5 lessons established financial institutions can learn from challenger banks

May 18, 2021
Jackie Lam
Contributing Writer

Some have folded. Some are pivoting. The fact remains: Overall, challenger banks around the world are growing in number and disrupting the industry. From 2016 to 2020, the number of established independent challenger banks – or neobanks – globally hit the 100-mark.

These digital-native banks that appeal to Millennials, the underbanked, and other underserved segments of the population have been at the forefront of digital banking innovation. With many people eager to bank differently, challenger banks have been able to meet the demand by tapping into data and technology to create a seamless banking experience that supports financial wellness. 

As digital banking innovation continues, the features that once set challenger banks apart from the industry are now becoming accessible to credit unions and banks of all sizes. So, what can established financial institutions learn from challenger banks? 

Here are five insights and takeaways to glean from the ever-evolving crop of challenger banks in 2021: 

1. Ease of use 

Challenger banks typically offer a simple product, then expand their products and services to users in the hopes of turning them into high-value account holders. As banks and credit unions are now deposit-rich, partly due to quickly responding to and administering most of the PPP loans last spring, many are left wondering how to parlay the surge of new account holders into long-term members and customers.

Established financial institutions can also explore how challenger banks make it easy to open an account online and apply for new products by cutting down the number of steps it takes to enroll.

Further, they fully automate the identity verification process for new applicants and drop requirements that create friction. For instance, the need to provide documents – such as a photo ID – when applying for a new product or opening an account can lead to a 50% drop-off rate in completed applications. 

The key is to simplify. Make these additional offerings accessible and easy to sign up for without compromising security. 

2. Playing the role of a financial friend 

The focus of challenger banks goes beyond a tagline of "we've got your financial back." Looking out for the best interests of users is baked into their featurization. A recent example of this is from the challenger bank Dave, whose taglines include "Banking for humans" and "We're your financial friend." In addition to donating $50,000 to customers impacted by the winter storm in Texas, they provide features that help their users cover financial shortfalls and build credit.

Having a robust suite of financial wellness features and educational content helps extend their brand messaging and speaks to a greater shared value amongst challenger banks: to make the experience of banking easier and enable you to finally achieve your money goals.

It's also the norm for challenger banks to develop features backed by well-informed financial literacy principles, such as overdraft fee protection, allowing customers to be paid early, and automating the process of saving up money so it stops being a conscious task. 

Other features, such as making it easy to track expenses and have all your accounts in one place, simplify day-to-day money management and help people see the bank as their primary financial institution. By doing so, neobanks and challenger banks attract new users and build loyalty with existing ones. 

3. Aligning on sociopolitical issues with account holders

Polarizing as it may be, challenger banks aren't afraid to make a bold stance on sociopolitical issues, which is in sync with and supports its customer base. Challenger banks communicate their larger mission through social media channels, word-of-mouth, and brand partnerships, such as with small business retailers and BIPOC influencers. For example, Chime partnered with rapper 21 Savage to reward scholarships to underserved communities and launch lessons in financial literacy.

They also achieve this through automation tools built into the online platform where customers can give back to the society. For example, Aspiration Bank's Plant Your Change program enables users to donate change from roundup transfers to plant trees

Positioning themselves as allies and remaining relevant on current issues, being in step with their users, and showing their support bolsters challenger banks' reputation, reinforces their brand values, and differentiates them in the space. In turn, challenger banks take the long-view on customer success. One that's built on establishing a relationship built on trust and mutual growth. 

4. Ensuring digital is native to everything they do

Instead of approaching "going digital" as being a single initiative, challenger banks weave in technology throughout all aspects of their design. Knowing that their customer base will grow, they've been able to swiftly roll out new features to serve their users’ changing needs.

Challenger banks can easily pivot and adapt to their growing customer base's needs, preferences, and lifestyles thanks to an open banking approach. Enabled by APIs, challenger banks tap into Banking-as-a-Service providers and utilize the firehose of user and transactional data to solve modern banking challenges. 

Established financial institutions can approach their digital needs as an ecosystem, not a single channel. In turn, established banks can work with third-party fintech partners to bridge the API development gaps and migrate to cloud-native infrastructure that helps them build and deploy quicker.

5. Consistency in user experience across all channels 

The pandemic and concerns over stepping foot into a physical branch has propelled a greater use of mobile tools. Over a third of banking users boosted their use of online banking during the pandemic, and in March 2020 mobile check deposits shot up 50% from the month prior, according to a recent report from Deloitte.

With brick-and-mortar locations of established financial institutions offering limited hours and others temporarily shuttering, there will be a continued greater reliance on mobile banking. It's a call for established banks and credit unions to create a seamless, cohesive, and consistent user experience across all channels – both digitally and in-person. 

From savings features to security, neobanks and challenger banks have mostly led the charge in innovation and technology that helps people feel more secure, confident, and financially empowered. Established financial institutions can learn from the way challenger banks position themselves in the space – through differentiation and brand messaging, the channels they use to reach out to their customers, and infuse technology into everything they do. In turn, they're laying the foundation to establish long-term relationships that meet their users' needs.

The key to growth in both revenue and the health of the community you’re serving. 

Regional banks and community credit unions have a well-earned reputation of working for the needs of the community and providing personal and friendly user experiences. The opportunity exists for these financial institutions to ensure long-term success by adopting what’s worked well for challenger banks while avoiding the pitfalls and risks commonly associated with “disruptive” innovation.

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5 lessons established financial institutions can learn from challenger banks