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Is launching a challenger bank the right strategy for traditional US retail banks? 13 October 2020

Some U.S. banks have made efforts to launch their own neobanks, but these projects were shuttered early on. Most are opting for the strategy of improving digital capabilities for their existing brands, writes Alex Jimenez.  

Recently, Efma published a study by Therese Torris on traditional banks that have launched their own challenger banks. Torris interviewed top executives at twelve such institutions to understand the decision to launch such ventures and their experience thus far. A curious point in the study is that out of the twelve there is not a single North American bank represented. While Goldman Sachs’ Marcus and JP Morgan’ Finn are mentioned in the study, there are no leading examples of successful US challenger banks launched by traditional retail banks. That is not to say that there aren’t any American challenger banks launched by traditional retails banks. The reality is that those that do exist haven’t garnered the attention that BNP Paribas’ Hello Bank! or CaixaBank’s imagin have in their home countries. Further, their strategic importance to the digital experience of the traditional bank is suspect.

Two of the four largest US banks have launched versions of challenger banks. In 2017, Wells Fargo launched a mobile-first banking app called Greenhouse. In July this year, Wells stopped taking new applications. According to PYMNTS, Roger Cabrera a Wells Fargo spokesperson noted “At this time, we are no longer taking applications for new Greenhouse by Wells Fargo accounts as we pause to evaluate the pilot learnings and plan for future product development.”

In 2018, JP Morgan Chase launched, with great fanfare, Finn. In early 2019, Chase announced that Finn had failed to gain traction and shuttered it. According to the Wall Street Journal “The bank ultimately determined that Chase was best positioned to provide that combination of services to its customers, according to people familiar with the matter, rendering Finn unnecessary.”

In both of these cases, the banks seemed to have only launched these ventures as a way to test or gauge the desire by the American public to bank with a neobank. I believe that the real truth lies with the internal friction between the existing traditional organization and the innovation function that launched the challenger bank. If the banks wanted to use their digital-only brand to test functionality that would be adopted by the larger organization later, the fact that they only gave two to three years of runway to these tests makes that strategy suspect.

Two regional banks that have launched seemingly successful digital-only brands are California’s Union Bank and Providence, RI’s Citizens Bank. Union Bank launched PurePoint Financial in 2017 as a way to expand their footprint beyond the West Coast, particularly to Texas, Florida, Chicago, and New York City. Citizens Financial Group launched Citizens Access back in 2018. Both of these offerings are purely to grow deposits beyond their current retail markets, as they only offer savings accounts and CDs. Reportedly, both banks do use these new brands to test out products and features that may be translated to their flagship brands’ digital channels.

Other examples in the US market are of legacy financial service organizations, using challenger banks to expand into the retail market. The most notable of these is Goldman Sachs’ Marcus, an effort by the investment bank to extend into a new market. Similarly, the commercial-only bank, Texas Capital launched Bask Bank in 2019 as a way to re-enter the retail banking space.

Twenty three years ago, Harvard professor Clayton Christensen urged organizations to disrupt themselves before they are disrupted by others. Executives at American banks often bring up this idea when talking about the impact of digital on the banking industry.  Yet, it seems that building a competing organization to disrupt the legacy business model isn’t a strategy that is being widely adopted in the US banking industry. The jury is still out whether fintech challenger banks will disrupt the US market in great numbers. American banks are more focused on applying digital technologies to the existing models, innovating at the edges, rather than a wholesale change to the model. Time will tell if this strategy works in the US market.

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