At a recent roundtable event hosted by Currencycloud with Mambu and Elixirr, 20 C-Suite industry leaders discussed what the future holds for the banking landscape. We found that culture is perhaps the biggest force at play when it comes to how challenger and traditional banks develop and execute their strategies. Here are our key takeaways from the event.
What is the cultural divide between challenger banks vs traditional banks?
Traditional banks: Reputation at the price of innovation
If there’s any one defining value at the heart of traditional banking culture, it’s the importance of reputation. Traditional banks place a premium on the value of their brand and that customers know their name, feeling secure that the bank can hold their assets or facilitate transactions and, on being a one-stop-shop for all banking-related needs.
Part of how they’ve earned this reputation is by delivering reliable performance and service over the course of their long histories. To survive the twists and turns of the market, they’ve had to adopt robust systems, processes and compliance protocols. This means traditional banks have been able to deliver consistent service and to do so no matter what the market looks like, but it also makes innovation challenging.
Legacy technology makes it difficult to adopt new, more modern technologies. Regulatory burden, pre-established processes, and a preference for “how it’s always been done” weighs heavily on any significant efforts to innovate. Fears of redundancy also can get in the way of potential transformation.
Today, the winds of digital change blow so strong that even change-averse traditional banks are making a push for more innovative technologies, processes and service offerings. But compared to digital-native challenger banks, traditional banks are still falling behind. In part, this is because traditional banks simply can’t afford to turn off all of their legacy technologies supporting critical business processes and start fresh.
Challenger banks: A safety net is still a net
In a sense, traditional banks are safe harbors. If a new initiative goes wrong, the bank isn’t going to fold. But this also means that there’s no reason to take a chance on ambitious, creative initiatives in order to prevent failure. And while their legacy technologies keep mission-critical businesses running, it also limits what new projects are viable. Thus, traditional banks’ safety nets both protect and restrict.
Contrast this with the situation in a challenger bank. For one, the employees at challenger banks often have a strong technical and software engineering background rather than a strictly financial one. Making improvements, seeking out efficiencies and pushing boundaries is part of their DNA. And there are no legacy technologies limiting what innovations they can pursue.
What’s more, challenger banks are often small organizations where team members have a stake in the bank’s success. Creative, strategic gambles can make or break younger, smaller startups like challenger banks — if you have a bad year, it could be the end of the enterprise. If your gamble pays off and you have a good year, then your reward will be commensurate with the challenger bank’s success.
Culture doesn’t just eat strategy; it is strategy.
Both traditional and challenger banks are interested in creating better outcomes for their customers, but it’s their cultures that dictate how they go about doing that. And correspondingly, their culture dictates what their biggest obstacles to delivering those outcomes will be.
For traditional banks, the biggest challenge lies in learning to overcome their institutional inertia against change while staying compliant.
Arno von Helden, Group Financial Director at Standard Bank Group and another member of our roundtable discussion, described how traditional banks can make remuneration changes to align their employees’ incentives with innovative activities. von Helden cited his own experience with intrapreneurship — where an employee starts a business that falls within their larger corporate structure — as being a highly effective approach.
“We [were] able to create a Fintech business within a large corporate,” said von Helden. “Although it belongs to a larger institution, we very much feel like owners of the business.” Standard Bank realized this approach with the launch of Shyft, its own Fintech offering cross-border transactions.
“Going forward, the larger corporates ought to be talking about creating an environment to spur entrepreneurial thinking,” he continued. “I think that they’re going to reconsider their remuneration policies in order to attract people that are entrepreneurially spirited.” Encouraging intrapreneurship is one way to attract this spirit, but shared ownership and other unconventional remuneration schemes can accomplish this as well.
For challenger banks, that challenge lies in building trust and diversifying their service offering.
Ricky Lee of Sync. Money and one of our roundtable participants asserted that challenger banks need to focus on building their brands. Not only does this help challenger banks compete against traditional banks, it helps them to differentiate themselves from each other. “Kick a stone in the UK or in London right now,” continued Lee, “and you’ve got 20 challenger banks there. Everyone is the next unicorn. It’s hard to differentiate.”
Collaboration is king
But more so than any individual tactic to overcome their challenges, the roundtable participants found that collaboration was the best path forward. When asked about how they viewed the emergence of embedded finance and banking-as-a-service for the banking industry, 80% of respondents reported that it was an opportunity for a symbiotic relationship between Fintechs and banks.
When it comes to collaboration, challenger banks and traditional banks have two non-exclusive options open to them:
Collaborating with one another
Collaborating with other non-bank Fintechs
1. Collaborating together
Challenger banks and traditional banks are often cast as adversaries, but they’re far better suited to act as partners. Challenger banks need the infrastructure and regulatory coverage to provide more services. Traditional banks need the innovative technology and agility to serve modern customers' ever-growing demand for faster, better, more transparent and more cost-effective experiences.
As a result, some traditional banks are making the transition to serving as sponsor banks. Sponsor banks partner with Fintechs and challenger banks to provide them the infrastructure necessary for all the services customers expect from a bank. In exchange, they gain the challenger banks’ niche expertise.
Furthermore, this kind of relationship leaves both parties stronger than they would have been on their own. By working with traditional banks, challenger banks can learn more about the challenges, opportunities and industry best practices that come with being a bank. Traditional banks, on the other hand, get to see how challenger banks use cutting-edge technologies to elevate the customer experience and solve new problems, such as the move to cashless transactions and digital payments following the pandemic.
2. Collaborating with Fintechs
Rather than collaborating together directly, each can overcome their challenges by partnering with individual Fintechs. Like Mambu who integrated its SaaS banking platform with Currencycloud’s APIs, enabling banks to build a world class international banking experience for customers through one integrated partnership.
The integrated solution offers a flexible plug-and-play product that allows for lower risk and hassle-free scalability – from minimal viable product testing to production.
This partnership brings together two like-minded organizations to deliver out-of-the-box banking capabilities. By integrating Mambu’s true SaaS banking platform with Currencycloud’s suite of APIs, customers are able to rapidly deploy flexible, enterprise-class virtual accounts, collections, FX and payments services.
On the traditional banking side, Currencycloud worked with von Helden of Standard Bank on the Shyft mobile app. Standard Bank needed to build this app quickly — at a pace that would beat their nimbler Fintech competitors. By partnering with Currencycloud, they were able to do so. Shyft has now delivered over US$750m in FX purchases to Standard Bank customers to date through its Shyft app.
Currencycloud has also helped Starling Bank — a UK-based challenger bank — provide a multi-currency e-wallet that enables their customers to hold, receive and pay out in multiple currencies, ensuring that Starling’s SME customers can minimize their FX costs and grow on an international scale.
Just as with traditional banks, challenger banks and Fintechs that collaborate with one another also gain a mutual learning experience. Fintechs get to contextualize their niche service offering within the larger banking service spectrum, and challenger banks get to see how specialists are executing on a slice of their service offerings.
Our first-hand experience
In our experience working with both challenger and traditional banks, we’ve seen our roundtable participants’ observations borne out. For a bank optimizing cross-border services, or startups building their own banking services, developing and maintaining a global solution is expensive and time consuming. Both types of banking institutions have hugely different cultures with different challenges, yet both have found that collaboration and partnerships are the key to overcoming those challenges.
Currencycloud is API-driven, which allows you to integrate its out-of-the-box solutions into your own platform without having to build everything from scratch. Currencycloud’s platform is fully scalable, allowing you to take advantage of the agility, speed, and efficiency of cloud-based technology.
At Currencycloud, we enable businesses across the Fintech and banking spectrum to remove the complexity of cross-border payments. Facilitating collaboration lies at the heart of our work.
To learn more about Currencycloud’s projects with banking organizations specifically, watch our webinar, How Starling Bank and Currencycloud Are Enabling Businesses To Grow Globally.