Defeating The Myth That Bank Challengers Own Digital

By Jeffery Kendall

Every new year comes with revived energy and optimism for what’s ahead. This has never been more necessary than it is now.

For traditional financial institutions, the pandemic was a digital accelerant. As a matter of survival amid the 2020 global shutdown, banks quickly enabled people and legacy systems to pivot from physical transactions to digital channels—sometimes within days. In many cases, the once seemingly impossible was accomplished to meet immediate, critical customer needs.

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As an industry, we have answered the most basic call to digital. But as we enter the new age of digital, innovation to survive and maintain the status quo is not enough. It is time for a new growth model, one in which traditional banks can compete with digital challengers and thrive.

The new era of digital is not about increasing digital channels, it’s about using digital to drive growth, revenue and profitability.

It is a myth that challengers own digital. In fact, despite the advantage of being unencumbered by legacy technology, nothing is preventing traditional banks from achieving next-generation growth in the new digital age. It will take a shift to a digital-as-default mindset and the tools, processes and technology partners to support it.

Breaking through the growth headwinds with niche as the new local

Without question, there are headwinds along the digital journey, including lost revenue from growing banking and payment alternatives. For example:

  • Starbucks’ and other mobile payment apps’ growing deposits. (Starbucks’ stored-value gift cards capture $2 billion in assets at any one time.)
  • PayPal’s expanded payment disintermediation.
  • Loan disintermediation started by Prosper and the peer-to-peer lending marketplaces that followed.
  • New financing programs by major global players like Google and Amazon.

These challenges are not new, but they are exponentially increasing the options consumers have for storing and accessing their money. Given the range of options, consumers are seeking out value. They no longer feel tied to a single financial institution to meet all their banking needs, presenting an added loyalty challenge for traditional banks and credit unions.

Fortunately, the same digital advantages and power of innovation that gave birth to these alternatives are available to traditional banks, and it’s time to leverage them for growth. To compete with challengers, traditional banks must move beyond just digitizing banking channels. They must quickly identify new growth opportunities and ramp up their go-to-market strategy. The fertile ground for driving growth is niche markets—where banks and credit unions can expand their reach by offering very specific, differentiated value propositions. This new growth model is about enabling personal experiences for customers, many of whom have previously been underserved and overlooked by traditional banking.

Fintech firms and challengers have made huge strides here because they uncovered and quickly responded to new opportunities. Traditional financial institutions must now accelerate their growth by launching dynamic digital experiences that meet market needs and solve problems for niche groups, moving beyond local geographical boundaries. Niche is now the new local.

This is a brand affinity approach that’s worked for decades with programs like airline credit cards that earn users points for travel. It’s about finding deep customer affinities and connecting them with brand products, services and personal experiences. Most banks and credit unions serve natural affinity groups based on geography. In a digital-as-default world, growth extends beyond local zip codes by through use of analytics and insights to understand customers and growth opportunities, then delivering value based on that data.

Shifting the mindset around speed to market and speed to innovation

Banks must break the cycle of making huge investments in technology, watching it become obsolete, then requiring additional heavy investments to sustain. This cycle is stacked toward technology vendors that profit from it. Maintaining the same approach that has defined digital banking since its inception will not guarantee growth—nor even long-term survival—in the new digital era. Traditional banks getting it right are succeeding by innovating quickly and standing up digital banks with niche offerings at unprecedented speed to market.

Launching a digital bank brand separately from a brick-and-mortar one can help banks access new customers, experiment with products and grow. But growth costs money and takes a degree of risk. With an eye toward cost efficiency, niche-focused digital banks can be folded into existing businesses and operate as parallel brands. This avoids redundant expenses but allows distinct tracking to analyze results, test products and adjust at the speed of digital. To accomplish this, banks must partner with vendors that share risk and empower them to adopt the new growth model with banking-as-a-service solutions—focusing on increasing revenue and minimizing risk. It’s an approach that flips the script on speed, value, accountability and innovation.

My client banks have seen compelling results with this model:

  • PeoplesBank launched its ZYNLO digital-only bank without a core conversion or new resources.
  • Centier Bank’s Billinero digital bank captured new market share with the capability to expand into 11 states without disrupting existing infrastructure.
  • TransPecos Banks created digital brand BankMD, targeting recent medical school graduates saddled with education loans. TransPecos Bank integrated its existing loan origination platform with BankMD without a technology conversion, and so far, it’s attracted $40 million in deposits.

What success looks like in the next decade

To achieve next-generation growth, traditional banks must use the power of digital for new, differentiated products, services, delivery and business models focused on niche groups and their needs. This will translate into growth through personalized solutions and dynamic customer experiences. It’s a model rooted in the most sacred foundation of banking: the customer relationship.

As it relates to banks’ relationships with their technology partners, vendors have the responsibility to lead banks to disruptive business models that create sustainable growth and loyal customers while sharing in the risk that comes with it. Challengers don’t own digital. In the new digital era, growth opportunities exist for traditional banks willing to traverse new paths using flexible technology and innovative approaches.

Digital alone, however, is not a growth strategy. It must be paired with people, processes, technology and go-to-market segmentation strategies. As they face intensified competition from progressive challengers—fintech companies to global brands—traditional banks must create and operate digital banks that deliver exceptional value, not simply digital banking.

Jeffery Kendall is CEO of Nymbus.