For Challenger Digital Banks, It’s Game On

New players on the digital banking scene are hoping to change the game by looking to industries that are categorically unlike banks for inspiration.

Over the past few years, dozens of so-called digital-only “challenger” banks have emerged on the financial scene, ready to compete with larger more traditional banks. The digital-first approach appears to be resonating well with consumers. A recent J.D. Power survey found “branchless” or “direct” banks outperformed traditional banks in customer service with an average score of 865 out of 1,000 points, 49 points higher than conventional banks. The same survey found these challenger banks outperform their conventional counterparts in customer loyalty and referrals as well.

The trend is mirrored in the U.K. market where mobile banking activity is rapidly rising. The British Bankers Association (BBA) reported 19.6 million U.K. consumers used banking apps last year, an 11 percent increase from the previous year. BBA also reported use of banking apps rose significantly by 356 percent between 2012 and 2017, with customers using apps more frequently to perform a variety of banking tasks beyond simply checking their account balances.

As one of the more active challenger institutions in the U.K. market, Atom Bank has been shaking up the traditional banking scene by offering banking services like a savings account and SME lending through its mobile platform. Earlier this year, Atom pulled off an upset when it was named the most recommended bank in the U.K. in BDRC Continental’s ranking, displacing rival traditional bank First Direct, which had held No. 1 spot since 1989.

For a discussion on how digital upstart banks are shaking up the financial landscape, PYMNTS recently caught up with Atom Bank Chief Operating Officer Stewart Bromley, who explained how the challenger institution is building its brand by completely abandoning the rules and strategies followed by traditional banks.

Gaming The Banking System

Bromley said Atom Bank wanted to launch a new mobile-only banking experience that would be completely different from what traditional banks offer. With that in mind, he said that when Atom built its app it took its cues from an unlikely source: the video game industry.

“We don’t have a single app developer that came from the banking sector, not one,” said Bromley. “We hired every single one of our app developers from the gaming sector.”

The decision to recruit developers from the gaming industry over the banking industry was by design, he said. The Atom Bank app was built using the gaming development platform Unity 3D and offers users a 3D graphics experience that provides a different way of managing their finances than the apps and interfaces offered by traditional banks.

By tapping the brain power of game developers, Bromley said, Atom is finding new ways to make banking tasks fun for consumers. He said building 3D animation into the app creates a more entertaining experience for the consumer that encourages engagement with the app more often to perform banking tasks and manage finances. As customers engage with the game-inspired app, Bromley said, Atom Bank’s development team can understand what gaming elements work and which do not for digital banking purposes.

“We’re learning a lot about how to use gaming to pick the right things to engage with customers in a very different way from how banks would think about engaging with customers,” Bromley said.

Meeting The Mobile Consumer’s Needs

Mobile technology has become deeply interwoven into the daily habits of U.K. consumers. By some accounts 18.3 million U.K. consumers use their mobile devices to shop, and the mobile shopping market alone is expected to be worth $79.6 billion by 2024.

With more consumers turning to their mobile devices to conduct business and get immediate, real-time access to information and services and engaging experiences, Bromley said the banking sector is under pressure to deliver products and solutions that can meet these standards. This is where established banks have fallen behind, he said, because these institutions have so far only delivered mobile experiences that are mostly limited to static information like displaying account balance information.

On the other hand, banking tools that are similar to online gaming platforms are more likely to resonate with mobile device users who are accustomed to a digital-first experience, he said.

“Customer expectations are completely changing,” Bromley said. “Digital users just don’t know of any other way of doing business, it’s how they expect to do business in any guise.”

Traditional Banks Stalled By ‘Organizational Inertia’

Bromley said there are a few reasons that upstart institutions like Atom Bank have been able to get a foothold in the U.K. market and successfully challenge conventional banks.

“The biggest issue is organizational inertia,” Bromley said, referring to the difficulty established financial institutions have in breaking out of old patterns.

Case in point, a recent survey by software firm Lithium Technologies found 62 percent of U.K. adults would prefer to conduct their banking business online instead of in-person at a bank branch. But Bromley said most traditional banks are still putting too much focus on supporting brick-and-mortar bank outlets.

“Their mindset and organizational dynamic is geared toward face-to-face, branch-based banking,” he said.

Technology is another problem, he said. Because bigger banks serve high volumes of customers it can be difficult for these institutions to make adjustments or changes to their technology offerings without causing disruptions.

“Most banks have layered technology onto technology onto technology,” Bromley said. “it’s very difficult for them to move off of those legacy platforms.”

When banks do innovate, he said, they simply add more technology to their stack, which makes it even more difficult for them to replace outdated systems.

“They’ve tied themselves up in knots,” Bromley said. “The technology that they use is typically 50 to 60 years old, and that in itself is a massive inhibitor to changing anything.”

Challenger Banks: Game-Changers?

Bromley sees signs that traditional banks are taking steps to end the cycle of “organizational inertia” by adopting some newer consumer-facing technologies. And the inspiration for these adoptions is coming from rivals in the “challenger bank” sector.

As an example, Atom Bank has offered customers the ability to access their accounts using biometric security protocols such as facial recognition and voice recognition, in addition to more familiar options like a password since the company first launched. Today, he sees most incumbent banks offering these same biometric services as a way of authenticating consumer information.

As more challenger banks arrive on the U.K. banking scene, Bromley believes these newer institutions will inform how traditional banks operate, rather than the other way around.

“Challenger banks can move much faster than incumbents and can tap into new technologies much quicker,” Bromley said. “When they do and they see the benefits to consumers are really palpable, the big incumbent banks have no choice but to change or they will lose customers in droves.”

With conventional banks taking their innovation cues from newer players, Bromley does not see much opportunity for challenger banks to learn lessons from their older, more established counterparts. Instead, Bromley said Atom Bank will look to non-banking sectors like video games for inspiration.

In addition to video games, Bromley said another non-banking industry that Atom Bank turns to for ideas is the retail sector. Specifically, Bromley said retail giant Amazon’s work with platform creations and open APIs to boost engagement across various players are the types of lessons that traditional banks just can’t teach.

“If you want to learn about how to do this, how to become the platform of choice, how to create market-place services, how to drive a business philosophy surrounding inter-company connectedness, then Amazon is probably the pinnacle,” said Bromley in an email to PYMNTS. “We have much more to learn from them than other banks.”

So as challenger banks learn from non-banking industries like retail and video games, established players are changing their strategies to keep up with the newcomers. In the U.K. market, it appears the rise of the upstart financial institution is an industry game-changer.

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The PYMNTS Digital Banking Tracker brings you the latest news, research and expert commentary from the FinTech and consumer banking space, along with the rankings of 198 companies serving or powering the digital banking sector.