The Key Advantage Challenger Banks Have Over The High Street

Written by EO Executives on Jul 27, 2015

For decades high street banks have had an unshakeable grip on the consumer banking market, but with over 20 applications in flight for a banking license with the FCA from new ‘challenger’ banks, should the High Street banks be worried?

Having supported a number of the challenger banks with executive expertise and worked closely with their founders over the last 4 years, we believe there is a key reason for concern amongst high street banks – a key advantage that every challenger bank has in common…

…a clearly defined business model.

Most pick off a niche and have a defined USP. Whether it be pure play mobile through to specialist lending they know where they want to play and build a clear marketing strategy around that goal.

Traditional Businesses, Traditional Thinking

How different it is with the high street banks, saddled with huge legacy issues around past conduct (both regulatory or technology) and many of who have changed Chief Executives and embarked on a major rebranding exercise around integrity.

Whilst this is of course important, their focus on proving their integrity may in fact be serving as a distraction to a bigger and more important question they need to answer, namely what is their business model for the next 5 to 10 years?

Instead, many seem to be relying on what they have always done for the last 50 years and some are struggling to define where they want to play.

Take investment banking: RBS is moving out, Lloyds is focused on being a better high street bank, but Barclays appears to be unsure. Targeting a 12% return on equity (RoE) for all its businesses, in 2014 the return on equity in its investment bank was 2.7%. Over the same period, the cost income ratio in the investment bank rose from 77% to 82% and profits fell by 32%.

The good news is that return on equity at the investment bank picked up, following a disappointing 5.8% in 2013, to a much improved 9.1% reported for the first quarter of 2015.  It's still short of their 12% RoE but perhaps justifies their decision to remain in investment banking for now.

In a conference call, John McFarlane said the board had decided the firm needed to change its strategy in order to boost revenue growth. So should they remain in IB? Barclays is stuck between a rock and a hard place trying to reposition their bank. 

A More Specific Focus Leads To A Better Outcome

The American banks however have rapidly rebuilt from 2008/09 and now dominate IB. They have a clear strategy and have rebuilt profitability whilst the high street banks are still thinking the same way. To quote Henry Ford “ If we asked customers what they wanted they would say a faster horse” Stuck in an analogue world, they need to look at what banking will look like in 10 years time and where they want to be.

I have been privileged to work with many of the challenger banks providing Executives of a high calibre, who are bright, innovative and agile thinkers. Given the calibre of these individuals I am convinced the challenger banks will really challenge.

What Next?

Challenger banks have an unprecedented opportunity to grab market share and build the bank of the future. To succeed they will need innovative leaders, the best brains and experts who think digital.

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