Challenger banks are pushing traditional banks to reboot their customer experience. In the latest Digital Banking Tracker, Jamie Warder, head of digital banking for KeyBank, explains how artificial intelligence (AI) and machine learning (ML) is helping them challenge the challengers.
Challenger banks are beginning to offer more robust suites of services beyond the mobile apps and prepaid cards with which they started. Such institutions are working to raise the necessary capital to expand their products and customer bases as they enter new markets.
Challengers in North America, Europe and Latin America raised $2.5 billion in new funding from January through July, and their customers opened more than 30 million accounts during that same timeframe. Challengers like Britain’s Monzo and Germany’s N26 are using that funding to create products and expand into new markets like the U.S., where they are measuring their services against legacy FIs.
Jamie Warder, head of digital banking for KeyBank, noted that challenger banks’ newfound popularity may be forcing legacy institutions to innovate, granting them more opportunities to better engage and serve customers.
“At the end of the day, in some cases, [challengers] are partners and, in some cases, they’re competing with us. But I think what it does is it pushes us. It [pushed] us at Key to build a design center that we never had before. … [It] pushes us to buy … and acquire technology companies,” he said. “It’s good competition [that is] making us better; it’s making legacy institutions … step up their games.”
Warder recently spoke with PYMNTS about how legacy operations are approaching their innovation strategies amid the rise of challenger banks, and why the latter institutions represent a key progression for the digital banking world.
Legacy Banks and the Innovation Game
Warder believes that both legacy and challenger banks have the same impetus for innovation and technological experimentation: customer engagement and satisfaction. Each institution tends to approach this differently, however.
“Legacy banks have the scale and the roots necessary to handle several diverse needs at once,” he said, “while challengers tend to focus on innovating in one particular area or aspect of banking.”
“We’re trying to make sure we’re taking care of our clients … from my 16-year-old daughter up to our biggest institutional client. We handle their payments, deposits and lending – by our nature, we cover a lot of ground,” he said. “What I think these FinTechs can do is focus on one area. They can bring a different way of thinking; it’s about how modern technologies and data can make that better.”
Warder noted that legacy banks should utilize tools like artificial intelligence (AI) and machine learning (ML) for greater customer engagement outside of simple transactional banking, including areas like small business origination or lending. Many challengers and FinTechs are starting to apply their solutions at the same scale as legacy banks as they become more prevalent in the market.
“Some of these challengers, when they do it right, they become legacy,” Warder said, using payment provider PayPal as an example. “I would absolutely call PayPal a competitor to the legacy banking system. [It] challenged way back when, [it] created scale, [it] created great products, and now [it is] a good old-fashioned competitor. I look at [PayPal] similar to how I look at Wells Fargo or Huntington.”
Legacy banks should have strategies to work with challenger banks and FinTechs, as well as compete with or even acquire them, he added. KeyBank has done all three over the past few years. It has managed a four-year-long partnership with AvidXchange, and it recently acquired small business FinTechs and lenders Bolstr and Laurel Road. The bank also works with PayPal to provide features such as instant transfer.
Legacy and challenger banks’ innovation and engagement approaches will depend on consumers’ perspectives. Many customers are now comfortable interacting with digital and mobile banking channels for transactional banking needs, for instance, but more complex services have yet to make the switch to these channels.
Legacy Banks and the Digital Banking Shift
Physical branches still have roles to play in banking, even as more consumers turn to digital channels. Financial advice and wellness still have homes within physical branches and with human representatives, according to Warder, who believes such locations are an advantage for legacy banks. JPMorgan Chase and Capital One seem to feel the same, as they both are building new physical locations despite the increasing presence of digital challengers in the U.S.
“Let’s be clear, there is a shift happening … toward digital. You can’t deny that – no data would say otherwise. What’s interesting, though, is the transactional shift is happening much faster than the advice and sales shift,” Warder noted. “So, I think [branches] matter … [but] they shift from being transactional to being more and more advice-driven [places].”
Challenger and legacy banks alike will need to keep their fingers on the pulse of customer preference to remain competitive. Staying abreast of changes in the digital world is a full-time job for all banks, and those that best apply these changes will be able to challenge others for years to come.
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