Eight tenets to build an unassailable challenger bank

The last decade saw traditional banks being buffeted by the winds of digital disruption and regulatory penalties. Many banks hastily embraced mobile and digital technologies, adopted processes to re-establish regulatory confidence and invested in creating rich customer experiences. In the resulting turmoil, a bunch of technology-fueled gazelles turned up, to provide an alternative to the giants of high street banking. The challenger banks used glossy digital technology to offer dramatic innovations such as real-time current account opening on a mobile device and instant cross border payments. Naturally, traditional banks have been trying to use the same technologies to launch competitive services and are gradually closing the gap. To succeed in this cut-throat and competitive environment, the most important enabler for a new challenger bank which is setting up shop is the Technology Platform. They need to keep a key philosophy in mind when deciding on their technology platform: They must implement a core banking platform on Cloud infrastructure as a collection of loosely coupled industry leading solutions, tools and components.

Around this philosophy are eight tenets for success:

1. Buy, don’t build – Some challengers are drawn into building everything from scratch because they have an overwhelming desire to differentiate. This should be avoided. Instead, the focus should be on building only the differentiating capability. If capex required to build an industry standard core banking solution was a major deterrent, SaaS and subscription-based option are now available, ensuring an affordable Opex model with modest initial outflows—again, allowing building only the differentiating capability.
   
2. Leverage the Fintech ecosystem – Intelligently stitch the industry-leading solutions and capabilities of FinTechs into a modern digital platform using APIs and integration frameworks. In comparison to building from the ground up, this will quickly build industry leading capabilities in key areas.
3. Cloud first – Opt for Cloud native applications for business support and operations. Most cloud providers can plug into your business performance management and finance tools, providing you a detailed view of run costs and optimization opportunities. The headache of IT heavy lifting–like evergreening, scaling and security–will also vanish!
4. Build once, run anywhere – Make the platform truly omnichannel, from a customer experience perspective and an employee perspective.  Invest in a low code base platform as part of your omnichannel strategy. This will create hybrid or native apps and offer a development platform using only one codebase—thus lowering costs.
5. Data-driven interventions to insights – Use data, analytics, process mining and customer analytics to sharpen your proposition. This will make your business customer centric and additionally help leverage a cognitive customer care and business performance management framework. The bonus will be the inherent ability to manage operational risks and control weaknesses before they impact business, thus establishing regulator confidence.
6. Open source wherever possible – Put money behind IP-based solutions and business support systems. Keep the rest of the stack open source to reduce capex/opex and retain the flexibility to tweak solutions based on needs.
7. Vendor independence – The last thing you need during launch of a business is a vendor who fails to deliver a component or does not deliver what it says on the wrapper. Therefore, create loosely coupled systems that allow you to swap in/out products and capabilities in a snap.
8. Micro-services to Micro-apps – A microservices based architecture is the key to stitch solutions and capabilities together. Create a strong API and mobile framework and enable business functionality by orchestrating discrete atomic microservices. This will go a long way in leveraging the FinTech ecosystem.

Our deep experience working with challenger banks has led to the development of a Challenger Banking Reference Architecture. It builds on the eight tenets to construct a state-of-the-art platform capable of successfully setting up challenger banks.

Recently there has been news of JP Morgan launching a digital bank in the UK. Over the last two years this has steadily become a trend—some examples include the Royal Bank of Scotland/ NatWest that launched Mettle and Goldman Sachs that launched Marcus. Other high street banks have not been left behind. Names like Greenhouse, aiBank and Digibank are signs that your bank could launch a digital winner next.