The financial crisis. Memories of the worst of it may, just, be starting to fade. But its legacy is likely to be felt for decades, through the reshaping of the banking landscape. We all know the key features of change; Regulation has hardened and proliferated
Banking customers have high demands, conditioned by experiences in other sectors. And in perhaps the most profound change of all, new and nimble players – including so-called ‘non-traditionals’ - have successfully entered a previously closed market. Yet attractive as this may seem, any investor wanting to start a new bank should be concerned about three main barriers to entry:
A strong brand wrapper around a well-capitalised bank with a license to trade: these are the critical foundations of challenger bank viability. Yet, our experience shows that any start-up bank determined to thrive requires additional attributes. It should offer clear differentiation through a killer proposition. It should be supported by relevant operations, solid risk policies and procedures. And it should meet the standards of modern technology. That’s no small checklist. So, where to start? We believe (and our proven experience con¬firms) there is a sequence of steps to follow to establish a successful new banking entrant in record time. We have done it before. In order to help other challengers succeed, we have packaged our experience in a reusable methodology and a set of supporting tools. Here, we walk through our approach.
Basic yet essential, a clear vision is a summary of what makes your business unique - and uniquely valuable - to your target market. It is your promise to your customers. It answers the pivotal question, “How do your business services benefit your clients better than anyone else’s can?”. The vision is the internal articulation of your USP. For example, Capco has developed a unique approach, deeply rooted in the needs of target customers, to define your ‘reason for being’. By applying our approach, we can articulate a differentiated Unique Selling Proposition and an inspiring vision for your teams.
Feasibility planning clearly defines key objectives and assesses both the internal and external feasibility with the goal to formulate a business strategy. Guided by the vision, a start-up bank should define its budget and other measurable parameters, including liquidity and capital requirements. A commercial plan can then be created around the ¬financial needs of the business. For example, this might manifest itself through launching the new bank on the back of a competitive lending proposition to drive income, then following with savings and current account propositions to bring capital. Capco has created a specific feasibility toolkit and templates to identify and size target markets, develop business and commercial plans, and prioritise the relevant operating model and capability requirements.
Newcomers will not be unaware that the banking industry is regulated heavily - by the FCA (Financial Conduct Authority) and the PRA (Prudential Regulation Authority). The majority of poorly prepared applicants are turned down quickly. Everything is reviewed and tested. The spotlight shines intensely across ¬financial forecasts, the backgrounds of the bank founders and directors, projections, bank policy statements, notarised signatures, and a very detailed business plan.
Several feet of paperwork are required to start your own bank and every inch has to stand up to scrutiny. Capco has used, documented and tested the regulatory templates required. The list is long and includes (amongst others): Funding Plan, ICAAP, ILSA, Large Exposure Policy, Liquid Asset Buffer Policy, Stress Testing Models, and a Regulatory Business Plan.
The process of building your own bank must be informed by a crystal clear picture of who is going to be served by it. The best new propositions are aligned tightly with customer needs and deliver something not yet offered by competitors. Relevant innovation requires a deep understanding of your target market segments, their behaviours and needs. A great injection of creativity is imperative to building anything new and appealing. So, while we are experts in rapid proposition development using methods such as conjoint analysis to help accurately predict demand for new propositions, our approach is also creative.
Successfully charting the desired customer experience is a critical differentiator for any new challenger bank. We typically start by developing relevant personae (detailed representative customer profiles) to help understand the world through their eyes. We use human-centred design techniques to develop customer journey maps. Such maps capture and describe all the experiences a customer can expect to have with the organization, as well as charting the emotional responses they trigger. Operational processes are also developed. Here, we focus on understanding where any potential gaps might occur between the customer journey and the underlying process. In this way, we can clearly see where processes need to be improved.
Risk and compliance go indivisibly with the territory. Successful banks manage risk effectively and protect their stakeholders in the process. Strong risk management necessitates sound, top-down and all inclusive corporate governance, together with solid controls. In previous experience we have developed risk management frameworks, supported by clear models for each type of risk. In turn, they need to be supported by all the requisite policies, procedures and key risk indicators. These models can be deployed readily within any start-up bank, cross product, or in a silo as required.
Every build should be customer-focused and proposition-led. If speed to market is your mantra, then consider using third party operations in support of your propositions to encourage a faster pace. It certainly makes better sense than adopting an existing approach that is just not ¬t for purpose. But there is a caveat that comes with the rapid build process: repeating it over and over again ‘from scratch’ is simply unsustainable. Instead, the challenger bank will benefit from the support of a technology partner who can mobilise quickly and apply experience. At Capco, we have worked extensively and successfully with a modular, out-of-the-box ‘base’ solution. This can be readily adapted to suit the specific needs of an individual client. As a result, the build can happen at pace – retaining design agility to support future propositions without constant re-engineering.
The key to a successful test is to treat it as a source of valuable information and insight, rather than a mere process stage gate. There are two complementary and equally important aspects. First, we need to know with certainty whether the process design and underlying mechanisms are capable of delivering the customer proposition robustly and with expected quality that will resonate with the target pilot base. Secondly, we need to know that we have a viable technology model. From experience, performance should be scrutinised through rigorous test cycles using the adoption of different appropriate testing methodologies, such as Agile, and reinforced through small test pilots.
So the offer, the surrounding brand, the vision, the promise and the core values have all been identified, captured and articulated. The test phase has yielded insights into customer reactions, and the key learnings have been fed back and incorporated. Now is the time to create engaging, customer facing collateral that makes the offer really live in the awareness and perceptions of the target customer base. And while high impact collateral – from web based material to direct mail to social and print media platforms – is being finalised, channels to market and direct targeting strategies are being prepared for rollout. At this crucial stage, we usually deploy teams of dedicated specialist designers and content developers, to bring the brand into full focus and support the proposition with relevant creative work.
Launch is naturally the pinnacle of the whole process. By this stage, there is considerable emotional as well as financial investment. Everything is believed to hinge on what happens in the ¬first days and weeks after the new proposition hits the market place. At this point however, the process is certainly not over. Focus is needed on tracking performance in the market and taking precise actions to gain rapid traction. Constant improvement is a key goal, enabled by low latency feedback mechanisms that capture target customer reactions and translates them into rapid corrective actions. This is also the time to be considering the next phase refining repeatable processes that can be applied to the next iteration of customer propositions. Capco has extensive, proven and successful experience of bringing new financial service propositions from challenger banks to their target markets, at pace and with real brand impact. Our objective in every case is to ensure that launch is just the beginning of a rapidly unfolding story, one of profitable revenue capture and brand growth.
Adam Davis is a Managing Principal in Capco's London office. He specializes in project delivery within Capco's consumer and banking practices.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco or FIS.