A challenging route to market for challenger banks

For many years the UK banking landscape has been dominated by a handful of big players. However, since the financial crisis the industry has undergone a number of changes. The major banks have had to tighten their lending criteria to keep in line with new regulations, and the use of technology has also allowed internet only banks to come to the fore.

Recently, we have seen a number of new challenger banks enter the market looking to take advantage of these opportunities. Brands such as Metro Bank aim to attract customers away from the established players by offering competitive products and a fresher approach to banking.

However, the route to market is not an easy one and anyone wanting to set up a bank will require a significant amount of funding. New banks could potentially require a sum of around £1billion before being given permission to trade. Subsequently many new entrants have decided to launch as internet only initiatives to keep costs lower. However, it may become a barrier to growth as the bank matures, as it becomes more difficult to attract more traditional customers without internet access or seeking a local branch network to bank at.

The changing requirements of consumers mean that banks will also need to offer their customers the chance to bank remotely. According to the latest research from the British Banking Association (BBA), it is estimated that customers will use mobile devices to check their current accounts 895 million times in 2015*.

Another challenge is the increased burden of regulation being introduced across the banking world.  Those setting up a bank need to ensure all their systems and processes are fully compliant before they launch and will need to keep a close eye on the horizon for upcoming regulations.

Perhaps the biggest problem will be attracting enough customers to move from a new entrant into a more mainstream bank.  Whilst some ‘non-prime’ customers may have to turn to new entrants for their banking needs, other borrowers have a clearer choice between high street brands and newer competitors and may be harder to entice.

To ease some of these challenges, new entrants may choose to outsource to external providers to help smooth the process of getting to market. This provides the advantage of utilising existing technology and processes which makes entry simpler and more immediately scalable, notwithstanding the invaluable advice and experience that comes from a third party supplier that’s dealt with these issues many times over. Some may also choose a combination of both, developing their own systems whilst partnering for post completion administration support, for the best of both worlds. Regardless of the approach, external support can enable new entrants to get to market more swiftly and remove some of the headaches of launching a new lender.