Challenger Banks: Looking Ahead to Expansion and Evolution in 2018
2017 for challenger banks is best characterised as a story of expansion and investment: BNP Paribas completed the acquisition of CompteNickel for €200m, N26 continued to impress by scaling all over Europe, Monzo raised another £71m, Revolut added £50m in funding plus applied for a banking licence, peer-to-peer lender Zopa raised £32m to fund the build-out of its banking infrastructure and Tandem acquired Harrods Bank for its deposits, customers and banking licence, a deal that GreySpark acted as a technology advisor for.
Customer acquisition for the leading digital challenger bank players has been accelerated by viral marketing and social media. GreySpark estimates that the average challenger bank’s cost of acquisition ranges from £1 to £30, varying by product but this figure is significantly less than the cost of acquisition for the incumbents. This trend of low-cost customer acquisition is nearly over. Indeed, as the viral aspect trails away and competition increases, it becomes more difficult and more expensive to attract new customers at an affordable cost. This provides the context for fundraising occurring across Europe. Capital is more crucial than it has ever been to shaping the product, increasing market share and meeting capital requirements.
Digital challenger banks have taken contrasting approaches to back-end technology stacks. Several, including N26 and Tandem, have resorted to outsourcing the back-end in the belief that differentiation is in the front-end. Advantages include a quicker time to market and less initial expenditure. Other banks take great pride in building both their technology back-end and front-end; Monzo and Starling constantly refer to their proprietary systems in marketing. Benefits include greater flexibility and control of integrations and potentially less operating costs in the long term. GreySpark predicts that challenger banks with in-house back-end technology will experience initial pain in scaling due to maintaining a larger technology code base and infrastructure, however, this will be offset by lower long-term operating costs per customer and greater flexibility in product development.
Over the next year, business models will evolve, with revenue and profitability becoming greater priorities. Rapidly paced launches and user base increases have validated the predicted demand for the services offered. However, no digital challenger bank is currently able to offer all the products provided by incumbents which include current accounts, saving accounts, loans, payments and mortgages. Furthermore, the products currently offered by digital challenger banks closely resemble what is currently provided by incumbents. GreySpark anticipates the trialling of innovative products as challengers attempt to differentiate their products. In what is fast becoming a crowded market, operational efficiency is as equally important as product development and enhanced customer experience.