Winning customers – the five challenge areas for traditional and challenger banks

By Venugopala Dumpala, Practice Head Banking & Financial Services at Firstsource

Mobile banking is now the norm. Over 90% of the British public reported using online banking services in 2022 – across traditional and digital-only banks. No surprise that digital wallets, mobile banking apps and personalised FinTech solutions are seeing high investment and growth.

Consumers expect a smooth experience that empowers them to control personal finance. Challenger banks were quick to meet this need ­– they now collectively hold 8% of the market share for current personal accounts. And are expanding into SME accounts.

There is a massive appetite for digitally enabled interactions. And banking providers are in a rush to get a piece of this pie. Traditional banks lag, encumbered by legacy IT from a pre-digital era. Yet they also hold some strong cards, such as a superior understanding of complex regulatory environments.

There are five areas of competition for traditional and challenger banks (aka neo banks). Understanding these is vital for both players’ ability to learn from each other so they can deliver the superior experiences customers desire.

The five areas of competition

Today’s customer expects to be centre stage. Best interest rates are no longer enough. Banks must delight customers across every interaction.

Superior customer experience

Challenger banks were born to compete on customer experience (CX) – they are leading the way on the digital front, and dropping voice channels for digital-only proved successful in the early days. Yet as customer profiles grow, challenger banks are expected to support voice and more traditional channels.

Meanwhile, established banks are catching up on digital and launching new brands and partnerships to compete. They hold the trump card of having well-established voice services, a channel that will remain a preference for some customers.

Holistic services

Achieving simple, intuitive digital CX across multiple product types is a significant challenge. Traditional banks have the product breadth but often clunky digital CX, such as siloed apps. Challenger banks offer a brilliant digital experience, but for a narrow offering.

Customers want both – an easy-to-use experience across multiple products. For challenger banks and FinTech, this is a strategic problem. Most focused on one area – brokerages, crypto, and Robo-advisors – now they must expand horizons to retain hard-earned customers who want more comprehensive services, especially in card and consumer lending products.

Traditional banks have been quick to respond to this need for holistic services. Some have acquired new platforms, such as Morgan Stanley’s purchase of E*TRADE. Others have gone the partnership route to growing portfolios – the Goldman Sachs and Apple joint card launch being a prime example. Expansions have helped traditional banks stay ahead – but with challenger banks focussing on expanding their offer, the gap is closing.

Continual technological innovation

ABCD technologies – Artificial Intelligence (AI), Blockchain, Cloud and Data – offer immense innovation opportunities for financial services. Neo banks and FinTech, unburdened by legacy IT, have quickly incorporated these into solution development.

Incumbents sitting on layers of legacy IT were initially slower to introduce new tech. Now adoption is speeding up. Some are partnering with smaller FinTech to improve offerings, while others are starting to run AI and machine learning on data sets. And more are shifting parts of services to secure cloud. One thing is clear, the application of ABCD technologies is here to stay.

Robust security and compliance

Governing bodies and customers expect high security from banking providers. Here, the age and pedigree of traditional banks serve them. Decades of working with regulations help quick adoption of new governance requirements. While thoroughly tested processes can better withstand scaling.

In contrast, many challenger banks had built solutions with somewhat lax regulations, primarily focussing on CX. As regulators across countries begin to clamp down on flexible regulation practices, neo banks, to ensure survival, must act quickly to attain the levels of compliance implemented by traditional banks. Neo banks have challenging times ahead, balancing technology-driven services with more compliant services and a heightened focus on financial crime.

Navigate market expansion

By 2030 embedded finance – personalised and contextual financial services – is set to outgrow financial institutions by 20%. This leaves much space for both neo banks and incumbents to expand, and both must look to adapt their business models.

What both traditional and neo banks can learn from each other

As conventional and neo banks compete by expanding offers, optimising contact channels and utilising new technologies, there is plenty they can learn from each other. And from their past experiences. Below we explore where the learnings lie and some key takeaways.

Evolving customer support

Pre-pandemic, online services offered by traditional banks lacked compared to their neo counterparts as they relied more on in-person interaction at physical locations. The pandemic helped banks speed up digital transformation, advancing and improving their online services with 24/7 support to meet customer expectations.

The lesson for traditional banks is explicit – while digital transformation projects face various challenges, they don’t need to take multiple years. And agility is key to evolving customer support.

Another learning for traditional banks is tied to digital channels. As older generations gradually join younger users in switching to online services, traditional banks are evolving their customer support. Emulating challengers’ use of AI chatbots and in-app chat is an excellent place to start. Because thanks to the proliferation of challenger banks, many users are accustomed to these channels already.

Tech-enabled experience

Significant learnings for both sides come from AI-enabled conversations. Retail banks are joining challengers to provide personalised experiences through better use of data. Both run AI on historical datasets to spot patterns that predict customer needs and intentions.

Beyond improving interactions, AI insights can support agents in cross and up-selling by bringing up relevant prompts. Giving agents the confidence to answer customer requests with increased speed and accuracy improves their confidence and minimises customer annoyance. As a result, the customer service role is much more fulfilling and enjoyable.

Yet we are still just scratching the surface of AI-enabled interactions. The following steps will use AI insights to drive customer interaction tactics that build lasting relationships.

Future-proofing customer support

Customer support systems are constantly evolving. The future direction is set to include asynchronous channels like WhatsApp.

Asynchronous chat lets customers pick up and set down conversations at their convenience. Customers drive the pace. Conversations start and pause based on customer, rather than agent, availability.

Fluid, asynchronous interactions provide many learning opportunities and CX possibilities. As customers move between channels with ease—from messaging to voice, to the web, to chat and back to messaging — banking providers need to be ready to adjust their contact strategy. The challenge for providers is to ensure they can reduce frustrations and improve the experience across all channels and conversations, making it one seamless experience.

Collaborating in the new era of CX

Perhaps the most critical learnings – for both sides – come from strategic alliances. Collaboration between challenger and traditional banks has begun. Goldman Sachs recently partnered with Barclays, while Stripe is partnering with Citigroup. It is a step in the right direction, but to succeed both parties must be willing to work together to complement their areas of expertise.

A new era for customer support

Most customers say the quality of online experience determines whom they bank with, so investing in customer service systems and tools is key to remaining competitive.

One learning is evident regardless of how you view the competition: CX must remain on the banking providers’ agendas. Great CX attracts and retains users whereas a bad service will repel even the most loyal customers.

Traditional and challenger banks must be willing to adjust processes, visions, IT systems, and offers to deliver the holistic, responsive and fluid experience that users seek. Because in the end, the winner can only be the customer.