Can challenger banks have the same impact on private banking as has been witnessed in the retail banking sector? Jamie Crawley investigates.
Challenger banks have enjoyed an exciting few years in the retail banking sector, with the likes of Monzo, Starling, Atom and Tandem all shaking up the industry and winning market share with their innovate technology and user friendly service.
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“2018 was a transformative year for retail banking and we’re increasingly seeing big banks looking to emulate the successes of challenger banks by re-positioning their digital offers,” Starling’s founder Anne Boden told Private Banker International. “Our technology means our operating costs are far smaller than a traditional bank, and we pass this onto our customers.”
While it is difficult to imagine HNWIs exchanging a relationship-led service for the largely digital offerings provided by challenger banks, there are several reasons why they might consider the move.
Definitions and difficulties
A broad definition of a challenger bank would be of a financial institution of relative youth that seeks to obtain a share of the market by drawing customers away from the banking world’s cornerstones.
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By GlobalDataIn this sense, the landscape for challenger private banking is rather barren. When Hampden & Co was granted its banking licence in March 2015, it became the first new name on the UK’s private banking roster in 30 years.
Metro Bank is one of the more established challenger banks on the British high street, and stepped into the private banking world in 2015, albeit coyly. “Not many people know about our private division. To a certain extent that’s deliberate as we don’t advertise,” head of private banking, Julie Barnsley, told PBI in 2016. “All our business comes through business advisors, specific editorials and also word-of-mouth referrals from existing clients.”
Another and wholly different example is that of Tandem – a digital challenger in the retail sector – which entered the private banking world at the end of 2017 with their acquisition of Harrods Bank, and its 10,000 customers and £80 million of capital.
Nick Bennett, chief operating officer of Tandem told PBI, “We have a tailored approach to understand each individual client – this appeals to high-net-worth individuals with more complex asset streams.”
Any institutions seeking to make a splash in private banking will have a wave of challenges with which to contend. Client inertia, risk of joining a new brand and a reliance on technology at the expense of face-to-face service are all factors that many retail banking customers would be put off by, and they are multiplied exponentially in private banking.
The more money there is at stake, the greater the reluctance to move it from one bank to another, the greater the concern for its security, and the greater the need for an effective relationship management.
Know Your Customer
One way a challenger bank can obtain market share would be to identify a certain type of client likely to be underserved by the traditional private banking mainstays.
Metro Bank has sought to do this by offering maximum flexibility when it comes to their assets. In the face of other private banks raising their minimum wealth, pricing a number of would-be customers back out the door, Metro accept those with earnings of £250,000 and a cash deposit of £250,000, or have £1 million of assets or borrowing with the bank.
Hampden & Co meanwhile find that their clients often fall into two main areas: business owners – either entrepreneurs or those from a family-owned business background – and high-earners from professional services, such as law, accountancy or medicine.
“While we attract successful clients from all sectors, we do appear to have a particular attraction to business owners, as they tend to have more individual needs,” Graeme Hartop, CEO of Hampden told PBI. “They also appreciate having one person that can look after their personal and business banking.”
Slow burners
Brand awareness is of the utmost importance for new kids on the private banking block. Rather than lifting and shifting their entire portfolio over to a challenger, clients may instead gradually move their centre of gravity over, as they become aware where the strengths of their new bank lie.
While an HNWI may not be altogether satisfied with his or her current bank, the notion of transferring everything to a new provider and starting again may not be a particularly attractive one.
Challenger banks then may be advised to work with this trend, rather than fight against it.
Metro Bank, for example, offers a Money Management account, aimed at working alongside the various assets their clients have with investment firms, offering up to 50% of the value on an overdraft basis.
At Tandem, Nick Bennett said “As a relatively new lender we recognise the importance of building confidence with our customers and partners. We look to grow steadily to ensure we consistently deliver the highest quality customer service possible. Tandem’s approach is to focus on specific niches that are underserved or where incumbents are delivering poor service rather than channelling all of our energies towards rapid growth.”
Best in class
Where a challenger bank may thrive then is by setting itself parameters, operating extremely efficiently within them and not straying outside into territory beyond their interest or resources.
Both Metro Bank and Hampden & Co abstain from offering a full wealth management service for example.
“We’ve specifically chosen to focus on our strength in providing the best possible banking service for our clients. We believe in our expertise, and that’s why we prefer not to have our bankers retraining as fund managers or performing any role other than the one in which they’ve spent years gaining experience,” said Caroline Primrose, Hampden’s head of banking in London.
“A traditional private bank’s first question to a client would be: ‘How much investable wealth do you have?’ We don’t ask that,” Julie Barnsley told PBI. “At Metro Bank we don’t do wealth or asset management – we stick to plain vanilla banking. It’s all about old fashioned relationship management – that’s our main differentiator.”
This is where challenger banks can impact the landscape of private banking, in much the same way start-ups and fintechs have done in the retail industry – by identifying something specific that they think is important to a broad cross-section of the client-base and focussing on doing it better than anyone else.
The effect of this could be that the bar gets raised across different areas of private banking, not unlike the way a Monzo or a Starling, or indeed a Tandem, has raised the bar for what a digital banking proposition can offer in the retail sector.
“Challenger banks can impact private banking by being more nimble and flexible in their proposition,” Nick Bennett said. “In the case of Tandem we can also bring a strong technology driven offering – this is an area many private banks compare poorly versus client expectations.”
Graeme Hartop told PBI, “How we challenge existing banks is by focussing on a particular client need – in our case, a professional, personal service, and deliver against that need exceptionally,”
“This means that more generalist providers will have to compete against specialists on every front, which I suspect they will find increasingly hard to do.”’
