Why ‘challenger banks’ haven’t taken off in the US

Digital banks, big in the U.K., have a trust problem in the States.

“Challenger banks,” as they’re called across the pond, include the likes of Monzo, Starling, Tandem and Atom — completely digital banks built on new technology as opposed to the outdated infrastructure of legacy banks. They usually tout better interest rates, lower fees, if any, and better service. They have an have an easier time creating a good customer experience because they don’t build on the rusty rails of the existing financial system, making the way they operate more efficient and the user experience more enjoyable.

That model hasn’t really caught on in the U.S., though, where startups are mostly building technology-based solutions for payments, investing and lending – anything that doesn’t require opening a bank account with an unknown entity. Building that type of business profitably is hard: the cost of customer acquisition is high and complying with complex financial regulations can be a big undertaking.

But beyond that, U.S. customers are still largely distrusting of startups when it comes to handing over all their deposits, and digital banks are waiting for that doubt to wear away, said banking and payments consultant Faisal Khan. Customers responded well to startups that give them convenience by connecting to their existing bank accounts, like Venmo for easy peer-to-peer payments or Moven for personal finance management. Even startups that take micro deposits like savings app Digit or micro-investing app Acorns have become popular among early adopter types.

Digital banks, however, need to create a stronger value proposition that will actually motivate customers to break a habit or create a new one and store larger volumes of their money with them – especially with legacy banks partnering more closely with startups and acquiring their services.

Making a profit
BankMobile, a rare U.S. success story, offers a compelling case study. With about 2 million accounts since its 2015 launch, it has grown so quickly Customers is selling it to Flagship Community Bank in Clearwater, Florida. (The Durbin Amendment of the Dodd-Frank Act requires companies with more than $10 billion in assets cap their interchange fees at 44 cents, and Customers’ asset size is just below that. BankMobile’s revenue comes mostly from interchange fees on debit cards.) The $175 million deal is expected to close before the end of the third quarter.

Luvleen Sidhu, president and chief strategy officer, said one of the main reasons BankMobile has been so successful is it is acquiring new customers at a low cost – about $10 per account, she specified, compared to the roughly $300 she said it generally costs to acquire a customer returns come out to “maybe $85 a year” in revenue.

“A lot of people are trying to utilize technology to bring an antiquated model into the 21st century,” she said, acknowledging the similarity of many fintech products and the importance of delivering a valuable solution. “The question is whether they’re successful at doing that and how you measure success. But if you’re not doing it profitably, it’s not a sustainable model.”

The reason most fintech startups aren’t building profitable businesses is obvious but important: It’s expensive and they don’t have easy access to funding like banks do. Many want to “make the world a better place,” and in fintech that often means bringing financial access to unbanked customers or offering low- or no-fee accounts for lower income people. Those ventures often don’t take off in a truly transformational way. But as existing financial institutions know well, lower income customers are not as profitable and the same is true for fintech companies, Sidhu said.

“It comes down to profitability,” she said. “Lower income customers are not as profitable. It’s the same for fintech companies:  A lot of these models don’t have low cost funding like a bank does – they have to lend to customers but then have to borrow from hedge funds – therefore they have to partner with banks or banks have to acquire them.”

Most startups understand that now. Financial technology as a concept is not new but the rise of the movement around “fintech” began with companies bent on disrupting legacy financial institutions. Today both sides understand each is necessary to the other’s success and are eagerly working together.

That’s perhaps part of the reason the U.S. doesn’t really have “challenger banks” – a term generally saved to qualify U.K. startups; U.S. startups are joining banks, not challenging them. Simple was eventually sold to Spanish banking giant BBVA, Moven is now partnering with TD Bank and BankMobile was born from a bank.

Customers need a better value proposition
Digital banks haven’t taken off in the U.S. yet but that doesn’t mean they won’t. However, it will take more than a better customer experience enabled by technology to motivate customers to open an account or switch from their current bank, despite their general dissatisfaction with the current financial system, Khan said. These new experiences need to focus more on customer behavior – something banks get but startups need to work on more. What will ultimately make a digital bank stand out from legacy banks that are improving digitally is the way it handles data.

“Technology is not an edge, it’s a temporary advantage and if a challenger bank can acquire technology so can a bank,” he said. “The one that’s able to get customers is the one that understands behavior well. It’s not about technology or price – and banks understand behavior very well.”

The bank of the future will understand how people use data in their everyday lives – on social media and not just in their financial affairs – and make it easy for them to manage their money in the same platform, Khan said. For example, if one day everyone with a Facebook account also has a bank account with Facebook, making one a natural extension of the other, that might be even more appealing to customers than a bank or digital bank, both of which currently act as designated environments for banking.

The value proposition and difference around brand awareness or trust is not worth it to consumers to make the switch from a legacy bank to a digital bank and that trust is what drives their behavior, said Jeffrey Brown, global banking and financial services lead at Genpact.

“The successful fintechs are the ones who think about a different customer experience or value proposition or solve a different problem than the existing guys,” he said. “Digital and artificial intelligence are just tools by which they deliver that but there’s nothing inherent about the technology driving the ones that are successful.”

That’s why it’s important to remember a tech giant like Facebook or Amazon could get into banking services before a digital bank even takes off, Khan said. If it’s a competition for customer trust, the tech company could beat out all the banks.

“Banks today are asking your institutional association not your social association,” Khan said. “There are many steps from legacy to seamless total data integration.”

Innovating by creating a movement: How Credit Suisse prepares for its technology future

Innovation is hard, but it’s particularly hard in finance where existing revenue streams are large and have a long history of being that way.

So how’s a technology leader supposed to sell innovation if change is disruptive and can cannibalize existing business models? What are the tools at the disposal of digital executives to get the budgets and resources they need for successful projects?

Anne Johnson is head of data at Credit Suisse’s international wealth management division. A techie at heart, Johnson also has a management consulting background at Bain. Her responsibilities include translating technical requirements of the IT division and fusing them with the business priorities of upper management in the business.

She spoke to attendees at the Tradestreaming Money Conference held in November in New York City.

Create a storyline

Selling innovation at Credit Suisse

Pitching a technology idea within a large financial institution isn’t much different than going out and trying to raise external capital for a startup idea. It requires a tight storyline to persuade those sitting on the opposite side of the table to believe in a shared vision and pony up money and resources to make it happen. So, start with the script.

Johnson advises being very clear about the reasons behind why a project should get funded. Is it because the technology is cool? Is it fear — fear that the competition is coming to eat your lunch? Or is it something more threatening? Is the business going to become unsustainable in the coming decade?

“Google doesn’t have a bank, yet, but it’s very successful building engagement,” Johnson said. “Will they come after my clients one day? Is my client going to get into a self driving car and request it to go see a new financial advisor?”

Computers are the greatest tools of our time with limitless potential, but senior management must see the connection between a large technology project and lowering costs and improving revenues before they allocate investment towards projects. Make sure the bottom line is part of the storyline.

After the pitch addresses the why of a project, determine the what. This is what’s going to get built and when — the meat of the plan. Johnson layers her project plans, combining a long term vision that gets her colleagues excited about her plan with short-term milestones that ensure her team starts delivering from the start.

“You can have a multiyear vision on blockchain but you need to deliver something tomorrow that reduces costs and increases revenues,” she explained. “I don’t want years to pass before I deliver something.”

Lastly, a storyline has to include how a tech leader plans to execute her plan. Johnson says that frequently senior management will respond positively to a pitch but ask the question ‘but can you build this’? This shows that the upper echelon doesn’t trust its IT group. So, the how part of the storyline must include building trust at all levels of the organization.

Getting buy-in

After a tight pitch is developed, it needs approval. You could get lucky meeting the CEO in the elevator, pitch him, and he agrees to fund everything, bypassing the entire approval process. That’s unlikely to happen. More likely, though, is that digital leaders will have to spend time selling their projects internally. But senior managers have the tendency to focus on the short term and push off making bigger, longer cycle decisions like technology projects.

To get over this hurdle and get support for projects, Johnson recommends building what she calls a movement. She cites her own experience owning data responsibilities across the organization. The challenge was that others also owned pieces of data and she needed them to play ball. So, she created a movement by launching what she called the data community at Credit Suisse, getting people to buy-in to the greater plan.

“Now I can nominate people to be the machine learning lead of the community,” she said. “This is how you herd people. On innovative projects, you can isolate yourself away from the company or get the whole company to move with you.”

Building momentum

Once a plan is fixed, and the funding and resources allocated, the project team needs to start delivering. “Once you get all resources, you need to deliver,” Johnson said. There needs to be a cadence and pace to consistent delivery, so that momentum builds in the execution phase of the project.

Creating a short delivery cycle tied to milestones has an added benefit: it opens communication channels internally. When delivery and communication starts happening on a regular basis, it develops a momentum that builds upon itself.

“It’s not easy, but large financial firms can be innovative,” she said.

Why digital transformation efforts are so fragmented

Digital transformation is one of banking’s top priorities. Product based processes, which might have been necessary a couple of decades ago, are severely damaging the customer experience and banks’ profitability.

Technology’s ability to break data silos and service the customer throughout his lifecycle offers banks opportunities to increase stickiness.

Though most banks have embarked on their digital transformation journey, only 4 percent reported that they have completed it, according to a new report by enterprise software company LifeRay.


When asked about the main challenges to digital transformation, respondents cited a wide array of issues, indicative, perhaps, of the lack of comprehensive vision and goals for the process as well as of the specific problems it intends to solve.


To be fair, this is a hard problem to solve that needs coordination between many people, IT systems and decision makers.

Fragmentation is the nature of the old product-based silos and procedures. It is this legacy that is preventing banks from truly creating a customer centric culture. When asked for the number one barrier to addressing the full customer lifecycle, a whopping 46 percent answered that different business units own different parts of  it.


With different departments owning various parts of the lifecycle, and with the very human tendency to not let go of organizational power and responsibility, how can management move the effort forward?

The path chosen by most FIs was the easy one: dealing with what they can, without stepping on too many toes. 53 percent of the survey respondents said they just deal with parts of the customer lifecycle right now.


Only 3 percent of respondents claimed they have created continuity across all customer touch points. 55 percent are in the midst of coordination and 36 are just starting to look at solutions.

As the adag, popularly attributed to Albert Einstein, goes: you can’t solve a problem with the same kind of thinking used to create it. Overcoming organizational silos will require banks to truly commit to the customer as the goal of their digital transformation.

The challenges of digital transformation: A view from the front lines

For the largest financial institutions, competing in digital isn’t about technical know-how. These firms aren’t slow to roll out digital products because they lack development chops. Their challenges are more existential and they keep bumping into themselves. Senior business-line managers withhold support for projects that will transform, and frequently cannibalize, their divisions and their revenues. How do you get buy-in across the organization?

CSFB's Anne Johnson
Anne Johnson

It’s a major challenge and one that Anne Johnson is tasked with at CSFB. As the head of data, her mandate spans the organization, helping to translate technical requirements into business cases for the management team. Tradestreaming caught up with Anne to discuss the challenges in running company-scale digital projects and what she’s learned along the way.

What are the biggest challenges in your role?

There are three big challenges:

  1. Lack of trust that IT can deliver
  2. Finding room in the budget when we are swamped in technical debt of past IT builds
  3. Getting buy-in from sponsors to not only see the vision but have the wherewithal to rethink and change end-to-end processes

Heads of digital projects need to compress BAU and make the case to spend that in innovation.  They need to get senior people to buy-in that innovation won’t mimic current business models and doesn’t require a joint venture to deliver it. Concentrate on quick milestones with high-value items to prove that you can deliver.

Can you do digital transformation piecemeal? Can you have transformation without full buy-in?

Yes, top-level people do need to understand it isn’t going to happen all at once.  Actually, it will probably evolve into something even better if you realize you can’t build the perfect spec with all the capabilities from day 1.

It is usually best to insulate innovation from the rest of the company.  It is very difficult to launch something when you are potentially cannibalizing existing business.

How does your experience as a consultant help or hinder?

Management consulting taught me how to benchmark to competitors and bring in industry trends to find the answers I need and build my business case.

It also taught me how to communicate effectively with senior stakeholders, but also my peers and my teams.  Achieving big things means I need to influence, build consensus, and drive change.

It has helped because I pull from the front. Don’t ever forget to keep asking yourself, “How am I changing the bottom line?”

Hear more from Anne Johnson at Tradestreaming Money 2016 in New York City this November 14.

Citizens Bank: 4 steps to seriously compete in digital banking

Without Bank of America’s deep pockets or Citi’s coverage breadth, Citizens Bank has grown to be the 13th largest retail bank through being scrappier. Digital plays an increasingly important role for the firm’s future and as it does, its impact is being felt on its culture, its recruiting practices, and the types of partnerships it considers.

“We think of digital strategy as an extension of our overall strategy,” said Lamont Young, Citizens Bank’s head of digital.

Citizens has focused on four core areas in helping guide the bank in an increasingly competitive digital market.

It all starts with culture

The firm frequently talks about its focus on customers and its relationship with them. Citizens sees the industry’s frenzy around fintech less as a disruptive force and more as an opportunity to show customers the way to better financial experiences. Culture sits at the heart of this change and first and foremost, it’s about servicing customers. It’s about creating an environment of people and processes that support customers across channels and touch points.

lamont young, head of digital, Citizens Bank
Lamont Young, head of digital at Citizens Bank

“We’re getting out of historical silos and channels and continue to think about the customer first,” said Young, who also heads up multi-channel marketing. “Customers want to interact with us any way they choose. They want to make sure they’re connected. I want to follow through an issue that began at a branch that carries over to phone with a single view of the customer, across channels.”

With the support of senior leadership of the bank, this thinking permeates the organization and extends beyond just the firm’s customers. It also impacts what type of technology the firm uses and how it works with partners.

Deciding where to compete

With $145 billion of total assets, Citizens isn’t Bank of America or Citi. The financial institution chooses to pick its spots where to compete and stays out of those where it doesn’t feel like it has an advantage.

Customer feedback plays a major factor in determining the firm’s product roadmap. The company’s strategic planning gives preferences to those things Citizens’ customers clamoring for and prioritizes them accordingly, with the intention to bring them more quickly to market. So, instead of typical 18-24 month cycle times, Citizens attempts to roll out new customer-driven products and services in six months.

Citizens aims to always be among the leaders but that doesn’t always mean it has to be first to market. “We don’t have to be the first adopters, but we can’t be laggards with core capabilities,” he said.

Making sure the right players are on the team

With roadmap in hand, Citizens then conducts a skills assessment to determine whether it has the requisite chops for a project. If it doesn’t, it then looks to see if the skills gap can be closed by reskilling or whether it makes more sense to form a partnership with a third party.

“We found that some of the recent hires are folks with ecommerce experience, but not necessarily bank experience,” explained Young. “Understanding digital sales is critically important. We’re not just competing against TD and PNC for talent. We’re also hiring people from Target and Amazon, with digital analytics expertise. Data scientists are in hot demand right now.”

As Citizens has attracted top talent from technology and ecommerce firms, the physical nature of the work environment is also changing. The digital team has hired social media and content marketing talent from media firms and agencies and in doing so, had to combat the stigma that all banking is suit-and-tie stuffy. These types of hires have an expectation of a more relaxed work atmosphere, and so Young’s digital group has tried to create an environment that is conducive to this type of work that includes more open space.

Rollout, measure, pivot

Young believes his organization should be nimble enough to make changes on the fly when something it’s been working on doesn’t pan out as planned. That’s done via an ongoing evaluation of the bank’s development and marketing activities.

An evaluation of the firm’s digital platforms over the past six months is a recent example of this type of analysis. Whereas initial thinking was that the firm should reinvest in both its mobile and online technology stacks, it looks more likely that Citizens will explore a single digital platform that supports both channels.

Young doesn’t believe he needs to reinvent the wheel when it comes to technology and sees opportunities to work with fintech partners. As an organization, he feels Citizens is open to different ways of doing business and different personalities. Senior leadership has bought in. Partners still need to be a good fit for the bank, though, especially if there’s data sharing going on. The rest will work itself out.

“One of the things I’ve enjoyed is selling this message [of collaboration] to our senior leadership,” said Citizens’ Young. “There’s an openness and value to working with smaller companies to reduce cycle times and join us in pushing the envelope.”

4 charts on the state of digital transformation in banks

Digital transformation is one of the buzzwords causing a stir in the banking community. Many bank execs are leading the process of unifying digital strategy and operations, spanning from the front office to back office.

Digital transformation is seen as the way banks can ensure they serve their customers even during times of great changes in technology and customer expectations. Data shows, however, that bankers are still thinking of innovation in a very siloed and opportunistic way.

According to CSI’s 2016 banking priorities study, about 11 percent of banking executives plan to enhance mobile or omnichannel banking. 18 percent plan to incorporate new technology. Driving interest income and loan growth was seen as the greatest opportunity.


Most bankers will say their organization in engaged in digital transformation. Many banks, though, still manage their transformation as business-led “islands of innovation”, posing as digital transformation, while true business-wide transformation remains much rarer, according to a recently published IDC report.

Only a quarter of respondent banks in the IDC study are in the two highest maturity levels and are truly able to support the level of agility and innovation that the market demands.


North American banks are investing the most in digital transformation. One in five banks is investing more than a quarter of its IT budget in DX initiatives, which is three times greater than the next closest region.


Digital transformation usually starts with front office applications like mobile banking or other customer service initiatives. However, as banks progress in the digital transformation maturity journey, back and middle office initiatives get more focus. Projects prioritized in the next 24 months, according to the IDC study, are more likely to be middle- and back-office focused, like building an enterprise-wide compliance architecture.


French bank Groupe BPCE buys digital bank, Fidor

Another large incumbent bank has joined forces with a new digital bank.

Last week, Groupe BPCE, one of France’s five largest banking groups, agreed to purchase German digital bank, Fidor. The result of a 2009 merger between Banque Populaire and Caisse d’Eparange Regional Cooperative Bank, Groupe BCPE provides a suite of financial services ranging from retail to international corporate banking. With the acquisition, Fidor becomes a member of the French cooperative banking group, which features 35 million customers and €1.16 trillion in total assets.

The transaction should come as no surprise to those who follow the French bank. Groupe BPCE presented its intention to launch more digital integrations in its 2014 strategic campaign titled Another Way To Grow. Since then, Groupe BPCE has launched several products catering to emerging fintech trends, like p2p payment app S-money and Howiz, a banking app designed by and catering to 18-24 year olds.

“This operation constitutes a key step in the acceleration of the digital transformation of our group,” said François Pérol, chairman of the Groupe BPCE management board. “It further demonstrates our commitment to innovation, to develop a customer centric approach enabled by a digital banking technology and to be more involved in digital and mobile banking field.”

Founded in 2009 by Mathias Kröner, Fidor caters to people who want a more transparent and user friendly banking experience. With the motto Banking with Friends, Fidor tries to turn managing money into an interactive process for customers. Users have opportunities to crowdsource financial advice from its 350 thousand community members, as well as interact with the bank through social media platforms.

With the agreement, Fidor doubles its equity, giving the digital bank more firepower to grow through technology investments and regional expansion, plus increased stability and sustainability. “In a world of increasing volatility it is important to be member of a strong group,” said Kröner, who remains a shareholder and CEO of Fidor, in a press release. “We are excited to have such a well-established partner as BPCE in the financial world that recognizes the need for a customer-centric and entrepreneurial approach to banking and innovation.”

“Technology is changing banking, and traditional banks are being pressured by disruptive, transparent, digital banks,” said Dr. Chris Martenson, an economic researcher and futurist, and co founder of PeakProsperity.com in correspondence with Tradesteaming. “In the purchase of Fidor, BPCE is trying to keep up with technology and not get left behind by more innovative banks.”

The deal is similar to the 2014 acquisition of Simple by BBVA, the second largest bank in Spain. BBVA also acquired online business banking provider Holvi in 2016.

The Groupe BCPE/Fidor acquisition is expected to close by the end of 2016.

Photo credit: frankh via Visual Hunt / CC BY