Challenger Banks Are Gaining Traction, What Large Banks Can Learn

Written by Christopher Musto, Digital Financial Services Consultant and Advisor,
and Susan Foulds, Managing Director

The first digital challenger bank launched its checking account offering, complete with bill pay, in 1995. Up against early digital banking efforts from traditional banks, several of these challengers did well in early versions of Keynova Banker Scorecards; however, it would be more than two decades before consumers embraced the category. 

Yet, over the last two years, digital checking offerings have started to take a sizable bite of the consumer market. Chime - by far the leader - has grown to 20 million accounts as of July 2021 by one estimate. Reports indicate that as many as half of these accounts are primary, which suggests 10 million Americans call Chime their primary everyday banking relationship.

Investors seem impressed: 2021 has witnessed a series of funding announcements from challenger checking providers.  Chime (a $750 million round at a $25 billion valuation), Aspiration (announcing plans to go public through a SPAC at a $2.3 billion valuation), and Varo (a $510 million round at a $2.5 billion valuation) highlight unprecedented sums of later-stage money pouring into challengers.

In comparison, large banks—especially national players—are doing well too. They’re awash in deposits and their primary checking attrition has stayed low. For that matter, challengers don’t offer the same variety of attractive credit cards, full-featured brokerage offerings, or personal advice, let alone branches or proprietary ATM networks. The sheer number of digital banking features offered by Keynova’s Banker and Mobile Banker Scorecard leaders, Bank of America and U.S. Bank respectively, far outstrips that of any challenger.

What challenger banks are doing right

So, what do digital teams at large banks have to learn from challengers? The way challengers are targeting specialized segments is one key differentiator.

As Aspiration has demonstrated with an eco-friendly positioning that has netted over 4 million customers, affinity and other forms of brand positioning can be successful in everyday banking. The lessons we see are:

1)      A clearly stated brand promise simplifies feature and experience prioritization. 

Chime has positioned itself as “Banking that has your back” with lower fees and overdraft avoidance which has spurred competitive activity among mainstream banks. Though not the first to offer it, Chime popularized early availability for direct deposits.  Another timely feature launch shows how Chime’s brand promise clarifies feature development: When the CARES Act passed, Chime offered to spot the first $200 of customers’ expected CARES payments. Rolling out this feature required Chime to step through risk analysis, operational considerations, front and back-end coding and marketing ahead of the payments.

The takeaway for digital teams: Aligning on a clear brand promise and being ready to work on golden opportunities to demonstrate that promise can help banks build valuable features quickly.

2)      Target communities with holistic propositions. 

When branchless checking first showed up in the late 1990s, it appealed to communities not defined by geography. One bank licensed David Bowie’s name to go after his fans. While it didn’t take off then, today, challengers are taking advantage of today’s technology to build tailored features beyond banking, and it’s working with some segments. For example, Oxygen has built into its app the ability to set up an LLC in any state – a feature that is helpful to gig workers. To gamify the impact of customers’ choices on the environment, Aspiration has built a dashboard showing “My Impact This Month.” And while large banks have built enriched financial management for select audiences, such as PNC’s Virtual Wallet targeting students, it is not the norm. 

The takeaway for digital teams: The time is right for large banks to offer thoughtful features that go beyond banking to serve unique community needs.

Overall, large banks can take a page out of challenger banks’ playbooks to target unique segments of banking consumers with specialized services, and/or repackage and position a suite of products for growing segments such as young families, new homeowners, newly retired populations with special interests, gig workers and small businesses, and sustainable interests, among others.