Part 2 – Why challenger banks need to be 100 times better than incumbents

In my previous article I attempted to reframe the “Fintech debate” into one centred around its goal (competition) rather than its means (Innovation, Fintecth, etc.).

In this piece I would like to offer a framework to discuss what an overall banking proposition is and why one will be better than another. This will lead me to argue that a challenger will have to be 100 times better than an incumbent to challenge at scale.

What is a bank made of?

First I would like to propose a simple model that will give us a framework to discuss the competitive advantages of different retail banking propositions.

Let’s consider a retail bank to be made up of 4 core blocks:

  • A block that makes it profitable and ensure it fulfils its legal compliance requirements
  • A block that fosters relationships with customers
  • A block that fulfils customer needs
  • And a block that enables it to reach customers

So far so good, nothing earth shattering. It’s a fairly generic model that can be applied to most organisations.

We can detail these 4 blocks further into the components highlighted in the below diagram:

To successfully compete challengers have to provide a better “overall proposition”

What’s the overall proposition then? Following the model proposed above, the overall proposition provided by a bank is made of the 4 core blocks it provides. For instance if a challenger is great at customer experience and servicing but hasn’t got a sustainable business model and no brand, it will fail.

Let’s define an “index” that measures the strength of a retail bank proposition, by taking into account the different elements that make a banking proposition.

Overall Proposition Strength (OPS)= making it profitable and fulfilling regulatory duties* managing and fostering relationships with customers* fulfilling customer needs* reaching customers

So my point is that challengers need to compete across different sets of metrics to provide an overall challenging proposition. I feel this point is needed as most discussions around challengers focus on a single area where they might be better (e.g. cost of operation and customer service) or areas where they will struggle (e.g. distribution).

So we now have a more holistic model to conduct our discussions around “why fintechs are going to to kill traditional banks”.

What about customers?

There are two broad categories of customers:

  • Customers that choose a bank for the first time (e.g. students, migrants, new business)
  • Customers that are already served by a bank

Basically the 2 key differences between the two groups is that customers need a good reason to change their existing bank and have the pain to switch should be acceptable.

When does Bank B challenge Bank A?

 1. For customers who don’ t bank with anyone yet

For Bank B to sustainably challenge (i.e. steal market share from) Bank A (challenger, neo or traditional) in the long run we must have:

Bank B OPS> Bank A OPS

⬄ Bank B OPS> Bank A making it profitable and fulfilling regulatory duties* managing and fostering relationships with customers* fulfilling customer needs* reaching customers

2. For customers with an existing bank

For customers with an existing bank account, there must be

Bank B OPS > ( pain to switch + why bother) * Bank A OPS

The “pain to switch” is made up of:

  • Efforts required to sign up to the new bank and close old one
  • Efforts to re-establish the links between the bank account and the various financial relationships we have (salary pay, standing orders, direct debits, etc.)
  • Additional products with the existing banks and potential negative impact of switching (e.g. still qualify for loyalty deals?[1])
  • Fear factor (something might go wrong, I might have forgotten something, etc.)

The “why bother” factor is made up of:

  • inertia: I have better things to do and it’s not that important in the grand scheme of my life


Where are we today?

1. For customers about to select a new account for the first time,

Let’s look at the advantages incumbents will have and what values we can associate with this advantage. The values work in the following way:

  • 1=incumbent is on par with challenger.
  • >1: incumbent is superior to challenger
  • >0 & <1: challenger is superior to incumbent.

So let’s allocate some value to each parameters:


  1. Makes it profitable and ensure it fulfils its legal compliance requirement = 1 . I assume that overall by operating at a lesser cost and being involved in simple products challengers can be on a par with incumbents
  2. Foster relationships with customers = 2 (mostly out of the strength of the brand)
  3. fulfils customer needs = 2 (due to the wide range of services incumbents are able to offer customers)
  4.  Enables it to reach customers =5 (this is the distribution advantage)

So that gives us a total of 1*2*2*5=20.

So a challenger will have to be at least 20 times better than an incumbent to compete for new banking customers.

Bank B OPS >20 * Bank A OPS  

2. For customers with existing banking service

For these customers today:

  • Pain to switch = 2 , that is to say the pain to switch is not null, it is sizeable but not so high as having been improved by legislative efforts in the UK market.
  • and why bother =3, it’s fairly high. That’s a reflection on the fact that banking is not that important in people’s lives. Albeit financial health is key to everyone’s life, people rather not spend too much time dealing with their finances.

Making it so that :

Bank B OPS> 20 * (2+3) Bank A OPS

⬄ Bank B OPS > 100 Bank A OPS.

QED, you know now why a challenger needs to 100 times better than an incumbent.

The numbers I have allocated against the different parameters are debatable. But let’s not forget that I use them here to provide a framework to assess relative strength. The specific numbers can be optimised based on the assumptions you make. The bottom line is to stand a chance the challengers need to be a lot better than the incumbent across a number of areas. So a new digital bank, that is just an app with great UX and pretty much the same services as the ones we know today won’t cut it.

Not the theory of relativity, but a useful framework to have more sensible debates.

I don’t want to over emphasize the “mathematical modeling” presented above; it has its strengths and lots of weaknesses. At this stage I have presented it as a way to frame and quantify the argument we can often see about the need for strength of distribution, the impact of customer inertia and other parameters.

I find it a useful framework to think about the different components that make a company’s competitive position.

For instance, will Atom bank be adopted by everyone in the UK because they are using biometrics authentication and with the aim of giving great customer service?

I think it’s great to remove some pain out of the current logging in experience, but the above framework helps us to think why this won’t be enough.

I will leave with something on how digital impacts some of the elements I have discussed through this article.

  • Digital will lowers the “pain to switch” factor: with PSD2 and improvements in onboarding customers I think the pain to switch factor will get closer to 0 at some point.
  • Inertia will remain: there will always be some inertia, we can see that as a human trait that seeks stability rather than continuous change. Banking will never be what people want to do when they wake up in the morning, they have a real life to live.
  • Digital will makes distribution easier for challengers: it is far easier to build a mobile app and website than to lease, refurbish and staff branches in every single high streets in the country. Easier doesn’t mean easy though! The problems of discovery and acquisitions still remain and are sizeable problems. Propositions that can successfully bake in a network effect in them (think social networks) manage to solve this problem. I think social channels (think whatsapp, facebook, and co) will erode the traditional distribution advantage that high street banks have painfully built on the high street.
  • Digital will have a much stronger impact across the 4 “blocks” I highlighted in the sections above. Today we have seen digital discussed mostly from a channel perspective. Its impact on product, risks, branding, etc. will become more predominant.

Hakim is available for interim roles and consulting projects on digital product management, strategy,  proposition development and transformation in Fintech and retail banking. He led mobile strategy and product at Lloyds Banking Group. More recently he was in charge of digital strategy and propositions for small business at RBS. He is also founder @FrenchDigital

[1] Impact on existing products inspired by this blog note: