The future of banking is in specialism, not an all in one solution

The future for challenger banks is through specialism, not becoming a ‘one-stop shop’ for everything, according to OakNorth deputy CEO Graham Olive in a research interview with FinTech Global.

With promises of offering better digital solutions and more alternative competition to the traditional banking sector, challenger banks are set to become bigger and bigger. However, Graham Olive believes the way they will evolve and find their spot in the market is through becoming specialised in certain aspects of the sector. Culture is changing towards people being more comfortable with shopping around, or switching, and aggregators are making this an easier task, he said.

Olive said, “Challenger bank is a very generic term anyway, but specialism is absolutely what we believe is the future. We think that the whole sale integrated one-stop shop banking is not what people require anymore. The combination of app-based technology and a diversification of products and flexibility of products means people are happy to shop around to get the best products that they need rather than going to just one shop.”

Last year the WealthTech sector saw a total of $2.2bn invested worldwide through 271 transactions and 2017 is set to surpass that level, according to data by FinTech Global. The third quarter of the year saw a record level of investments made, with companies pulling in a combined total of $907m, which is 1.8x more than Q2. This rise in capital comes as the number of deals fell, but a sharp increase in transactions over $100m counteracted this. The sector has seen YoY increase between 2014 and 2016 at a 36 per cent CAGR, with this trend set to continue in 2017.

Traditional banks are not ignoring the changes happening and are trying to create their own solutions, but challengers have a technology edge. “From our experience, we already know the large banks are trying to utilise solutions to solve their IT issues. They have a reasonably slick looking front to the banking offering, but the back is not connected properly,” Olive said. The issues with their technology tend to arise when a more bespoke request is made, such as an international payment, and shows that the solutions are not as strong.

A lot of the current challenger banks are still very new, with most being under five years old, but as they grow they will begin to take larger portions of the market share. In recent years there has been a spring up of challenger banks, with OakNorth, Starling Bank and Tandem being just three of the ones leading the way in the UK.  Starling Bank is currently looking to follow up last year’s $70m raise, with a new £40m round, while Tandem recently acquired Harrods Bank for around £80m. OakNorth on the other hand, has recently pulled in £244m in a pair of investment rounds over the past couple of months.

“The banks have a massive presence and they are also working very hard to be the one platform. They are joining partnerships, so they can offer these services through their platform, but I think the fundamental drive will be the breakup of market share from large banks, as that market share breaks up as the products penetrate,” according to Olive.

As more competition breaks-out then the market share will be broken up quicker, and bring further opportunities for consumers. Olive likens this change in the market to that of how mobile phones beat telecoms, with many people now not having a landline phone. He argues this could soon be the future with banking, with student graduates from university never having a traditional bank account.

“I’m not saying you wouldn’t have one of the app-based banking payments systems, but what you wouldn’t have is a standard current account, with a sort code and a relationship manger. However, you’d have an app-based banking system, some e-wallets for retail payments and the Tube, a prepaid card for oversea use, you’d be paying money abroad with Money Gram, you’d have your money saving products through the likes of Nutmeg.” Having solutions like this, Olive believes it enables for more transparent use and work more in line with today’s culture.

OakNorth has had a very active couple of months, following the close of two funding rounds, totalling £244m. The bank initially raised a £154m round in October from investors including The Clermont Group, Toscafund and Coltrane, with the group taking a 16 per cent stake. Last month, the company raised another batch of capital, after GIC injected £90m and picked up a 10 per cent share. The capital from these rounds will support OakNorth as it launches its ACORN product which collects data about SMEs from across the globe on a range of parameters to be analysed by machine learning algorithms for credit decisions.

Challenger banks hold the potential to change the banking ecosystem, the amount of data available and the specialisation of individual solutions could enable banks to become more predictive of the market, Olive added.

“One of the big problems with the financial crisis was that banks were in the situation where they were more and more committed to same behaviour and not really having sufficiently analytical data to be able to detect when they when they were storing up credit problems for the future. We believe using high quality data challenger banks will be more predictive of the future rather than reactive,” he said.

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