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The Challenger banks

Ian Ingram
Aug 21, 2014 9:41:00 AM

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Ian Ingram

In 1596 Shakespeare wrote the Merchant of Venice - a play in which a young Venetian merchant, named Antonio, signs an interest-free loan to help his friend, Bassanio, romantically court (with lots of money) Portia, the woman of his dreams. The catch is that if Antonio defaults on the loan, Shylock (the financier in this scenario) has the right to take a literal “pound of flesh”.

Antonio hits hard times and is unable to make his payments and thus the financier demands his pound of flesh. There is a short legal proceeding in which, through a contractual loop-hole, Antonio gets off scot-free.

It’s a good thing we have come a long way since this over dramatized personification of the financial system in 1596… Haven’t we?

De Montfort University, via Bloomberg, recently published research that found that loans in default climbed 13 percent in 2013 to £24.5B ($41B) as banks became more willing to “pull the plug” over late repayments. Furthermore, scandals such as the mis-selling of loan insurance, Libor and rogue trading, have fuelled public anger and created a canyon of distrust between retail banks and their customers.

Looking back to see the future

A Reuters article, which explores the more competitive aspects of the banking sector, highlights that in 2010 the “Metro Bank became the first new high street lender to emerge for over 100 years”. Further, the article suggests that industry regulators are starting to think that the issue of trust is spurned from a lack of competition in the market.

The history of modern banking practices goes back to the 17th century when local goldsmiths, who usually owned private vaults, would store merchant's gold for a fee. Over time the goldsmiths began to lend this money out on behalf of their customers for interest.

The reason I bring this up is because of one key word – "local". The goldsmiths were not multinational conglomerates. They were local traders, serving a local market, based on local demands - who ran an opportunistic side business.

The argument that the public’s distrust of banks stems from a lack of competition in the market fails to entertain the idea that perhaps banking could be done completely differently; or at least not like it has been done before.

Over the past five years, the UK has witnessed a surge in Challenger banks popping up. And whilst they are each challenging the big retail banks in their own way, they all seemed to be aligned to the idea of intimacy* with the local community.

Below are some high level differentiators of a selection of Challenger banks:

  • Metro Bank: Offers seven-day-a-week, 362 days a year banking. Accommodates customers’ dogs with bowls of water and dog biscuits
  • Virgin Money: Takes a “no hard sell” approach. Offers “lounges” (places where customers can relax and local communities come together)
  • Handelsbanken: Offers a strong decentralised branch management approach – focusing on local initiatives rather than national marketing campaigns
  • Umpqua Holdings Corporation: Bank branches are called 'stores' and have a more retail atmosphere than a conventional bank (they also send their employees around local communities buying coffees for strangers) - read the full profiles here

Key lesson for Procurement

Whilst none of these banks are offering anything radically different, they will be taking the challenge to the big banks at the grass roots level, by developing trusted relationships with the communities they serve. Those who listen to the wants and needs of their local customers, and develop their services accordingly, will go on to prosper ahead of those who rest on their laurels or tread the path carved out by previous retail banks.

Finally, there is also a challenger of the Challenger banks bubbling away in the form of purely online banks and peer-to-peer-lending companies. These branches of banking aim to serve those customers who do not want to associate with a bank in any incarnation. These companies have truly challenged the banking system and we are yet to see the role they play in changing the wider financial services landscape.

If you would like to send in your own examples of Challenger stories, please contact us here, or as always, use the comment box below to let us know your thoughts.

* Intimacy is one of the defining traits of a challenger, which I will come back to in a future post.

Proxima Best Practices Guide to Audit

Ian Ingram

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