Challenger Banks Revisit Their Model

Many challenger banks — the small, newly created companies that want to compete with the “big guy” legacy institutions — have taken similar approaches when launching their services. The problem is what they’re offering isn’t enough for their companies to take root among consumers.

Challenger banks typically start by offering an individual account, a debit card, and a smartphone app to track spending and encourage savings — but they can’t stop there, said Emily Steele, Temenos president for North America.

That’s not enough, explained Steele, who has worked with several challenger banks that use Themenos’ modern banking platform. She has observed banks closely during the several years Geneva-based Temenos has been trying to crack into the North American market.

Emily Steele

Emily Steele

Both Parties Are Left with Unmet Needs

“When a challenger comes to market with just a savings account, they are not really capturing my overall banking relationship,” she said. “Consumers jump in for the high interest rate but go back with their legacy bank for a broader set of services.”

Challenger banks rely on interchange fees from frequent use of their debit cards to reach profitability without charging fees. But if they remain a secondary account, they have the costs of running a digital bank without the revenue.

Moven and Simple, the two earliest challengers, launched with a single account that let a user track spending and, at Simple, place funds into virtual envelopes to save for expenses like a vacation or a tattoo.

But they didn’t offer more complex products like loans or credit cards.

“Card transactions are how companies get to know us as consumers, because that is how we spend our money.”

A Young Grasshopper Across the Atlantic

Now some challengers are offering a wider range of products.

New York-based Grasshopper Bank, the first 100% digital commercial bank in the U.S., will focus on entrepreneurial firms, especially in tech — a kind of junior East Coast version of Silicon Valley Bank.

Grasshopper will offer its commercial users a cash burn rate calculator — the commercial equivalent of Simple’s Safe-to-Spend product for consumers. It also expects to use artificial intelligence to offer smaller loans to small businesses.

Varo, which will use Temenos when its FDIC approval comes through, offers personal loans plus checking and savings.

Temenos Powers Traditional Banks Too

The Temenos story involves supporting technological innovation among all banks, not just the challengers.

Commerce Bank of Kansas City, Missouri announced late in 2016 that it would use Temenos to replace multiple core systems acquired over the years. It is expected to go live in Q1, said Steele.

In Canada, Temenos is used by BlueShore Financial, an innovative boutique bank and wealth management firm in North Vancouver, and by EQ Bank, the digital arm of Equitable Bank in Toronto. It offers a single type of account and, unlike U.S. banks, no ATM access.

Small but Mighty: Challengers Use Fintech Better

Steele warned that established banks should not become complacent just because the challengers are small.

“They are in the market enticing consumers and doing better than legacy banks in partnering with fintechs and creating experiences that are unique and more lifestyle-like for consumers.”