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Will Millennials Fuel the Rise of Challenger Banks?

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Senthil Kumar - ORACLEBy Senthil Kumar, Vice President, Business Development, Oracle Financial Services



Over the past four years, we’ve witnessed something in the banking industry that we have not seen in more than 100 years: the rise of smaller, niche banks that are ready to service a new breed of consumer known as the millennials. This emerging breed of consumer is, in fact, driving traditional banks to revisit and reinvent the customer experience and has led to the emergence of challenger banks in the UK, banks with new banking licenses around the world. 

The millennials have never known a world without computers, the Internet, mobile phones, or other mobile devices. They have an approximate U.S. $2 trillion in aggregated net worth and will comprise 60 percent of the workforce by 2025. The term millennials is used to describe young people (most of them born after 1980) who have a strong influence over older generations. Their behaviors and attitudes are spreading to their elders at a rapid pace, which is why we are seeing consumers of all ages adopt the use of digital channels for everything from banking to retail. For the first time ever, the consumer has become completely empowered and, therefore, more demanding. 

The issue the banking industry now faces is that these influential and empowered millennials don’t have a lot of faith in financial institutions1, yet they possess tremendous social influence. In a recent trust survey1, consumers were asked to rank businesses in terms of how much they trust those businesses to “do the right thing.” Banks ranked the lowest at 51 percent and came in last on a list of eight industries. Considering how social and digitally empowered these influencers are, it’s clear that a single positive or negative experience with a financial institution can have a dramatic, viral affect. There’s no doubt that gaining the millennials’ trust and loyalty is not only difficult, it’s imperative. 

So what do these millennials want and what will convince them to bank with a particular brand? They want their bank to know them, wow them, and empower them. They don’t want to fill out applications with their bank every time they need a new product or service. They do want account managers or loan consultants to know who they are after years of loyalty. They don’t want to make several trips to a local branch just to open a new account or make changes to existing accounts. And they do want more eye-catching rates and services. 

Enter the challenger bank, and welcome to the new financial services playing field. 

Smaller in size, more agile than their larger competitors, and typically run by entrepreneurs, challenger banks are taking the approach of offering more-personalized products and services, innovations in technology (mobile and digital), and superior customer service, all in the name of attracting niche groups of consumers. In 2014, we saw a sizeable shift in people’s attitudes toward their banks and their accounts. Fed up with the traditional fees and a lack of their bank’s ability to know them, wow them, and empower them, consumers started jumping ship and moving their accounts to where they felt their needs could be better met. With the launch of the Current Account Switch Service guarantee of 2013, which cut the time it takes to move from one bank or building society to another from an average of 18 to 30 days down to just 7, we then saw more than a million people in 2014 make the move to a new provider 2. 

For entrepreneurs wanting the opportunity to garner some of the market share, it is important to deliver according to customer expectations. Challenger banks should be able to digitally switch from both participants’ and nonparticipants’ banks in the Current Account Switch Service guarantee. 

All of these trends have entrepreneurs primed to trump their larger, more established opponents, and they are putting their customers at the top of the hierarchy with a “customer-in” approach versus the age-old “product-out” approach.

The long-standing, more established banks aren’t taking this trend lightly as the industry becomes chock-full of new threats. It’s a new spin on the story of David and Goliath. However, many traditional banks are seeing this as an opportunity to innovate and take a more holistic look at their business—specifically, how they modernize and transform by adopting and employing a more customer-in approach. 

But whether it’s an existing bank or a challenger, both are recognizing the need to up the ante when it comes to putting the customer first. A true customer-in approach requires a business and technology architecture that delivers digital engagement, externalized customer-centric processes, and componentized core capabilities to enable progressive modernization.

Hampden & Co., for example, is scheduled to open its new UK private bank in the first quarter of 2015. The bank is alleging greater choices and offerings for its customers, and to facilitate this, Hampden has selected Oracle FLEXCUBE on Oracle Managed Cloud Services as the technology foundation that will enable the bank to deliver personalized service to its customers. But according to Hampden’s founder and Chairman, Ray Entwistle “it’s not easy setting up a new bank in the world we live in, it’ll take you longer than you think and it’ll cost you more than you think”.

What’s required is a solid technology architecture foundation that can support getting both challenger banks and established banks who want a piece of the innovators market share up and running as fast as possible.

Currently, challenger banks are not taking over the lending market and there are still some barriers to growth, but the industry is ripe for change and many are running to get to the finish line before their counterparts. 

Oracle Corporation is supporting this paradigm shift with its applications and technology that underpin a bank’s operations and help deliver the innovative pieces they need to win over the millennials. 

The industry is definitely going through a major shift right now and we are the lucky generation that gets to see history unfold in front of our eyes.

1Source: Edelman Trust Barometer, 2014 Global Results.

2 Source: http://www.moneywise.co.uk/banking-saving/savings-accounts-isas/traditional-vs-challenger-banks-it-time-you-switched

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