing them better interest rates as compared to legacy banks. The combined valuations of these digital banks are now half as that of Deutsche Bank.
But everything is not rosy with these challenger banks. Their customer acquisition cost is high and most of them are yet to make profits. Trust is a very important factor in banking. Many of the customers of these banks are still using them as secondary and tertiary accounts. In order to make money and be sustainable, challenger banks are looking at value-added services. Revolut recently introduced a subscription-based model where they provide higher thresholds for money transfers, crypto-currency transactions, cashback, travel insurance, free medical insurance abroad, airport lounge access, and priority support for a monthly fee. Another route the challenger banks are looking at making money is by providing banking services to SMEs.
While these banks look for more and more ways to make money and break-even, it is important for them to build robust tech capabilities as legacy banks are bound to catch up. They cannot just rely on attracting customers with huge marketing budgets. Challenger banks should stay one step ahead of legacy banks in order to maintain their competitive advantage and stay relevant in the long term.
