The new entrants bring innovative services, slick delivery and apply pressure by leveraging the latest technology available. They take a lean digital first approach, enabled by regulators and fuelled by venture capital, and are starting to make significant revenue reaching out to those who feel underserved by traditional banks.

Established institutions can (and have to) play in this digital market, not just because of the market shift but also because of the opportunities available. The emergence and success of new banks like N26, Oaknorth, Mondo and Starling illustrate this well.

So what can incumbents learn from this success?

Start with the ‘right’ technology:
Having a flexible core banking solution on which all products, services and delivery is based is a key differentiator. It can either dominate resources or enable agile movement in the market. Incumbents cannot afford to follow the path they have always traversed - long, expensive overhauls and upgrades. This is not a sustainable way to stay relevant in an ever-evolving financial services landscape.

A starting point is accepting the need to work and think differently - instead of rebuilding the bank, create a lean, agile fintech spinoff. It would need to be technology savvy, work under a new brand or name and operate independently from the parent institution’s influence. This is an innovation arm created to address a specific market need instead of changing an entire organisation.

With an API-enabled composable architecture, they would have flexibility allowing them to work with best-in-class providers in each area. Value and cost savings are derived from leveraging technology to streamline operations, automate processes and reduce overall cost of doing business.

Be lean, agile and focused:
The business model of challenger banks enables them to outpace their incumbent competitors. Costs are drastically reduced across infrastructure, management and operations by harnessing cloud technology and the digitisation of near all processes. Resources are instead focused on utilising tech-driven solutions to redesign the customer journey, tailor products and improve customer service. However, it is challenger’s frequent focus on niche markets that really sets them apart. This approach allows them to grow quickly and easily by providing a tailored offering aligned to specific needs.

Provide innovative digital services to keep pace with evolving customer behaviour:
Challengers are providing their business and individual customers with a refreshingly simple, streamlined and bespoke banking experience. The composable architecture helps them integrate and offer new products and services at a fraction of an incumbent’s time, cost and operational impact.

Incumbents of course understand the critical importance of the digital experience but are often unable to access the innovation offered by new technology or take it to market quickly due to the complexity of existing legacy technology, which makes the time and cost of change and innovation prohibitive and extremely risky to their existing core business. It is critical that incumbents overcome the innovation interruption to compete with challengers in the digital space.