Banking as a service could help challenger bank expand and profit

Offering a banking service to companies in sectors that deal directly with consumers could help fintech driven challenger banks grow their customer base quickly.

Starling Bank is offering businesses in various sectors the chance to provide retail banking services through its application programming interfaces (APIs).

There is nothing new to banks offering other companies a white label service that they can stick their own brand on but the new digitally driven and tech savvy challenger banks offer something a bit different. It will offer the company the latest fintech services that customers today desire. At the same time it will boost the user bases of challenger banks, although on paper they will not be their own customers.

These challenger banks have a huge task on their hands winning over lethargic consumers. History shows that when it comes to current account providers consumers are reluctant to change.

Regardless of all the fancy apps and genuinely useful services on offer from digitally driven challengers the lack of financial incentives to change bank means customer acquisition is slow. Furthermore for many consumers that do sign up to challenger banks it is often as a second account to complement their existent current account, often from one of the high street giants.

The figures are revealing. When the UK payments regulator launched the current account switching service, which enable consumer accounts to be transferred to another supplier within seven days, in 2013 a rush of people clamoring to change their current supplier did not follow.

This system means when people are ready to change current account supplier it is easy, so clearly people are not ready. But as I said earlier people are attracted to second accounts and if offered one by brands they trust, like retailers, it is appealing. It can be combined with things like reward cards and offer financial benefits as well as making the customer feel special.

Then if you look at Open Banking, a regulation recently introduced to spur competition through enabling consumer data to be used, if consent is given, by multiple finance firms, there is a lack of consumer awareness of what it is and can offer them.

In fact, as I wrote an article last week, research from YouGov recently revealed that only 28% of people have heard of open banking, which promises to inject competition into the retail banking sector, it wasn’t really a surprise.

What was a surprise though was that YouGov found that only 14% of 18- to 24-year olds had heard of open banking, compared with 39% of over-55s.

Gareth Lodge, financial service IT analyst at Celent, said: “Undoubtedly the concept is sound because Starling are far from being the first to offer such a service – CBW in the US and Solaris in Germany are just two that spring to mind that have been operating for several years.  Nor are they first in the UK.”

“That perhaps raises the second view point – the fact that others already exist yet haven’t transformed the industry suggests that Starling won’t instantly grow over night either. Not to say that there isn’t a need and a demand, more that this is a new market that demand has to be created for.

Lodge reckons profit rather than user acquisition is the main benefit for a company like Starling. “Unlike old legacy, which would require custom coding and integration, built correctly, exposing the right APIs to the end client is virtually free. It is an asset already built, so it will almost pure profit on the revenue. I think that, rather than customer base, is the more attractive thing for Starling, as it allow them to expand more profitably.”