What happens when challenger banks get old, and incumbents embrace the new?

One of the pleasures of working in the technology sector over a number of years is watching innovation cycles play out. Back in 2007, for example, Microsoft had just released Windows Vista, instantly putting it on shaky ground – especially when you consider that iPhone had just come out.  

At the same time, the team was consolidating its hold on the gaming market with the Xbox 360, before launching the world-renowned Surface range of laptops a few years later. And while Apple may still be enjoying meteoric success, it also saw its first glimpse of failure with the iWatch. 
I see exactly the same thing happening in the banking arena; many banks that I once referred to as ‘challengers’ are now quite established and don’t see themselves as challengers at all! Similarly, many of the established, customer-rich incumbents have risen to the occasion and have been providing very innovative, agile services worthy of a challenger.
One of my favourite banks which defies definition in this way is BBVA. Now technically, BBVA’s ‘parts’ have been around since 1857, but post-merger, the team began a serious push to evolve around a decade ago. Since then, BBVA has kept a laser-focus on elements including customer service, new business models and hiring and training a workforce which is second-to-none – and with developments such as iris recognition and a speedy cloud infrastructure, the team is clearly not afraid to try new things! The results? Well, last time I checked, profits had risen 18% which is 1% higher than rival behemoth Santander.
And these old definitions are doubly unclear, because there have been many cases where incumbents have launched their own challenger offerings, such as Axa and Soon, for example. Similarly, you can’t underestimate the value of the trust and brand recognition that incumbents ‘own’, when many newer challengers are seen as ‘just an app’ – giving incumbents an instant boost when bringing new products to market. Incumbents also have experience in handling change, because they’ve been doing it for years – whereas it can be tough for newer challengers without the right backing and advice when things move on; the pace of change can be intimidating!
Now the rule of thumb is still accurate that the bigger the bank, the greater the need for attention to detail. Bigger organisations have a greater ‘magnetism’ to regulators, largely because they have a greater duty of care to look after more customers. But it can also be extremely tough for the once-agile challengers to keep innovating at the same pace. For example, Clearbank made a splash by being the first new UK clearing bank in over a hundred years, but it will be a tough journey to keep standing out from the crowd after the initial ‘big bang’.
That’s why, in my mind, I called time on these terms a while ago. Banking innovation is a continuum, not a binary distinction. And as we shuck off the simple divisions, where does that leave us? Well, we’re finally starting to see something that I’ve been excited about – perversely, almost since the dawn of Windows Vista. Collaboration 3.0, where organisations and individuals work together as if they’re sat next to each other.
For example, SharePoint has always promised collaboration 3.0, but today Microsoft has finally developed a usable UI with robust collaboration and security process. Slack’s integrations and plugins are finally reaching maturity – but it’s not just about the tools available. Collaborating executives are also realising that they need to ensure the culture and vision of their companies are similar – or that there are at least commonalities and benefits for both.
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We’ve seen great examples of this in the past – incumbent Barclays saw huge success with collaboration in developing payments service Pingit, because all parties were working together towards a clearly defined and mutually beneficial goal. Other projects have not gone as smoothly!
It’s not surprising that we see this conflict and collaboration hitting peaks and troughs; challengers understand the customer and new platforms – and receive investment relatively easily – but they don’t always understand the regulation and it can take time to build up customer numbers. ‘Established’ banks have both of these in spades, and have been through both rough and smooth periods, so they’re used to change.
Now, we’ll never have completely seamless integration between partners – we’re only human, after all – but if we can crawl out of our silos, see the bigger picture and understand what we can gain from each other, then a whole world of possibility opens up.
It is clear to me that we are at the end of the comfortable binary period where we can speak glibly about challengers and incumbents. In fact, we’re at the start of a far more exciting time where organisations work together far more efficiently than has previously been possible, at both a technological and human level.
But alongside this excitement sits a very real challenge – whilst the once-aggressive challengers may run the risk of pushing the boundaries too hard, or not enough, incumbents also face a grave threat. In short – failing to collaborate with other players may slow innovation and result in not serving the customer correctly. The rules have changed, and customers are far less patient and loyal than they used to be.
In short, any company not keeping the customer’s interests at heart should listen out for a ticking clock. 

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