Over 100 challenger financial institutions have entered (or reinvented themselves in) the UK in the last few years. Among those on the retail or SME banking side, most have come with a strong "digital" play, aiming to provide a strong and innovative customer/client experience primarily or solely through digital channels. New players in this area have focused on using the latest technologies to provide an intuitive, streamlined, and customer-centric banking experience to attract customers dissatisfied with the traditional mainstream banks.
This has catalyzed the traditional banks to revamp their digital services. Initially, they were primarily focused on their own digital channels, but recently, many of the larger banks have announced the creation of, or plans for, standalone digital bank challengers, such as RBS with Bo and Mettle (for retail and SME banking, respectively). Both Santander and HSBC are reported to have similar plans for the SME segment. The rationale behind these moves is that the pace of change in the digital world demands a new way of thinking that is hard to combine with the culture and complexities of managing a legacy environment. Banks have effectively become willing to cannibalize themselves, to ensure they can meet the demands of the digital age.
However, while such drastic moves can help banks develop new systems and a new mentality, it is critical that the banks don't forget their heritage in managing risk and ensuring compliance. Although UK regulators in particular have adopted a supportive approach to startups, such as the Financial Conduct Authority (FCA) with its "regulatory sandbox" that allows new ideas to be tested with the regulator, regulators will not allow the drive for a strong customer experience to impact regulatory requirements.
Revolut is a good case in point. The company has been one of the most successful fintech startups in the UK, reaching over 3 million customers toward the end of 2018 (having only been founded in July 2015). However, it had a major incident last year with respect to money laundering, which is currently being investigated by the FCA. Although full details have yet to be made public, the Telegraph reported that a sanctions system was turned off for three months because it was generating too many false positives. The company has denied this version of events, stating that it has reverted to an older system due to calibration issues with a newer one. However, this is a good illustration of the challenges of managing compliance requirements around screening and Know Your Customer (KYC) while also delivering a streamlined customer experience.
There will always been a contest here, to some degree, particularly as compliance-related elements often take more time in application and origination processes. The key point is that digital transformation programs to streamline processes and develop a strong customer experience need to ensure that compliance is included as an integral element. Very often, compliance processes, particularly in middle-office functions, are dealt with as separate. This will invariably lead to challenges, and both startups and traditional institutions should look to include compliance in digital programs from the start.
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