The disruption of the retail banking industry by challenger banks is often compared to the upheaval of the airline industry by low budget airlines in the mid nineteen nineties. Both cases are arguably evolutionary rather than revolutionary and both represent an example of the underdog taking on the heavyweight champion in a David versus Goliath style duel. However, after careful consideration, this may be where the similarities end. Whereas the arrival of “low cost, no frills” air travel tested the spectrum of consumer preference by teasing price elasticity, the challenger banks have burst onto the scene promising to be all things to all people without the need for the consumer to compromise (or endure tasteless sandwiches whilst stranded in an airport 40 miles from their intended destination).
The so called ‘”Golden Age of Flying’” in the 1950’s and 60’s saw Pan Am and Concorde grace the skies whilst glamorous and unmarried airhostesses (and yes, they had to be unmarried) walked arm in arm with tall, muscular, moustached pilots (and yes, they had to have a moustache!) ready to escort the well-heeled to the French Riviera for some much needed R&R ……Fast forward five decades and the exclusivity and sense of occasion previously synonymous with air travel has been replaced with cramped seats, miserable service and an unpalatable smell of sick that lingers relentlessly in the cabin. When UK based carriers started to replicate the Southwest Airlines business model from 1995 onwards (minus the obligatory hotpants) they were taking a risk, yes air travel still offered the same core product (a promise to fly you from A to B) and yes this product was being offered at a significantly lower price, but the delivery was unashamedly inferior and the new disruptors on the block made no bones about the fact that they expected consumers to lower their expectations.
The arrival of challenger banks in the UK couldn’t provide a starker contrast. Unlike the challenger airlines who won over the market by offering the same product delivered in a less opulent manner at a lower price, challenger banks are offering consumers the same products (e.g. a savings account) at a better price (higher interest rates) and delivering them in a manner that optimises consumer experience in a way incumbents never envisaged (e.g. a digital banking platform). Indeed, many of the long established bank’s back office systems can’t even accommodate the new customer engagement methods utilised by new fintechs.
A quick online search for “the best savings product in the UK” illustrates the immediate benefits of banking with a challenger institution. The best one year and two year savings account is offered by Atom Bank at 1.4% and 1.65% respectively and Ikano is offering the best priced three year bond at 1.65%. Challenger banks are so synonymous with optimising customer experience through digitalisation, biometrics and increasing use of AI that it’s easy to forget that they’re also offering some of the best rates on the market with some, like Atom Bank, effectively offering the equivalent of a first class flight for the price an economy ticket. Crucially, unlike “low frills” airline carriers, not only do they bring their own USP to the table but they’re also able to beat the traditional players at their own game. If incumbents can’t offer the best rates or the best service and they resist technological innovation then it’s hard to see how they will remain relevant in the future.