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In the five years since launch, UK-based Revolut has acquired over 15 million international customers9 who have been lured by the attractive product offering (e.g. zero fee currency exchange) and mobile-only relationship.

“We’re on a mission to build the world’s first truly global financial superapp where our customers can manage all of their daily finances. Across our personal and business accounts, we help customers improve their financial health, give them more control, and connect people seamlessly across the world.”10

Nik Storonsky, Founder & CEO of Revolut


 

Visa Consulting and Analytics

June 2021

 

11 - 14 Minutes

Can digital challenger banks create a competitive edge?

The digital transformation of the banking sector is seemingly unstoppable, and banks face several key challenges now and in the years ahead: how to integrate digital technology into all areas of the bank, how to rethink the way they operate and deliver value, and how to incorporate agility into banking culture.

Technology is enabling bank customers to manage their money safely and more conveniently from their smartphones and desktops. As a result, several digital-only alternatives have sprung up since the mid 2010s to offer a differentiated customer experience to traditional financial services. In some markets, tech savvy users (mainly millennials and Gen Z) have flocked to these services. See Revolut example.

Furthermore, fintech start-ups have targeted some of the more lucrative segments of the market (e.g. lending or international money transfer). To remain competitive in this environment, many traditional banks are re-looking at how they want to offer digital products and services to their customers. To that end, they are asking themselves a range of important, strategic questions:

  • How are our customers’ needs changing?
  • How do we compete with digital challengers and fintech providers?
  • How do we develop our digital channel strategy?
  • What are the growth opportunities?
  • Do we build on what we already have, or should we create our own challenger bank?
  • How should we enter the market?

Visa Consulting and Analytics outlines strategic imperatives to consider and provides a framework to help banks decide whether creating a standalone digital challenger bank is the best approach.

Different approaches to compete in digital banking

Banks and fintechs have taken distinct approaches to digital banking to date. While it is too early to tell which approach will prevail, banks are increasingly considering standalone digital bank brands to meet today’s customer expectations.

Why launch a separate digital challenger bank?

Banks that have chosen to launch a standalone digital challenger have done so for three main strategic reasons: to defend their market position; to go after new opportunities; or as a vehicle for learning about digital innovation.

  1. Defensive Play

    In markets with many new digital entrants, incumbent banks are seeing their customers migrate some or all of their business to the digital banks. Even if they still retain the account, it may only be for commoditized services, e.g. deposits. To compete and retain their customers, banks choose to create their own digital native offering.

    • DBS Bank created DigiBank in 2016, a mobile only digital bank, i.e. no physical branches, to expand into new markets (such as India).1
    • Capital One (U.S.) revamped their digital end-to-end experience for online shopping by providing new services such as post-purchase notifications, taking engagement and digital security to a new level2.
    • Tangerine Bank (Canada), Canada’s leading digital bank continues to innovate the mobile experience, allowing for clients to sign up completely digitally.3
  2. Capture New Segments

    Proactive banks will look to retain customers and will seek to utilize digital capabilities to win new business. These banks are looking to attract new market segments that are underserved by their core offering, e.g. youth, mass affluent or small business.

    • Emirates NBD (UAE) launched Liv. in 2017, a lifestyle-orientated and mobile bank, to offer a differentiated digital experience to millennials and a new generation of customers.4
    • Google Pay is collaborating with several U.S. banks to offer digital-first bank accounts directly in the Google Pay app.5
  3. Test & Learn

    Some banks are using their standalone operations to test innovation. In this environment, unhindered by parent bank processes and systems, it is quicker to test, learn about and launch new digital services. These learnings are invaluable when the propositions are subsequently integrated into the main bank.

    • BBVA (Spain) is a traditional bank that is heavily investing in and focusing on innovation, e.g. invested in digital banks Simple (US)6 and Atom Bank (UK)7 to drive innovation within the parent bank.
    • RBC (Canada) launched RBC Ventures8 to focus on products and services that go beyond banking and transform the way you live your life.

 

Planning and implementing the route to market

Once a “go” decision has been reached, banks will need to factor in wider operational considerations, choose how to enter the market and develop an implementation roadmap. For example, while it may be desirable to create a separate entity from scratch, it might be quicker and more cost effective to adapt existing solutions once operational dependencies and implementation are taken into account. Depending on the situation it may be optimal for banks to subscribe to proven, white label capability instead or, assuming the right synergies exist, the simplest option might be to buy an existing digital bank.

 

Banks will need to decide how they plan to implement the new proposition and how they will use existing assets and products. There are four main pathways to building a digital challenger: adapting an existing solution, building from scratch, using a white label platform, or through acquisition. These pathways are not mutually exclusive, and each come with different benefits and disadvantages that must be assessed carefully since they will vary depending on individual bank circumstances.

 

Whichever pathway is chosen, the bank will need expertise, guidance and support from trusted partners, none more so than for the implementation roadmap that will frame how a digital bank is created and launched. We believe there are three core phases to a robust implementation roadmap: (1) business model definition, (2) solution design and (3) implementation.

 

Technology has given customers more freedom when choosing financial products and services and they are attracted to providers that enable them to manage their money safely and more conveniently from their smartphones and desktops. Banks are finding that they must reimagine their customer experiences to continue to remain relevant in today’s market. To be successful and to differentiate from the competition, you may choose to develop your mobile banking capability as part of your multi/omni-channel strategy and digitization roadmap. In addition, you may also decide to create your own standalone digital bank to defend your position in the market, to go after new business or to use as a test and learn for your digital innovations.

 
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1 DBS.com, “DBS breaks new ground in digital banking”, 2016, https://www.dbs.com/newsroom/DBS_breaks_new_ground_in_digital_banking

2 How Capital One is using tech to improve the online shopping experience, October 2020, https://venturebeat.com/2020/10/09/how-capital-one-is-using-tech-to-improve-the-online-shopping-experience/

3 Another first from Tangerine Bank: Sign up as a Client in minutes on the Tangerine Mobile Banking app with a few taps and a selfie, June 2020, https://www.tangerine.ca/en/about-us/press-releases/pr-2020-06-23

4 EmiratesNBD.Com, “Emirates NBD launches Liv. digital banking proposition”, 2017, https://www.emiratesnbd.com/en/media-centre/media-centre-info/?mcid_en=409

5 Google Pay to launch digital bank accounts in 2021, August 2020, https://9to5google.com/2020/08/03/google-pay-digital-bank-accounts/

6 BBVA.com, “BBVA acquires Simple to accelerate digital banking expansion”, 2018 https://www.bbva.com/en/bbva-acquires-simple-to-accelerate-digital-banking-expansion/

7 BBVA.com. “BBVA invests in Atom Bank, the UK’s first mobile-only bank”, 2018, https://www.bbva.com/en/bbva-invests-in-atom-bank-the-uks-first-mobile-only-bank/

8 RBC Ventures, https://www.rbcventures.ca/en/ventures

9 Revolut.com, “One app for all things money”, June 2020, https://www.revolut.com/about-revolut

10 Revolut.com, “Revolut raises $500 million in Series D funding as it sets sight on profitability and daily adoption”, Feb. 24, 2020, https://www.revolut.com/en-US/news/revolut-raises-500min-series-d-funding

11 Businesswire.com, “Bank of America Business Advantage 360 Gives Small Businesses the Ability to View Data From Third-Party Business Applications in Award-Winning Digital Dashboard”, Feb. 6, 2020, https://www.businesswire.com/news/home/20200206005307/en/Bank-of-America-Business-Advantage-360-Gives-Small-Businesses-the-Ability-to-View-Data-From-ThirdParty-Business-Applications-in-Award-Winning-Digital-Dashboard

12 Finextra.com, “HSBC targets teens with PayMe wallet app”, May 13, 2020, https://www.finextra.com/newsarticle/35815/hsbc-targets-teens-with-payme-wallet-app

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