By Stuart Tarmy, Global Director, Financial Services Industry Solutions at Aerospike

Revolut, Monzo and Starling Bank may not yet be household names, but the rise of such “challenger” banks using technology to gain market share is shaking up the traditional banking industry and leading the once dominant legacy banks to change the way they do business.

There are now more than 250 challenger or “neobanks” that have been launched globally, with the 20 largest now valued at more than $73 billion and having more than 130 million customers.  These fintechs are being propelled by a large influx of venture capital money, such as Chime, which offers no fee mobile banking services. Chime has received some $2 billion in investment funds since it started in 2013. According to Financial Technology Partners, by October 2021, there had been 185 fintech financing rounds of $100 million or more, “an unprecedented level”.

Source: FT Partners Fintech Industry Research, January 2020

Apps like Revolut, Monzo and Starling Bank, all based out of the U.K., offer customers online services such as budgeting, credit cards, business accounts – even cryptocurrency services – that have filled the gaps that the more established banks with their legacy infrastructures have failed to provide. Regulations in Europe and the U.K., such as the Open Banking Initiative and the Payments Services Directive (PSD2), have made these online banking services easier to operate as financial data can be shared among institutions with customer approval.

Traditional banking under pressure

Traditional banks are trying to compete, especially at a time when younger consumers are abandoning banks as their primary account holder. For example, JP Morgan Chase has introduced a digital bank in the U.K. that offers a fee-free current account combining money management aspects in addition to cashback rewards. Goldman Sachs is investing £50 million in Starling Bank and launched “Marcus by Goldman Sachs,” in 2016, which is an online bank offering high-yield savings accounts, no fee-personal loans and high-yield and penalty-free certificates of deposit.

So, while it’s clear that these challenger banks are going to continue to innovate and use technology to attract customers and drive new services and products, legacy banks aren’t going to simply cede market share. Legacy banks have long customer relationships and have significant financial resources and talent, which means they are expected to continue to push innovations to attract and retain customers.

Another significant competitive threat to banks are companies outside of financial services, often referred to as ‘non-banks’, who want to offer their customers financial services to complement their core business.  Examples include companies such as Amazon, Tesco, IKEA and Mercedes, who are using software to offer customers financial services such as banking, credit and insurance. It’s a cross-selling strategy that relies on the deep data relationship these companies have with customers.  For example, in March 2021,  Tesco launched its Tesco Clubcard Pay+ debit card that enables users to get membership points for every transaction they make (even outside of Tesco) which, combined with in-store membership discounts, offers more meaningful incentives and a greater loyalty experience than simple cashback ever could.

Delivering better experience, value

All of this is putting enormous pressure on the legacy banks to innovate and expand their digital capabilities.  Being able to act on their customer data in real-time is critical for both challenger and legacy banks if they want to offer differentiated, personalised service and products.  In addition to the need for more data access, traditional and challenger banks alike must be able to provide secure transactions with speed and reliability, as well as being able to scale operations easily while containing costs.

The solution lies in using the correct data platform to collect, store, deliver and control customer data securely.  Companies using real-time data platforms can get more data faster to foundational digital banking applications, including payments, customer 360 and fraud/risk management solutions as well as when feeding recommendation engines and powering the artificial intelligence / machine learning that enables these applications.

For example, a major European bank has been able to secure payments from anywhere in the area within a matter of seconds. The bank processes more than 43 million transactions a day, which requires constant availability and results to customers in real time

Improve AI/ML applications

Digital banks use artificial intelligence (AI) and machine learning (ML) to better understand and engage with their customers.  For example, banks can now engage customers with 1:1 marketing by offering products with interest rates, fees and promotions personalised to their individual needs.  For example, their credit-scoring and pricing models are becoming more sophisticated by increasingly using non-traditional data to evaluate customers with limited credit histories, such as new college graduates or foreign nationals.  Fintech is using more AI because it is applicable to so many real-time and customer-facing applications and helps them deal with huge amounts of data that must be processed precisely. These challenger banks also rely on AI for better risk management; to make more informed decisions; provide greater customer support; detect fraud early and prevent it; and to automate back-end operations such as accounting, tax compliance, reporting and other administrative tasks. In addition, AI/ML algorithms can help businesses use large data sets to create faster and better predictions of future customer behaviour and needs. Using a platform that is designed to ingest large amounts of data in real-time enables banks to provide the most demanding AI/ML-based applications.

While challenger banks and legacy banks operate differently, their goal (and challenge) is the same: to attract and retain customers with highly reliable, secure, and personalised interactions.  In this highly competitive and fast-moving business environment, there’s no room for resting on your laurels. Market share gains and increased share-of-wallet are going to the fast innovators who can provide exceptional. real-time experiences for their customers.