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Challenger banks, which are smaller upstart banks that usually operate solely online, are gaining in popularity. In fact, their innovative features and services are reshaping the traditional banking industry. Mark Miller joins us from Comperemedia to provide us with background and insights on this new banking trend.
A podcast where innovative business leaders discuss data: how to think about, how to use it and how it can help us all make better business decisions every day. As they tell their stories of trials and triumphs, you’ll gain key insights to leverage in your own day-to-day operations.
Data Dialogues Podcast
Episode 8, Transcription
Rissa (00:00):
Welcome to the Data Dialogues podcast brought to you by Equifax. My name is Rissa Reddan, and I am your host. You may have heard of challenger banks, smaller upstart banks, many of which operate solely online. They're gaining in popularity, especially since 2020 when a lot of people began banking from their sofas during the pandemic. In fact, challenger banks are really shaking up the traditional banking industry, and that's what we're going to talk about today. How are they changing the way we bank and what is their appeal? To help me answer these questions, I'm joined by Mark Miller, director of insights at Comperemedia. Mark is an expert in banking, lending, credit cards, and the evolving payments landscape. Welcome Mark. And thanks for joining us.
Mark (00:46):
I'm happy to be here. Thanks for the opportunity.
Rissa (00:49):
Mark, for listeners who may not be familiar with Comperemedia, please introduce us to the work that you do both as a media company and more specifically with your payment insights.
Mark (00:58):
Sure. So Comperemedia is part of Mintel, which is the world's leading market intelligence agency. In my role, I manage the financial services Mintel consumer reports. And also produce content around product and marketing strategies from our Comperemedia direct and Omni platforms, which track marketing spend and impressions across paid, owned, and earned channels.
Rissa (01:20):
So, let's dive in. Can you give us a bit more background on challenger banks? What's driving their popularity and success?
Mark (01:27):
Sure. So, challenger banks, also known as neobanks, are essentially technology companies that are providing direct consumer banking services. They typically don't have national banking charters, although that is beginning to change. But instead work with a smaller traditional banking institution. They're offering a lot of unique and lucrative benefits and targeting an audience that is frustrated with traditional banking options. The pandemic certainly accelerated their growth. So, our research at Mintel found that over 30% of people said they were using online and mobile banking more than they did before the pandemic started. That growing comfort with digital banking will likely contribute to the continued popularity and success.
Rissa (02:08):
What are some of the more specific ways that challenger banks are able to differentiate themselves? And what impact is that having on the banking industry?
Mark (02:16):
So, I'd say the first differentiator is really the mobile first approach. So, speed and simplicity are key. In many cases you can be up and running from your phone and in a matter of minutes. Another is a trifecta of benefits that are very common among the top challengers. So, there's no fees or minimum balance required, fee-free overdraft protection, and the ability to access your pay two days early. The second two kind of go hand in hand as it's common for people to overdraft at the end of a pay period. It's also fairly common to see cash back rewards on challenger debit cards, often more generous than what you would get on a credit card. This could be either a flat one to 2% cash back on purchases, or in some cases up to 10% to 15% when shopping with selected retail partners. It's really hard for large banks to match these perks as they have much higher overhead costs and benefit greatly from fees like overdraft. But there are some big online banks like Ally, Capital One, and Discover who've eliminated most of the account fees while they, as well as some other regional banks like Huntington have begun to address overdraft and give customers access to their pay two days early.
Rissa (15:47):
Mark, who is attracted to challenge your banks?
Mark (15:51):
So, the core target group is going to be tech savvy millennials who have some money, but no strong banking relationships. In a recent Mintel survey, we found that 70% of 18 to 44 year old males said that they would be interested in opening a bank account with a technology company. So that's definitely a group of people that would be more likely to join a challenger bank as opposed to a traditional bank. But there's a lot of newer challengers out there who are also taking a different approach and focusing on specific communities and identities. So, there's banking options now designed specifically for historically marginalized groups like Blacks, Latinos, LGBTQ plus, as well as immigrants. So, their focus is really around banking with other similar people and then making sure the proceeds flow back into that community. So, it's really almost more like a community bank or a credit union mixed in with a FinTech.
Rissa (16:50):
And what can you tell me about the expectations customers may have about their experience with challenger banks?
Mark (16:58):
I think most people are looking for transparency and ease of use when they're flocking to these options. So, transparency is really a key one around fee structures. So, a lot of these challenges are really heavily promoting the fact that they have no fees, no minimum balance requirements. It's easy for you to bank. You can earn rewards. So that's definitely something that can help build trust as well, that kind of transparency and lack of hidden fees. They also expect a good customer experience. So, when they have questions, they want to easily be able to find answers. That is something that I would say is a bit of a pain point for challengers now, just because they don't have the same type of scale that a big traditional bank would have that has call centers set up around the country with tons of employees ready to answer your question. So, it's a pain point I would say for challenger banks, but they're trying to leverage a lot of different technology in order to create the best customer experience that they can.
Rissa (04:34):
I attended a pricing workshop years ago now, and I'll never forget the presenter’s discussion about how there are riches in niches. Does that theme apply here?
Mark (04:43):
I think it does. I think when you have these companies that are these challenger banks that are targeting a specific type of customer base that are leveraging data in order to do so and creating a type of community of like-minded people, it can really benefit them. So, you've got kind of with traditional banking, often a one size fits all approach. And with these challenger banks, they're really digging into a more specific product, a specific type of customer, and really focusing on that personalized element that's helping to build that loyalty.
Rissa (05:21):
Access to credit is an incredibly important topic at Equifax. And we are firm believers in leveraging alternative data for a more complete picture of customer risk. How does this translate into challenger banks? Is this a topic that is also something that you see with challenger banks?
Mark (05:40):
Yeah, definitely. A little bit more so with some of the lending or credit products that are coming out of the space. But even with some of these, challenger banks whose core focus is banking they are expanding into those other products. So, for Chime and Varo Bank, two of the biggest challengers had launched credit building credit cards. So, they're designed to help people without credit to build credit. So that's happening where they're inching into that credit building space. And like I said, in the kind of the lending and credit space it's already happening, where we're seeing these FinTech lenders able to target individuals looking at things like their cash flow management, their job history, as I mentioned, subscription payments, and things that typically wouldn't come into an overall kind of credit profile.
Rissa (06:43):
What does the regulatory environment look like for challenger banks versus traditional banks? Are there some differences?
Mark (06:52):
Yeah, there are some differences. You know, for the most part, they do have to play by the same rules, but enforcement is much different. There's a myriad of financial regulators on both the state and national levels and challenger banks may be treated differently based on their charter or size. So, one big rule that does not generally apply to challenger banks is the Durbin amendment, which caps debit interchange fees for banks with assets over $10 billion. These fees for challengers make up an enormous portion of their revenue, and it also enables them to more easily offer benefits like cashback rewards.
Rissa (07:29):
Mark, are you seeing any differences as it relates to marketing for challenger banks versus traditional banks?
Mark (07:35):
It is definitely a much more digital first approach. So, when we're looking at bank accounts, specifically, most of your big traditional institutions are still primarily using direct mail to target customers. What we see very differently in the challenger space is a big push into national TV and into paid social media, particularly Facebook and Instagram. So, they're using these more digital channels to target a more digital savvy, younger audience. Whereas the traditional players are still using those traditional direct marketing channels.
Rissa (08:13):
Are there any concerns that consumers have about using challenger banks versus traditional banks?
Mark (08:19):
There's always a risk when putting your money outside of an established financial institution. Although most deposits with challengers are FDIC insured. It's difficult to kind of attract a customer from an existing banking relationship that they have and move them over to a new challenger account. So, a lot of what we've seen happen is somebody maybe has an existing banking relationship and then they'll open a secondary or a third account with a challenger bank. But that's something that's kind of beginning to change. I've seen some data recently for Chime where they're estimated to have about 12 million customers and 8 million of those said that Chime was their primary bank.
Rissa (09:37):
And what about commercial or business banking customers? Are you seeing any, any themes emerge there as compared to consumer bankers?
Mark (09:45):
There is some movement in the business banking space. A lot of it is focused in the challenger realm around the gig economy. So, there's options out there to help you kind of manage your personal expenses, as well as your kind of side gig expenses or your business expenses if you're a small business owner. They'll do things, you know, it'll help you when it comes to tax time, understand, you know, what your business purchases were, what versus what your personal purchases were. So that tends to be the space that we see most of these players operating in. Although, digital banking is definitely alive and well in the business banking space. For example, Cabbage, which was just acquired by American Express has come out with an online banking account for business holders.
Rissa (10:34):
What does the future look like for challenger banks? And if you had to boil down to the top three most important elements, what would they be?
Mark (10:42):
I do think they're here to stay. But it's likely going to evolve into something that looks a lot different than it does today. I mentioned in the regulatory space, different types of charters can affect, you know, how banks are regulated and what specific rules they have to abide by. But we've already seen lending club and Varo gain, national banking, charters, and SoFi, which has a suite of products that really rivals many of the larger banks is eyeing that as well. So, there will likely be some consolidation due to all of the competition with these biggest names emerging on the national spotlight. And then some niche players fitting in. As these changes occur, we're likely going to see new challenges emerge with value propositions that we haven't even seen before. And that's probably the most important element of why they will remain in innovation. Always searching for ways to improve the experience. If I had to give two more, I'd probably say pending new regulations, the ability to offer cheaper products to consumers and also to micro-target down to that specific customer segment.
Rissa (11:50):
So, it sounds like Mark, what I'm hearing is that the themes for the future of challenger banks is really around innovation, micro-targeting and also inexpensive access to credit.
Mark (12:03):
Yeah, that sounds about right. Also, you know, I guess like a throw in there as a fourth creating a very customer centric good experience. That's definitely something that they're trying to go for and differentiate themselves from traditional banks who don't always have the best reputation with customers.
Rissa (19:50):
We've had a lot of discussion here today around the differences between challenger banks and traditional banks. Are you seeing some similarities begin to emerge?
Mark (20:45):
That's a good question. I think from the similarity perspective, we're seeing more traditional banks, you know, from, or from a, I'd say from a features perspective, we're seeing traditional banks become more like challenger banks. So, you know, you've got your, the elimination of overdraft fees, elimination of overdraft fees or helping you manage those overdraft fees, the ability to get your pay two days early, a lot of players promoting these no fee accounts and a lot of big traditional banks promoting these no fee accounts. So that's one way that we see these traditional banks becoming more like the challengers. Also, all of them now have a mobile app and that's something that previously kind of set the challengers apart was there the mobile focus. So, I remember Chase a few years ago, came out with a product called fin, which was a separate mobile banking product designed or targeted towards younger users.
Mark (21:48):
Eventually they got rid of it in part because the core chase banking app really caught up with all the features. So there wasn't much of a differentiator. So, that's one way that traditional banks are becoming more like challenger banks. I would say on the flip side, you know, we see these challenger banks expanding to become more like a traditional bank or even becoming a traditional bank. So, the ones that are gaining the national banking charters, it's going to be difficult to differentiate them from the big traditional players. So, if SoFi has a national banking charter, and it's offering loans, bank accounts, credit cards, investment accounts, how are they that much different from another big online player? Like Discover or Capital One. We also see some of these challenger banks like SoFi again plastering their name really on the national and at times international spotlight.
Mark (22:43):
SoFi is the sponsor of a new stadium in Los Angeles, where two NFL teams play, where there's going to be a Superbowl, where the Olympic game ceremonies are going to be held. So SoFi's name is really going to be, you know, plastered on an international stage. And then Chime is another example, one of the biggest challenger banks out there they're a sponsor of the Dallas Mavericks basketball team. So, when you see a Dallas Mavericks player wearing a Jersey, you see that Chime logo. So that's something that kind of is bringing them out of that, just strictly digital marketing space into the mainstream, and also building that brand recognition and trust that's needed to compete.
Rissa (12:22):
Thank you so much for joining us today and for sharing your rich knowledge with us. If our listeners are interested in more information, where can they find you?
Mark (12:37):
So, thank you. It's always a fun topic to discuss. I'd encourage everyone to check out the Mintel and Compremedia blogs. And you can also follow me on LinkedIn.
Rissa (12:47):
Thanks again for joining us today. If you haven't yet, I invite you to listen to our previous episode, Demystifying Data for Small Business, where we were joined by Markaaz founder and CEO, Hany Fam. And I caught up on the top three things small businesses should do right now and which digital digital solutions can help them succeed. If you liked our episode today and would like to be notified of future episodes, hit the subscribe button wherever you are listening. Additionally, feel free to leave us a review at Equifax. We know that smarter insights drive smarter actions. Thank you again for joining us for our latest Data Dialogues podcast.