How to start a challenger bank? Pragmatic advice

How to start a challenger bank? What is worth focusing on? What could be your advantage and what certainly will not? In this article we are going to give you answers to the previous questions resulting from our experience. We have cooperated with several companies from the fintech industry, now it’s time to draw conclusions.

One does not simply challenge a banking system, but…

In many countries it used to look similar: there were a few large banks (let’s call them market leaders) and several dozen other traditional banks. Now it’s changing and all of a sudden there are new competitors – tens or hundreds of challengers. This is due to the need for digitalization of banking and the increasing demands of users to which traditional banks find it difficult to adapt at a fast pace. 

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In addition, challengers are continuously developed and, frankly, some of them hold a budget that you have not dreamed of. Without looking far, Revolut was founded in 2015, since then it has been growing all the time, has over 160 developers working on it, and is able to deliver updates even several times a week. By this, we want to tell you: it is not worth trying to monopolize the market that will look completely different in the future. The number of challenger banks will grow and more and more of them will aim at different niches. When you think about how to start a challenger bank the first thing you need to do is to focus on getting a niche.

Why is getting a niche important?

At the heart of the bank challenger is the delivery of solutions that are not provided by traditional entities. The problem is that the market is getting tighter and tighter due to the rapidly growing number of challengers. If you want to fit in you need to find a niche for yourself and give it a value that no one else guarantees. 

An excellent example is the case of Nest Bank that has discovered that there are many entrepreneurs in the trading sector in Poland who do not have a bank account and prefer to operate with cash. The bank provided them with safe, tax-free accounts and delivered ATMs to the fairgrounds, so they could deposit cash.  

What to do for a start?

Our experience allows us to suggest you start by creating a clear list of core banking functionalities you need, and hypotheses for Unique Value Propositions (UVP), which meant functions that were to stand out. Then, you’ll have to sort them out, starting with what is most important for your niche. All our business partners founding a challenger bank had such a list.

Instead of creating all functions at once, you should start in a pragmatic way by building the direction in which you are going. Use User Story Mapping to choose the basic functionalities. Having many user stories divided into different areas of the banking application, so-called “backbone”,  (customer registration, transfers within the application, local transfers, card, customer application, compliance, etc.) you could decide what to focus on first. 

Also using Business Model Canvas would be a great solution to identify strategic suppliers, sources of expenditure and revenue, target groups, and personas. We used it every time we worked on challenger banks. We tailored the product development plan to the marketing strategy adopted by the business partner as well. With this in mind, it was possible to jointly establish a definition of Minimum Viable Product.

MVP – what should it be?

For all the challengers we work with, MVP was core banking functionalities + at least one UVP. Why is that? Because people don’t like change, especially if they don’t see the benefits in it for themselves. So, if you want to enter the market with a product offering only basic functions, your only chance to win first customers will be aggressive marketing ( as we say: “communicate benefits not features”) or dumping. In this case, you have to reckon with high costs and no feedback to check your hypotheses. 

That’s why we and our business partners decided to create at least one of UVPs before the first users start using the product. Such an MVP gives you an answer for questions: is your product attractive for a niche market and in which direction should you develop it next?

How to start a challenger bank? Do it in a pragmatic way!

Recently we worked together with the founders of a new challenger bank who pleasantly surprised us with their approach. They turned to us after a year of doing detailed research for information and had the concept of bank challenger construction ready, which consisted of creating it from already completed components. They also prepared the list of providers. Founders didn’t want to create a bank application from scratch. Why were we delighted with this? Because it fits with our pragmatic thinking about building products.

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Using ready-made components

Using already completed components is time and energy saving especially if you choose a proven supplier, and you can be sure that they have been tested several times already. So the challenge is to find trustful companies that provide these components and the development teams that will bring these components together into your challenger bank. 

Our mission, as a product development partner and technology advisor, is to suggest the most effective solutions. As we mentioned before, our business partners usually come to us having research on providers done. Then, we check what integration with components could look like, which means: exact comparisons, meetings with providers’ representatives, and inspection of documentation. After that, we recommend to our partners the most optimal components, especially that we already have experience with some of them. Of course, the final decision is up to our clients, and we are flexible in our approach to their needs. 

What components are we talking about?  For example:

  • The payment processor that deals with the transactions;
  • Component for customer identity verification (KYC);
  • Cloud solution infrastructure (like AWS).

In the case of UI, we are able to offer to help ourselves by building a backoffice, which is an application responsible for resolving clients’ problems, monitoring, and reporting. We can very quickly prepare the core of such a tool based on our own accelerator.

Building a challenger bank from already ready components has many advantages. First of all, the sooner the product is completed, the sooner it will appear on the market. You will get feedback from users or check if your strategic assumptions were correct to avoid a shot in the dark approach when developing further functionalities. Moreover, it takes many months to build everything from scratch, and, instead, at the same time you can have a working and user-tested application and a vision of how to develop it next. 

Bet on a very convenient UX

It won’t make a big difference to other challenger banks, but it will make a big difference to traditional banks. This applies to countries like the UK where many people remain loyal to the biggest brands present on the market for years. And if you think there is a slight difference between challengers and traditional ones, just look at the number of clicks needed to set up an account with different banks. In Revolut only 24 are needed, in Santander, for example, 91, and in HSBC – 99. 

UX is the Achilles heel of traditional banks which creates an opportunity for you to stand out, so accordingly challengers should pay a lot of attention to User Experience. What is worth thinking about? As an example, during the recent development of a challenger bank our UX Design team prepared:

  • a questionnaire for internal users (100 people);
  • clickable mock-ups 
  • in-depth interviews with end-users.

All this to understand what we should focus on when building the basic banking functionality, and how users navigate the application. 

What you can gain from the extraordinary UX?

With this knowledge, it will be easier to create a user-friendly banking application with the features expected by real customers. As you probably know, there is no better advertising than a satisfied client, so make your users feel like on top of the world when using your challenger bank app! Consequently, the number of people who recommend your bank to others will increase.

Challenger bank and cryptocurrency exchange – what do they have in common?

By the way, have you read an article on our blog about building a cryptocurrency exchange or Fintech Software Development Outsourcing? To put it in a nutshell: we are pretty sure that creating all the structure and mechanisms from scratch is a good idea only in a few, rare cases. In all the rest, which means 80-90%, it is much better to use white label solutions. Reading this, you will see some analogies with challenger banks. 

TL;DR – how to start a challenger bank?

After reading this article, try to remember:

  • There are plenty of similar products on the market;
  • You probably don’t have the budget to compete with market leaders;
  • It’s better to focus on creating a solution for a small group of users. Their satisfaction and success will spread and help you gain new users;
  • To build a challenger bank use already existing components from professional providers;
  • Start with core banking + at least one Unique Value Proposition as MVP;
  • You have to focus on UX and build your own history; 
  • The brand must be consistent and have a message.