The Impact of Challenger Banks on Financial Sector IT

By Michael Eaton|17 January 2017

The rise of financial tech startups (FinTech) is shaping financial services on several levels. Challenger and digital-only banks, such as Atom, Mondo and Starling are having an impact on consumers’ experiences of retail banks.

More established challengers, those with branch networks, such as Metro Bank, Virgin Money and Yorkshire Banking Group are also demonstrating how they can win more customers without deep IT budgets. These challengers have focused more on the user-experience for customers, which is not a strong area for most banks.

Yves Mersch, an executive board member of the European Central Bank (ECB) said, “customers now expect to be able to integrate e-commerce, social media and retail payments. They also expect to be able to switch seamlessly across digital platforms.” Speaking at a financial sector forum, Mersch noted that “these are not areas of strength for many banks: given their heavier compliance obligations, banks have traditionally invested more in the security and resilience of their systems rather than optimising the user experience.”

Whereas challengers FinTech startups - especially emergent payment providers and digital-only banks - are making this look easy. It isn’t, but consumers care more about user-experience than clunky IT security systems. Banks have to accept that non-bank challengers, including Apple and Google, already have the digital edge, whilst aiming to make the smartest investments possible to enhance the customer experience.

Is FinTech A Threat To Financial Services?

FinTech is dynamic. It poses a challenge to traditional financial service companies. It is even disrupting service providers in that sector, but to claim it is a challenger to the entire sector seems overly optimistic. Focusing on IT within financial services, FinTech and challenger banks have a lot to offer. For the sake of their business model, they need to find ways to reduce costs. Shareholders want lower cost-to-income ratios (CTI) and higher returns.

Some of the secrets to unlocking efficiencies come from these new businesses with efficiency at the centre of their operating models. New technology has unlocked efficiencies in challenger banks. So has a customer-centric focus that has taken traditional banks by surprise. Consequently, new offerings, apps and digital experiences have been rolled out, to improve the customer experience.

In a report on the sector, PwC says that the next step is a seamless “omnichannel experience”, which challenger banks are better equipped to create than the big five. This will require new digital investments, which is something FinTech and challengers can deliver for larger banks, either through partnerships, mergers or acquisitions.

IT in banking cuts across every layer of the operation, from customer service to the “back office.” An integration of FinTech, like 78% of financial CEO’s are supporting, could unlock huge efficiencies that will transform IT in the banking sector. Challenger and digital-only banks are already having an impact on the financial sector. However, considering the moves the sector is already making, we should expect to see the closer alignment between challengers and traditional banks, for the sake of profitability, efficiency and customer relations.

How To Be A Bit More Like Them

One of the key differences between FinTech startups and traditional financial services institutions is agility. The ability to flex and scale, and to quickly respond to change and customer demand.

Information technology is the key to achieve for many organisations; after cultural change, which is generally the biggest barrier to innovation and transformation.

One strategy that can enable organisations in the financial services sector to be more agile and gain some of the advantage that FinTechs have, is to outsource some or all of the IT function. Outsourcing non-core activities, such as IT service desk not only generates cost savings, but also frees up members of the IT department so they can focus on more strategic projects.

Outsourcing IT infrastructure and systems also enables those financial services organisations that are being held back by legacy systems to become more agile and competitive.

If you would like to talk to me about this in more detail get in touch - 0845 643 6060 or email

Further Information

Client Success

The RPA is responsible for delivering over £2 billion of payments to farmers and traders each year under schemes including the Common Agricultural Policy (CAP). Because thousands of people are dependent on these funds, the organisation has a serious responsibility to ensure they are made on time.


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