Here is a look at Challenger bank strategies at a high level. What is a Challenger bank, you ask?
A challenger bank operates digitally, generally from an app, rather than from a physical branch or office.
These challenger banks usually tackle the big problem of financial inclusion and the high costs of transacting for under-served customer.
For a startup bank trying to make a dent in this space, here are three possible strategies to adopt (by no means are these the only ones!):
1) Become a manufacturer of banking products with on the balance sheet lending products for retail and business customers, with own platform for trading, investment and wealth management. Examples: Revolut / Tandem Bank / Webank in China
2) Choose to be a “Transaction processor” , (enable Peer to Peer money transfers or cross-border remittances. Examples: Xinja in Australia and Paytm in India. You may dispute this classification because TransferWise falls into this bucket and they are not a Bank (yet!).
My argument is that this strategy could be a good place for FinTechs to start from and then gradually own the entire financial relationship with the end customer. In the UAE, it is quite painful to transfer money through the banking system. Imagine a Venmo-like social money transfer app that solves the problem of transferring money in the less hat $100 range.
3) The Challenger Bank could become a Marketplace of third-party financial products- Like Monzo in the UK. These app banks become a slick front-end to multiple financial services provider APIs. They earn money through referral fees. Here the trick is to offer a hook that attracts the customer to the challenger bank in the first place. An example of a good hook- Credit Karma in the US offers free credit reports. It drives customers to download the app and check their credit history. Credit Karma packages the data of the customers and sells it to their partner financial institutions (this is not exactly what I was referring to in number 3) above)
Did I miss out any interesting strategies? Perhaps Uber Money (US now) / Careem super-apps in the UAE beg to differ? Those apps belong in the realm of what A16z calls “Every app is a fintech app” solution and definitely the topic of an entirely different article!