The Future of Banking as It Happens

Challenger banks or neobanks are built to meet customer demand for simpler and more convenient mobile banking services. As a response, and to protect their business against innovative competition, traditional retail banks are developing similar services for customers through their existing mobile banking applications or by launching their own digital banks.

Traditional technology providers could not always support these innovative challenger banks, which has led to the rise of new fintechs providing technology solutions to support the new wave of banking propositions and meet the increasing demands for digitally advanced solutions. This article explores the latest trends observed across the three different segments of the banking landscape.

Over the last six years, the UK financial industry has witnessed the rise of neobanks, which are fully digital banks, existing without physical branches, with reinvented processes and practices credited to traditional retail banks. This banking model is represented in the UK market by the likes of Monzo, Revolut, and Atom Bank. They provide customers with a range of banking products and reformed online services via a mobile application.

The growth of this sector has seen a strong ecosystem developed within the UK and European financial industry, with a number of these firms successfully securing a banking licence. As of September 2019, around 13 million people in Europe had opened an account with a neobank.1 This rapid adoption rate is primarily due to the range and ease of access to various banking products and services, like current and savings accounts, loans, mortgages, budgeting tools, low currency exchange rates, etc.

In a short time, these neobanks have managed to include a wide range of product offerings for their customers, enabled by innovative banking solutions, such as Mambu or Thought Machine. These new core banking providers utilise modern technology architectures with advanced API capabilities or built-in solutions, allowing neobanks to plug in banking products from different fintechs. Examples are the use of TransferWise for international payments by Monzo or Iress’ Mortgage Sales & Origination (MSO) suite for mortgages by Atom Bank.

The increasing competition, strong backing from investors, and rapidly growing customer base of the neobanks suggest that the industry disruption in the UK is in full force. To grow in this competitive industry, we found that neobanks are using the following two key areas to differentiate from incumbents and peers:

To compete with similar collections of products, services, and processes offered by their competitors, neobanks are trying to differentiate with unique and innovative offerings for their customers. This range of services includes competitive savings account rates or premium account offerings, which give customers access to rewards schemes, such as cashbacks, access to airport lounges, travel insurance, etc.

Other innovative offerings include cryptocurrency investments by Revolut or the “Get paid early” feature by Monzo that allows customers to receive salaries in advance. Quite attractive to users are the spend monitoring and budgeting functions – usually lacking in the incumbent banks’ mobile apps – attractive currency exchange and multi-currency accounts, the basic ‘wealth management for the masses’, with the ability to invest from within the same app in various asset classes, or to perform simple financial planning.

The business model of neobanks is targeted to cater to one of the three different market segments. This is respectively reflected in the focus of their services, operations, and business models. We identified three prevailing types of business models:

• Retail bank replication. Replicate the end-to-end banking operations and services of a traditional retail bank (e.g., Monzo, Starling, N26) to offer full-range services to mass consumers and businesses.
• Banking for SMEs. Support business banking for underserved small and medium-sized enterprises or budding entrepreneurs in the market (e.g., Tide, Coconut).
• Niche product offering. Business model with a niche focus in their service offerings. For instance, providing only credit facilities, like loans, mortgages, or saving accounts (e.g., OakNorth).

The new model of digital banking has provided mass consumers with easy access to personal financial management and better digital offerings. But despite these choices and opportunities, customers still prefer maintaining a main account with traditional retail banks. This is primarily due to factors like trust and security.

Traditional retail banks are now coming up with better digital offerings or subsidiaries with offerings similar to a neobank, making the ecosystem more dynamic. Neobanks must continue to stay ahead of the innovation curve, keep providing customers with better digital offerings, and make their systems more secure to gain the trust of their customers.

Highstreet retail banks have responded to the competition from challenger banks in two different ways: by building a new value proposition and by extending their existing value proposition.

When building a new value proposition, existing retail banks have either opted to create new subsidiaries or entirely new and independent firms. These initiatives can be divided into different categories: challenger banks and open banking apps.

Initiatives, such as B by Clydesdale or Hello Bank by BNP Paribas, are great examples of retail banks launching their own neobanks to compete against more aggressive challenger banks, such as Revolut and N26. These newly launched digital banks have different brands and often target different client segments from their parent banks. A good example is Mettle by NatWest/RBS, a digital bank focused only on small and independent businesses, instead of the mass market.

Other initiatives, such as Yolt by ING, are considered to be open banking apps. Although technically not a neobank, as these initiatives do not offer core banking solutions but instead offer a completely different set of services, such as budgeting, these are still considered to be a new value proposition, as they are unique and new to the bank’s current existing offerings.

Launching a standalone (subsidiary) neobank may seem an easy initiative for an incumbent bank, with all its experience and readily available infrastructure, not to mention vast resources. Unlike fintech startups, they don’t need to seek external venture funding, they only allocate budgets form their much larger resource pool. All these advantages, however, do not guarantee easy success. In fact, we are seeing some failures.

At the time of writing, NatWest (RBS) surprised the market with the closure of its digital subsidiary, Bo, which took nearly two years and GBP 100 million of investment to onboard only 11,000 customers. Fintech rivals, like Revolut, reached a magnitude larger user base in shorter times and often with smaller investment, working in true agile manner and attacking the market whilst still in an early pilot mode. Such experiences may lead traditional banks to rethink their challenger strategy and choose alternative paths.

When extending an existing value proposition, some retail banks have opted to enhance their current offering. Barclays is a great example of such propositions. The application offers open banking functionality, which allows customers to access all UK bank accounts using the Barclays mobile application.

Financial services institutions have been putting significant time, attention, and resources into digital transformation. They are also seeking ways to cultivate offerings that will snare the attention of the tech-literate millennials, whilst achieving key operational goals, such as cost reductions and regulatory compliance.

As with the ever-changing technological landscape in financial services, a pool of familiar and emergent vendors has arrived, looking to disrupt traditional core banking solutions, enable business innovation, and capture market share.

To understand the what, why, and how of the evolving core banking platforms, we researched the suppliers of challenger ‘Software-as-a-Solution’ (SaaS) offerings whose mechanical makeup followed a common theme.

Of the 16 vendors we analysed, the structure of the technology repeatedly mimicked one another, with approaches and features typical of the new API-driven technology age dominating the market today.

• Core process kernel
  This is normally made up of a single layer of code that forms the centralised permissioned ledger that the bank bases its actions. Here, different core functionalities can be provided, such as loans, mortgages, etc. This core engine has a workflow-based structure that defines how the bank operates and each provider will have their own flavour added to differentiate themselves from one another.

Some may focus on fast and frictionless payment services, whilst others will have a bespoke business account offering. An example vendor is the Dutch fintech ‘Ohpen.’ Its core modules include savings accounts, investment accounts, payments, CRM, robo advice, reporting and analytics, user management and settings, audit, risk and fraud management, and order and fund management.

• APIs or 'Smart Adaptors middleware'
  All the providers claim their solution is a microservice API architecture platform. The art of the API is that each banking software can interface with many different applications through middleware connections. This will allow them to offer clients a greater pool of services without the need to search for a ‘one size fits all’ software.

An example of a plug-in would be a CRM module that allows goal-based data analytics and customisable dashboards. The core kernel doesn’t interact with the APIs directly. Resources are rather allocated accordingly, as defined by the single layer of governing code.

Five Degrees, another Dutch fintech, have a core banking system that prides itself on ‘plugging in’ to most partner products through its ‘smart adaptor middleware.’ It has its own digital marketplace, where different software companies can plug into the matrix core banking system, with APIs readily made, such as Ortec Finance’s OPAL.

• Cloud-native services
  These are loosely defined as container-based environments that are used to create applications that are packaged up. The core module and apps live in the public cloud, as opposed to an on-premise data centre. We are rapidly seeing most vendors moving to this offering and selling the packages as subscription-based products. This can also be defined as ‘Platform-as-a-Service’ (PaaS).

The 10X Banking, headed up by the ex-Barclays CEO Anthony Jenkins, is a testament to the platform-based service model. When writing this, Virgin Money pulled out of a deal to integrate the platform as its core banking system due to new owners, Clydesdale Banking, electing to integrate their existing provider into Virgin.

The three characteristics above exhibit the ever-changing banking technology and highlight the trend of moving away from ‘on-premise’ software to a cloud-hosted solution. Key advantages to this challenger software model are mainly cost of ownership and implementation speed. Some vendors claim that integrating and deploying the architecture takes mere weeks. The subscription model provides great flexibility with the length of the licence, and the API ‘plug and play’ structure allows greater customisability and you only pay for what you use or need.

With all the benefits that come with cloud-based products, there is always a cybersecurity risk when client data is not hosted on the premise. However, as these platforms become more mainstream, so will the methods of mitigating cyber-based risks associated with banks.

We observed that with the new players entering the market, the boundaries between the banks and neobanks are gradually becoming translucent and disappearing. The new fintech challengers are expanding their service offerings and applying for banking licences.

By every description and the services offered, these neobanks can be called “banks”. Their constant innovation and ambitions are blurring the line between them and the traditional banks. This landscape has encouraged both traditional and neobanks to constantly innovate and improve their position in the market. This innovation in the financial service ecosystem has been supported with new cloud-based and API-capable technologies facilitating the banks to move towards the new models in much shorter times.

Synpulse is building up knowledge on the intersection and relationships of the three key sectors within the banking landscape. We maintain market radars of comparative data on the key players in each of the above segments. Over the years, we have built profound knowledge and expertise in the design and innovation of banks’ business operating models and processes to support them in pursuing growth opportunities.

We have extensive implementation experience and knowledge of the latest trends in the financial industry, such as open banking and customer-centricity. In working with our client institutions, we take a holistic and integrative approach, providing support from designing the go-to-market strategy through assessing and selecting technology solutions up to their implementation and successful operations.

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