Are challenger banks now facing challengers of their own?

Since they emerged in the middle of the 2010s, challenger banks have changed the entire financial landscape, growing exponentially in the process.

Fintech in the 2020s is all about collaboration

But for the first time in their short history, the challengers are now being challenged themselves.

These new challengers are building on the work done by the likes of Monzo, Revolut, N26 and Starling. But they’re not just creating and offering new and hyper-personalised features. They’re creating new and hyper-personalised banks.

The most exciting bit? It’s not just a new wave of banks mounting a challenge. It is businesses too.

A new wave of personal challenger banks

The 2010s were all about mass appeal. But as we go through the 2020s, it is about taking the features and level of customer experience that made the challengers so popular and hyper-personalising it.

Now banks are being created to serve the needs of specific communities. Banks like Daylight, Tomorrow and Fardows, which serve LGBTQ+, socially minded and Muslim customers, respectively.

But this is not just about creating a bank and saying it’s for a certain audience. It goes well beyond marketing. It is about offering genuine features that appeal to different communities. For example, Daylight provides debit cards with an account holder’s chosen name, no matter what their ID says. Fardows allows account holders to borrow money in a completely halal-compliant way. Tomorrow customers automatically invest in renewables and social initiatives, with every €5 they spend restoring a wheelbarrow’s worth of natural life.

There are now banks for different professions too. In the US, there are a number of challenger banks aimed at doctors such as BankMD, which offers loans specifically for opening new practices, and Panacea, which provides refinancing designed specifically for medical, dental and veterinary school debt.

Then there are banks for musicians like Nerve. As well as financial features targeted at the sometimes chaotic life of a creative, it also syncs with Spotify to show streaming and follower data and offers a networking feature to aid work discovery and artist collaboration.

This level of specificity also makes it far easier for challenger banks to become profitable – something they’ve famously struggled with. Research from Deloitte suggests customers are willing to pay up to 20% more for hyper-personalised financial products.

This is something non-fintechs and more traditional businesses have realised too.

A new wave of challenger businesses

Interestingly, the other group of challenger-challengers will consist mostly of non-financial businesses.

Now, thanks to embedded finance – the embedding of financial products into mostly non-financial spaces – almost any business from any sector can gain access to new financial products for their customers. According to recent research from Vodeno, across the UK, Germany and Belgium, 75% of retailers are already using embedded finance, while 56% are planning to introduce further financial services in the near future. These include business loans, cards, virtual accounts, wealth management, insurance, cross-border payments, foreign exchange and more.

Businesses can essentially become one-stop-shops for financial services, allowing their customers to conduct all of their financial business on their site and platform. They can even become banks themselves – something modern consumers have an appetite for.

This is done by simple API integration, making it considerably quicker and cheaper than building these services from scratch. Businesses can offer buy now, pay later (BNPL) via companies like Klarna and Afterpay, access payment rails and digital wallets from Railsr and Treezor and offer financial exchange and transfers from Wise. The list goes on.

But the reason embedded finance is going to be so successful is because of the personalisation options available.

Businesses can behave like hyper-specific challenger banks and target communities that share a passion, interest or career, but they can go further than that. They can target individual members of their own customer-communities. Think how Google monetises search and social media monetises relationships. Businesses will soon be doing the same thing but with spending data.

For example, if you purchase a flight or a hotel, chances are you’ll also be in the market for travel insurance, holiday money, budgeting tools and everything else involved in a trip abroad. Businesses can offer these options right at the point of need, triggered by specific purchases, emerging spending patterns or even geolocation.

This hyper-personalisation offers a vastly superior level of customer experience and I am certain it will soon become the standard.

What now for the original challengers?

The original challengers are now firmly part of the finance furniture and are not going anywhere.

The new challengers are fine with this. The original challengers were created to disrupt the old way of banking. This new breed’s mission is building on that work, using the same principles for guidance.

Despite the size some of the originals have grown too, at their core they are still tech-first, agile businesses. Many are already working with the new challengers, embedding their services into their ecosystems and vice-versa.

Fintech in the 2010s was all about challenging. Fintech in the 2020s is all about collaboration.