Annual challenger banking report

24 Pages·2017·1.89 MB·English

Framing
new
futures
Challenger banking report 2017
October 2017
Content
Foreword ..........................................................3
Challenging defnitions ....................................4
Introduction ......................................................8
Challenger bank fnancials: plain sailing? ........ 12
Technology: the great leveller ......................... 14
Capital ideas: avoiding inertia ......................... 16
Conduct and customers: the edge ................. 18
Conclusion: natural evolution .........................20
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Challenger banking annual report 1
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Foreword
Shifting landscapes
We titled the 2016 Challenger bank report ‘A New Landscape’. The past
year has shown that the banking scene remains in fux.
The complexity and diversity of UK banking is typifed by the sheer amount of time we spent debating what to
call the non-Big Five banks and how to categorise them.
‘Challenger banks’ looks like an increasingly poor term – a gross generalisation. Nevertheless, it has stuck as
a way of describing almost any organisation that does something the traditional Big Five do, but which isn’t a
member of that group. So we stick with it. Next year? Maybe not.
Trying to fnd types of ‘Challenger banks’ that help us and our clients understand the forces at work in any
useful way is equally frustrating. We debated chronological waves of new banks; categories based on size; on
breadth of offer; on digital adoption; and on business model.
In the end, however, the platformisation of the banking sector not only makes such labels misleading, it also
fails to account for rapid changes both across the sector and within individual players. Even just categorising
new entrants that have strong existing brands in other sectors makes this a fruitless task.
As you’ll see, to overcome this problem we ended up with three very broad groups: Classic, Contemporary
and Nouveau Challengers.
The really interesting strategic decisions for banks – big or small, branch-led or digital, niche or mass market
– will be driven less by where they come from and more by where they are heading. So while this report
summarises the state of play with today’s Challengers, its main purpose is to outline how they might respond
to the drivers of change.
The Challenger banks continue to get more numerous and diverse. But many will not pass the threshold for
further growth. The evolutionary forces and revolutionary change will result in acquisitions, partnerships and
even extinction for some entities and potentially whole types of banks.
What’s clear from our own work with Challengers is that creativity and adaptability – as in all evolutionary
systems – are the key. Read this report in conjunction with Challenging Perspectives, our companion report
featuring the views of a dozen bank CEOs, and that message will come through loud and clear.
Richard Iferenta, Head of Challenger Banking
C©o 2o0p1e7r aKtPivMe (G“ KLPLMP, Ga UInKte lirmnaiteiodn laial”b)i,l itay S pwaristnse ersnhtitpy .a Anldl raig mhtesm rebser vfermd. of the KPMG netw ork of independent member frms affliated with KPMG International Challenger banking annual report 3
Challenging
definitions
‘Challenger bank’ is a catchall term that describes
any organisation outside the Big Five. But it does
little to explain the breadth of their ambitions or the
complex business models they employ. Is there a
better way?
4 © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Since the fnancial crisis in 2008, more than Nouveau Challengers
Nouveau Challengers tailor their
50 institutions have been granted a banking licence in
services to customers in underserved
the UK – there were 13 applications to the Prudential markets, around cutting-edge
technologies or with services that
Regulation Authority in 2016 alone.
bleed outside the boundaries of
Countless others have launched They have the resources to innovate traditional banking – for example,
services that don’t require a licence, in-house – but they’re not averse to Revolut, B-Social and Iam Bank.
but that have traditionally been partnerships or acquisitions to stay
The Nouveau Challengers do not
offered by banks. We have also seen competitive. Many in this group are
seek to compete with the big High
brand new approaches that seek to not full-service provision, nor do they
Street players at all, recognising that
disrupt the market, providing a step- intend to be. By blending traditional
customers in the future are more likely
change in customer experience or and innovative banking services, many
to use banking services from multiple
technology deployment. Classic Challengers have achieved
organisations channelled through
strong balance sheet growth over the
A signifcant proportion of these new platforms and apps. These businesses
past few years.
players exploit underserved niches, reduce competition by creating “blue
and all strive to differentiate from the These banks might be considered to oceans” of uncontested market space.
Big Five banks. be beating the Big Five at their own
The main trial for Nouveau Challengers
game, using more modern systems
Many Challengers argue that the will be in raising brand awareness
free of legacy conduct issues and
challenge has already taken place, and winning over customers to new
building resilient, trusted brands.
and that the label is now redundant. ways of thinking about money as a
They’re more interested in dominating series of lifestyle choices. Reliant on
their chosen area of opportunity Contemporary Challengers technology, they also need to stay
than competing with those High Technology focus creates value in at the cutting edge and ensure new
Street incumbents. these banks’ distribution channels risks around data and conduct are
and brings life to commoditised managed without creating a costly
‘Challenger’ remains little more
products. Banks in this category are compliance burden.
than convenient shorthand, But
predominantly planning to be digital-
the diversity of an ever-changing
frst (and likely digital-only), offering
market suggests we need some new
customer support via online chat
ways of looking at the strategies of
or call centres. Cloud architectures,
these banks.
streamlined third-party systems
and open application programming
Classic Challengers interfaces (APIs) offer a low cost base
Blending traditional and innovative with high effciency.
models, these banks seek and exploit
Contemporary Challengers may
scale in their customer base and often
be more likely to partner with, or
a branch network. Their relative cost of
even consider themselves to be,
regulatory compliance remains lower
Fintech companies. Riding the wave
than for smaller Challengers. Classic
of platformisation, these banks are
challengers, including the Co-operative
gateways to a rapidly growing network
Bank, TSB and Virgin Money, feature
of interlinked, specialised product
elements of classic banking, having
providers and fnancial technology.
a branch network, taking deposits,
Contemporary Challengers such as
making loans – they’re fexible
Atom, Monzo and Starling hope to
enough to exploit new technology
create a marketplace for fnancial
and business models for innovative,
services, with banking operations at
customer-focused services.
the core.
Contemporary Challengers need to
meet the expectations of shareholders
by gaining scale, creating value and
carving out defnitive, differentiated
niches of products or customers.
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG netw ork of independent member frms affliated with KPMG International Challenger banking annual report 5
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Brand Technology
A diverse and crowded market We’ve seen many Challengers
means consolidation is inevitable. focus on technology that allows
Five key
Brand differentiation and strength them to plug into external
will be a critical component services, such as investing or
towards high levels of customer shopping. Platformisation is here
drivers engagement to ensure survival. to stay.
We expect signifcant additional In the short-term, we expect
attempts to build brand awareness. to see more Challengers use
In many cases that will mean technology to create fexibility
partnering with better-established in their operation and control
brands – as Tandem sought to do infrastructure costs.
with House of Fraser.
Cloud services (well-established),
Challenger banks are now fghting open APIs (soon to be mandated
a ‘personality’ war, with trust and through Open Banking), AI (more
recognition the spoils. compellingly in the longer term)
and a host of newly emerging
technologies will be signifcant
factors in deciding which banks
will win.
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PK G M International Cooperative (PK“ G M International)” , a Siw ss entity . All rights reserved.
Customer experience Deal-making Regulation
Challenger CEOs told us this The strategy, timing and execution Challenger banks have seen rapid
year that differentiated customer of acquisitions and partnerships is growth in the wake of increased
experience sits at the heart of their critical for the future of all breeds openness, as well as customer
offer. It’s the foundation of organic of Challenger. desire for tailored, cheaper and
growth and helps them to carve more modern banking services.
Inevitably, some of those deals
out a market niche.
will involve larger, incumbent Emerging capital rules in Basel IV
Challenger banks must now players buying up capabilities, will continue to shape Challenger
make their services sticky technology, loan portfolios, brands appetites for different products
as well as easy to use and or customers developed by and services, as well as defning
available. Customer experience Challengers. As markets evolve, their drive for scale and stronger
is about expectations, and across new opportunities emerge thanks balance sheets.
customer and B2B markets, those to changes such as Open Banking
Brexit also creates signifcant
expectations are rising in line and even Brexit, so we can expect
regulatory upheaval that
with experiences from a host of a solid run of partnerships of
Challengers must begin preparing
other sectors, such as retail and all kinds.
for now.
– most importantly – consumer
tech services.
Great customer experience and
customer propositions must clearly
drive value for the Challengers and
their investors.
© 2017 PK G M LLP, a KU limited liability partnership and a member  rm of the PK G M netow rk of independent member  rms af liated iw th PK G M International Challenger banking annual report 7
Cooperative (PK“ G M International)” , a Siw ss entity . All rights reserved.
Introduction
We were right to question the idea of the
‘Challenger banks’ as a homogenous group last
year. Their aims, methods, opportunities and
challenges are incredibly diverse. Based on the
perspectives of their CEOs and the forces now in
play, further upheavals are inevitable.
8 © 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.