Traditional banks are confronted with a critical juncture in the evolution of their technological infrastructure. The transition is not just complex but fraught with financial and operational risks.
While older banks struggle with legacy systems, newer challenger banks have the upper hand with advanced technology and agile operations.
Challenges Facing Traditional Banks
A key figure at a £2.3 billion challenger bank believes that high street banks could face erosion as they endeavour to modernise their technology. Their older systems and large customer base compound this challenge, making it difficult to integrate new systems without incurring losses.
“[Traditional banks] have a dilemma: they can either rebuild all of their technology or migrate people and create a new bank, under a new banner,” stated the former director of a major financial institution. They face the issue of having too many outdated systems.
High street banks attempting to start from scratch with new technology may lose parts of their existing client base during the transition. “To migrate users over, they have to cannibalise themselves and accept that they will make less money for a few years,” the source remarked.
Opportunities for Challenger Banks
This situation presents a unique opportunity for challenger banks to gain a technological edge. As traditional banks grapple with their outdated systems, newer banks can set up more advanced technology comparatively easily.
According to the source, this gives challenger banks several years to establish themselves and grow. “In time, traditional banks will also have to modernise because they will be too heavily eroded,” the source explained.
Founded in 2015, one such challenger bank focuses on business and property loans. This bank operates entirely in the cloud and employs artificial intelligence and machine learning for lending decisions.
Expansion and Regional Focus
Since its 2015 launch, this bank has lent £2.6 billion and, in 2017, posted £10.5 million in pre-tax profits.
Based in London, the bank plans to launch a Northern lending team in Manchester soon. The company currently has an operations team in Manchester, growing to 15 employees to meet increasing demand for loans across regions.
It emphasises the importance of having individuals on the ground who possess local knowledge and experience to make informed credit decisions.
Significant Transactions
Last year, this bank completed several notable transactions with Northern businesses, including a £40.2 million loan to a well-known property company and a £33 million loan to another property firm.
Additionally, the bank provided finance for a hospitality group’s expansion.
These transactions underscore the bank’s growing influence and its capacity to support significant regional projects.
Advice for FinTech Start-ups
Speaking about success in the FinTech sector, the bank’s co-founder advised against selling too soon. They highlighted the importance of long-term vision and sustaining growth.
“The key to a successful FinTech start-up is patience and strategic planning,” he noted.
Other critical factors include technological innovation and understanding market demands.
Technological Integration
Integrating advanced technology is crucial for new banks to compete effectively. Challenger banks have an advantage as they can build their systems from the ground up using the latest technology.
Traditional banks, however, must address their legacy systems, which can hinder seamless technological integration.
Despite these challenges, the transition to more advanced technology is inevitable for all banks to remain competitive in the evolving financial landscape.
Conclusion
Traditional banks face significant hurdles in modernising their technology. They must either rebuild their systems or risk losing their client base during transitions.
Challenger banks, unburdened by outdated systems, have a window of opportunity to gain a foothold in the market. Their focus on technology and innovation positions them advantageously for future growth.
In conclusion, traditional banks must navigate the complexities of system upgrades to stay relevant. This process will invariably involve substantial risks and potential loss of clientele.
Conversely, challenger banks are well-positioned to exploit these gaps, leveraging technology and innovation to expand their market presence.
