Who Will Challenge the Challengers?

There are a few new banks emerging post-pandemic – a subgroup of financial institutions called challenger banks. A challenger bank is typically a smaller bank that aims to compete with traditional banks by leveraging technology. Most challenger banks are digital or app-based and do not have a physical branch system. This structure provides a considerable benefit to the challenger bank because it can avoid the high costs of running in-person branches and use the money saved to deliver better digital service and product innovation, resulting in lower costs to consumers. The apparent target of challengers is those who embrace technology, primarily millennials and Gen Zers.

Because of their smooth digital and app experience, many challengers saw a rather nice uptick in use due to the pandemic. Challenger banks were able to process and deposit stimulus payments faster than traditional banks. This efficiency was appreciated by those who might have been living paycheck to paycheck or who lost a paycheck during the pandemic.

How much of a challenge are these banks? Chime, Varo and Brightwell are few successful challenger banks. Let’s look at them deeper.

Chime is the market leader with a reported eight million primary account holders, making it the fifth-biggest bank in the U.S. It offers no hidden fees, early payments of a paycheck, and a “spot me” feature that provides customers with up to $100 for debit card purchases to be paid back.

Varo has reported three million accounts as of February and was the first challenger to acquire a national banking charter. This means it can provide loans, wire transfers and joint accounts to their customers.

Brightwell is an excellent example of the niche that challengers can fill. Brightwell focuses on cross-border payments and financial services for business with employees dispersed worldwide. This makes the challenger appealing to larger businesses with international workforces.

These and many other challengers offer ease of access via technology and value through lower fees and the ability to solve their users’ key problems.

What Can Credit Unions Do to Challenge These Challengers?

They can make everything they do about the member, and intentionally get their arms and strategy around delivering value to the member.

To help clarify and deliver value to members, let’s step back and review the problems the credit union solves for the member. Members joined a credit union to gain access to financial products and services. There are four fundamental member problems:

1. Transportation: The member needs transportation (not an auto loan), and the credit union is the conduit to transportation.

2. Shelter: Like transportation, the member needs a place to call home (not a mortgage), and again, the credit union is the conduit to shelter.

3. Travel and play: The member has desires for either travel and play. They need a financial partner that will help them achieve these goals within their current financial condition.

4. Rainy day and retirement funds: The member needs a financial partner to help set them up with short-term and long-term deposits.

A member may find themselves with a variety of these needs. They may have shelter but are looking to downsize. They may want to travel but don’t know how to save. A member’s financial needs describe the member’s current financial journey. That journey is leading them to a financial destination that is their true financial north. The member’s true financial north traditionally focuses on a version of financial security. It may be retirement, a first-time home purchase or a sixth car purchase. Members want to have the funds when they need them to make their financial dreams come true – to seek their true financial worth.

And wherever the financial destination is, there is data behind it. Data can come from a variety of sources, including the core, marketing customer information file (MCIF), loan origination system or payment system. All this data holds information about the member’s current financial condition and their next financial need. It is up to the credit union to leverage this knowledge and take action.

Translating data insights into action is similar to developing a new habit; it takes a plan, repetition and time.

Let’s approach this with the end goal in mind – creating actionable insights.

Step 1: Evaluate Your Friction

Your member has friction when doing business with you, and within your organization, your team members have friction when doing business with each other. It’s a fact and part of being human. What we can control is how much friction we create. Understanding member friction and internal friction quickly provides a list of data use cases.

Woo-hoo! You just linked data to the business problem.

Step 2: Solve Friction Using Data + Human-Centered Design + Agile Sprint

Working in cross-functional teams, an organization can design solutions with the member as the end-user. Using the member friction list, this serves as a simple re-focus. The more significant challenge arrives when it comes time to put these ideas to the test. Agile has been a predominant methodology in technology development and fits beautifully in this application. Allowing a team to fail fast and often has been proven to generate better solutions.

Congrats! You have launched a data-driven innovation culture.

Step 3: Developing a Strong Pipeline of Member-Centric Solutions

To continue to produce these impactful solutions, an organization will need to create an innovation value chain. This is a formalized process that consists of three phases: Idea generation, idea conversion and idea diffusion.

Voila! An innovation capability is born.

A member-centric data culture (the heart) and leveraging data to transform (the head) are complementary processes with the heart helping to accelerate the head. Creating a member-centric data mindset allows credit union talent to achieve the following:

• Create a distinctive member experience that is powered by technology and obsessively member-focused.
• Leverage the power of cross-functional teams that generate high-speed innovation and result in a strong pipeline of new products to meet member needs.
• Build a robust data consumption capability to propel the credit union to scale fast and efficiently, and stay competitive.

Credit unions may not become challenger banks, but if they can turn their data insights into action, they can challenge the challengers.

Anne Legg is the Founder of THRIVE Strategic Services, a San Diego, Calif.-based company that assists credit unions with data transformation, and author of “Big Data/Big Climb,” a credit union playbook for data transformation.