Challenging yourself: How traditional banks are forging their own challenger banks September 2020 - Efma
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VOICE OF THE MEMBERS Challenging yourself: How traditional banks are forging their own challenger banks September 2020
Efma A global non-profit organization, established in 1971 by banks and insurance companies, Efma facilitates networking between decision-makers. It provides quality insights to help banks and insurance companies make the right decisions to foster innovation and drive their transformation. Over 3,300 brands in 130 countries are Efma members. Headquartered in Paris. Offices in London, Brussels, Andorra, Milan, Stockholm, Bratislava, Warsaw, Moscow, Istanbul, Beirut, Dubai, Tokyo, Singapore, Sydney and Montreal. Learn more at efma.com. _ Author: Therese Torris, PhD, is a consultant in fintech innovation and digital transformation, and a writer on consumer finance, fintech and alternative finance. She has held senior executive positions in eCommerce and at the leading business and technology consultancies Forrester Research and Gartner Group. Executive editor: Boris Plantier Strategic content manager Efma boris@efma.com Production team: Kevin Spangenberg Copywriter & Anne-Laure Jozan Head of content management Efma Lorette Masson Graphic designer Loeesong.com _ Images courtesy of the interviewee
Foreword
Challenger banks are a major topic of discussion in the financial services industry no matter where
one looks. While the biggest digital-only banks receive much of the attention, at Efma we wanted to
further examine how a number of traditional banks have responded to new competitors: by creating
their own challenger bank. These self-disruptions are the result of the constant connectivity that defines
21st century life. Customers want digital, simple, and adaptable banking experiences. So traditional
banks have set out to create that type of experience for customers via new, digital-first banks.
Starting a bank-within-a-bank is no small feat. In this edition of Voice of the members, we look at what
led certain financial institutions to launch their own neobank. How do you position the neobank in the
market? Do you target a new segment or cannibalize current customers? Are the neobanks granted
complete independence from their parent institution? We asked all these questions and more to
understand this phenomenon from those who know it best.
This report gathers exclusive interviews from top executives at: ActivoBank (Millennium bcp),
buddybank (UniCredit), Discovery Bank (Discovery), EON (Union Bank of the Philippines), Hello
Bank! (BNP Paribas), imagin (CaixaBank), au Jibun Bank (MUFG), Liv. (Emirates NBD), Mox
(Standard Chartered Bank), Next (Banco Bradesco), Space (TBC Bank), Woop (Sicredi).
We want to thank all contributing Efma members for providing their expertise and insight for this
newest edition of Voice of the members.
We hope you find this an interesting and informative resource regarding the opportunities and
challenges that come with building an entirely new bank for the next generation of customers.
John Berry
CEO, Efma
3
Contents
05 Point of view
The challenge of incumbent-owned challenger banks - Therese Torris
10 Interviews
10 | ActivoBank (Millennium bcp, Portugal)
10 | buddybank (UniCredit, Italy)
10 | Discovery Bank (Discovery, South Africa)
10 | EON (Union Bank of the Philippines)
11 | Hello Bank! (BNP Paribas, France)
11 | imagin (CaixaBank, Spain)
11 | au Jibun Bank (KDDI, MUFG, Japan)
11 | Liv. (Emirates NBD, UAE)
12 | Mox (Standard Chartered Bank, HK)
12 | Next (Banco Bradesco, Brazil)
12 | Space (TBC Bank, Georgia)
12 | Woop (Sicredi, Brazil)
4 Challenging yourself: How traditional banks are forging their own challenger banks
The challenge of incumbent-owned
challenger banks
Only a few months ago — it seems ages ago — legacy retail banks were carrying out their digital transformation
at their own pace, i.e. slowly but surely for most. The Covid-19 pandemic and the resulting lockdown forced
them to drastically accelerate the pace of change. Within weeks and even days, traditional banks found ways to
remotely handle processes they had, for a long time, been reluctant to move online, away from the branches.
Digital is the new normal
Digital suddenly became the ‘new normal.’ As the lockdown was extended, new consumer behaviors have
taken root and new expectations emerged. Research by McKinsey1 on Covid-19’s impact on banking shows, for
example, that across Western European markets, 60 to 85 percent of customers now express a preference for
handling everyday transactions digitally. That figure would have taken two to three years to reach at the pre-crisis
pace of change.
As digital-only or digital-first banks, the challenger banks owned by traditional banks were launched to counter
the offensive of startup neobanks and challenger banks. They now seem well positioned to benefit from the digital
acceleration wrought by the Covid-19 crisis.
Age is no longer a differentiator for retail banking digital preferences
Internet/mobile banking preference by activity across age groups,1 % of respondents by market2
Highest observed, % XX Average across 6 markets,2 % Lowest observed, %
100% 85 82 82
75 77
74 72
70
70 67 59 57 57
64 50
62
50%
37 27
35 32 26
29 23
19
20 22
23 23 17 16
21
16 18
11 12
0% 10
Age 18-34 35-50 51-64 65+ 18-34 35-50 51-64 65+ 18-34 35-50 51-64 65+
Groups
Everyday transaction 3
Simple needs 4
Complex or ad-hoc activities5
1
Q. Please indicate which channel you prefer for each of the following banking activities: [...] Internet banking (eg, via tablet application or bank’s website), mobile banking (via
smartphone application or mobile website).
2
Sweden, France, Italy, UK, Germany, and Spain.
3
Credit/money transfer transactions and balance inquiry.
4
General information on products and open account.
5
Advice on complex products, questions, complaints, other services, and getting help.
Source image: https://www.mckinsey.com/industries/financial-services/our-insights/reshaping-retail-banking-for-the-next-normal
1
Reshaping retail banking for the next normal, McKinsey, June 11, 2020 5
For this issue of the Voice of the members, we asked twelve incumbent-led challenger banks from eleven
countries and four continents to share their plans for competing in the new landscape: ActivoBank (Millennium
bcp, Portugal), buddybank (UniCredit, Italy), Discovery Bank (Discovery, South Africa), EON (Union Bank of
the Philippines), Hello Bank! (BNP Paribas, France), imagin (CaixaBank, Spain), au Jibun Bank (KDDI, MUFG,
Japan), Liv. (Emirates NBD), Mox (Standard Chartered Bank, HK), Next (Banco Bradesco, Brazil), Space (TBC
Bank, Georgia), Woop (Sicredi, Brazil). Their contributions reveal the challenge they are facing as separate
ventures, as well as the innovation labs of their parent company.
Mobile challenger banks for the millennials
Across the world, incumbent banks have launched challenger banks with strongly similar core goals.
• Firstly, they want them to develop a separately branded offering suited to the needs of the new generation of
banking customers, the digitally savvy and the digitally native millennials and generation Z. The goal is to stop
these customers from flocking in millions to fintech banks such as Revolut, N26, or Nubank.
• Secondly, the challenger bank must function as an innovation lab, a testing ground for new products, new
business models, and advanced digital technologies.
Concretely, to attract millennials challenger banks must be simple, fast, and accessible mobile-only or at least
mobile-first offerings. They are often marketed in distinctively soft or bright colors, with short, cool names such
as Max, Marcus, MOX, Finn, Next or Woop, and with loss-leading offers such as free payment cards or no-fee
checking accounts.
However, beyond these similarities, the higher ambitions of legacy bank-owned challenger banks vary.
Many aim to reinvent the banking experience by centering it on the life goals and the lifestyles of digitally savvy
users. With the help of multidisciplinary teams, including non-bankers, and management consultancies, they
6 Challenging yourself: How traditional banks are forging their own challenger banks
design new approaches such as lifestyle banking (Liv. Bank, imagin), behavioral banking based on financial
health goals (Discovery Bank), or conversational banking based on AI customization (buddybank, Mox).
Others such as BNP Paribas in France and TBC Bank in Georgia more pragmatically want to use their mobile
banking apps, Hello Bank! and Space, to expand internationally. Others again, such as investment bank
Goldman Sachs or insurance company Discovery use their challenger banks, Marcus and Discovery Bank,
simply to enter retail banking.
Varying degrees of independence
As incumbent bank-owned ventures, most challenger banks must arbitrate between maximizing the synergies
with their parent company or exploring true, i.e. independent alternatives. At their current level of maturity and
size—with a median age of 3 years and median size of 435,000 customers—most challenger banks in our sample
favor synergies over independence. It helps them keep investments and operating costs down.
Making use of the infrastructure of the parent company, for example its ATM network and its compliance
resources, also enables them to offer better quality services. Commercially, most of these challenger banks sell
products from their parent company. Some, such as EON in the Philippines and Hello Bank! in Belgium are able
to switch high-end or older customers from the challenger bank to the parent bank, the Union Bank of Philippines
and Fortis Bank, respectively.
Only three of the twelve challenger banks surveyed (Discovery Bank, au Jibun Bank, and Mox) operate under
their own banking license. Only five (Discovery Bank, au Jibun Bank, Mox, Next, and Space) run their own
technology stack with its own architecture. au Jibun Bank of Japan, a pioneering joint venture between telecom
operator KDDI and Mitsubishi bank with 12 years of experience in mobile banking and 4 million customers, and
Discovery Bank owned by South African insurance company Discovery are cases in point. Both are not strictly
speaking legacy-bank led. They do not operate directly under a legacy bank.
The challenge of self-disruption
Observers have often noted that the notion of an incumbent bank-led challenger bank is an oxymoron. It is
indeed a form of controlled self-disruption. Legacy banks adopt this strategy in the hope that their challenger
banks can stick to the delimited customer target of digital natives and digitally savvy customers, and thereby
counter fintechs without cannibalizing their parent bank’s customer portfolio.
Liv. Bank, for example, prides itself on bringing in customers, 95% of whom are new to its parent bank, Emirates
NBD, causing only 5% cannibalization. The Brazilian challenger bank called Next claims that 78% of its
customers are new to its parent company Bradesco Bank, a much higher 22% cannibalization rate.
Is this strategy sustainable in the long-term? Can legacy banks create challenger banks that reach a viable critical
mass without cannibalizing their owner’s business model?
It seems unlikely. It seems that legacy banks will not be able to avoid the impact of the tight economics of the low-
cost challenger bank model. The risk is that profitable customers of the legacy bank such as the older consumer
segments become self-service digital customers who pay close to no commissions and fees and buy fewer
products. As noted by McKinsey in the above-mentioned study, generation X and baby boomers are already
following millennials in their preference for digital banking channels.
7
For these reasons, several large legacy banks, including J.P. Morgan Chase in the US, NatWest in the UK,
and BPCE in France have ditched their challenger bank strategy. They folded their initiatives after a short
experimentation phase to refocus their developments on improving their existing offerings.
Optimistic for their full-service offerings
The incumbent-owned challenger bank strategy is a challenging game to play when it encroaches on this
incumbent bank’s existing territory. Yet, the executives we surveyed for this Voice of the members report are
optimistic. They are fully aware of the intense competition their challenger bank is facing. However, they are
confident in their proposition. They believe that the link to the legacy bank uniquely positions their mobile bank to
propose the full-service financial and lifestyle offerings modern customers need.
Although they acknowledge the contribution of neobank startups, they do not believe that these will be able to
expand their product and service offerings quickly enough and with enough quality, even with open banking.
They also believe that big tech companies will prefer to partner with banks rather than submit to financial
regulation. l
About the author
Therese Torris, PhD, is a consultant in fintech innovation and digital
transformation, and a writer on consumer finance, fintech and alternative
finance. She has held senior executive positions in eCommerce and at the
leading business and technology consultancies Forrester Research and
Gartner Group.
8 Challenging yourself: How traditional banks are forging their own challenger banks
A bank for the next generation
of customer
When it comes to financial services, banks are beholden to rapidly changing customer preferences. Older
customers may still prove to be a reliable source of revenue, but all bankers realize the impetus to adapt to
changing preferences in order to remain viable long into the future. The next generation of customer has a
smartphone, rarely visits a bank branch, and expects immediate access to their finances at all hours of the day.
Everyone knows that changing banks can be a difficult and painful process. The key for these challenger banks
will be to acquire customers when they are young so they become the institutions and banks that people are
reluctant to leave when they are older. This is why you see financial institutions pour vast resources into customer
acquisition. If a bank is able to acquire customers before they turn 25, they can cultivate customer loyalty and the
lifelong relationships that are so valuable to any institution.
With the explosion of banking options in recent years all around the globe, traditional banks have seen digital
and challenger banks enter the market, competing for a slice of the financial services pie. There is no question the
market has been transformed by mobile-based banks catering to changed customer habits. Traditional players
have examined the changed landscape and searched for the appropriate response to new competition.
For many traditional financial institutions, their answer to new competition has been to develop their very own
challenger bank. These new banks are intended for a different demographic – with new names, branding, and
offerings. With their slate of digitally-focused features, these new challenger banks are free of the buttoned-up
image that might accompany their parent institutions. As you’ll see in the following interviews, these executives
understand the way the market has shifted, and the importance in adapting to a new type of customer.
Read on to find out how executives from top banks all over the world are constructing digital banks to meet the
needs of the modern-day customer. l
9
Interviews
The below interviews are available online and reserved for our members.
Ricardo Campos, CEO of ActivoBank Claudia Vassena, Head of buddybank
ActivoBank - Millennium Bank (Portugal) BuddyBank – UniCredit (Italy)
Click here to read more Click here to read more
Akash Dowra, Head of technical marketing Paolo Eugenio J. Baltao, EON Banking Group Head
and client insight at Discovery Bank EON – UnionBank (Philippines)
Discovery Bank - Discovery Insurance (South Africa) Click here to read more
Click here to read more
10 Challenging yourself: How traditional banks are forging their own challenger banksSophie Heller, Chief operating officer, Benjamí Puigdevall, imagin CEO
retail banking & services, BNP Paribas imagin - CaixaBank (Spain)
Hello bank! - BNP Paribas (France, Belgium, Italy, Austria) Click here to read more
Click here to read more
Chisato Nakamura, Jayesh Patel, Head of Liv.
Manager of the innovation division, au Jibun Bank Liv. - Emirates NBD (United Arab Emirates)
au Jibun Bank – MUFG (Japan) Click here to read more
Click here to read more
11Deniz Güven, CEO of Mox Bank Limited Jeferson Ricardo Garcia Honorato,
Mox – Standard Chartered (Hong Kong) Executive superintendent at Next
Click here to read more Next Bank – Bradesco (Brazil)
Click here to read more
Nikoloz Kurdiani, Deputy CEO at Space Tiago Nunes Nicolaidis,
Space – TBC (Georgia) Digital transformation leader at Sicredi
Click here to read more WOOP - Sicredi (Brazil)
Click here to read more
12 Challenging yourself: How traditional banks are forging their own challenger banksChallenging yourself:
How traditional banks are forging their own challenger banks
September 2020
A global non-profit organization, established in
1971 by banks and insurance companies, Efma
facilitates networking between decision-makers.
It provides quality insights to help banks and
insurance companies make the right decisions to
foster innovation and drive their transformation. Over
3,300 brands in 130 countries are Efma members.
Headquartered in Paris. Offices in London, Brussels,
Andorra, Milan, Stockholm, Bratislava, Warsaw,
Moscow, Istanbul, Beirut, Dubai, Tokyo, Singapore,
Sydney and Montreal.
Learn more www.efma.comYou can also read
