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The Key to Improving Challenger Bank Metrics

June 8, 2021

Challenger banks have positively disrupted legacy banking by resolving fundamental financial challenges faced by people, providing a user experience compatible with popular social apps, and ensuring superior customer service. The spike in digital adoption caused by the COVID-19 pandemic has further accelerated the growth of challenger banks. WeBank, Nubank, Chime, N26, and Revolut are some of the largest challenger banks with millions of users. Research by Exton Consulting states that there are over 250 challenger banks worldwide.

Challenger banks vary by target segment and operating model. For example, while Nubank targets financial inclusion in Brazil, Chime gives advance access to one’s paycheck. Australia-based Judo Bank provides SME-focused banking services, whereas Greenlight caters to kids and teens. Monzo and Starling Bank in the UK are among the challenger banks operating under regulatory licenses. Chime, on the other hand, partners with licensed incumbents.

‍Roadblocks to Scaling Business

Diversity in operating models and target segment-specific customer journeys hamper the growth of challenger banks. Here are three of the top challenges faced by challenger banks:

Sustained User Growth: Marketing spend and superior onboarding experiences are instrumental to user growth. Regardless of the operating model, funnel conversion depends heavily on legislated KYC, AML and identity checks, fraud checks, the time and effort invested in form-filling, and the number of keystrokes. A study by Built For Mars shows how challenger banks in the UK trump incumbents in customer onboarding metrics such as fewer clicks and questions.

Lower Customer Acquisition Cost (CAC) and Higher Lifetime Value (LTV): Several studies show that the average cost of customer acquisition for challenger banks is in the $25–$50 range. Customer retention, a crucial factor impacting LTV, is contingent upon easy operations, exceptional customer service, continuously improving user experience, and high-quality products and services.

Security: Surge in cyber fraud since the onset of the pandemic has shifted the focus on enhancing security by fortifying existing authentication methods and processes. Reinforcing security, however, should not impact user experience and convenience.

‍How to Beat These Hurdles

Speed up Customer Identification with Phone-Centric Identity: Identity fragmentation across multiple data sources—both public and private—poses serious challenges to foolproofing KYC. While legacy identity verification methods rely on traditional identifiers, modern methods use phone numbers as a unique identifier due to the ubiquity of mobile phones and the richness of phone intelligence.

With higher confidence levels in the validation output (optionally strengthened by a risk score), Phone-Centric Identity verification improves straight-through processing and routes fewer applications to manual verification queues. The result is better SLAs, faster onboarding, and better conversion from prospects to customers.

Prove’s Identity Verify™ supports electronic identity verification for KYC by leveraging authorized data sources and matching the phone number to PII data. 

Faster Application Capture Using Auto-fill: According to the Built For Mars study referred to earlier in this article, it takes 24 to 45 clicks to open a challenger bank account in the UK. While significantly faster than incumbents, this could be improved further by auto-filling PII data. While auto-filling forms using social auth have existed for a while, in addition to consumer apprehensions around security and data privacy, the authenticity and cleanliness of data fetched are often questionable.

The recommended best practice is to auto-fill demographic and PII data from verified sources as part of identity verification. Auto-filling supported by strong identity verification significantly reduces the time taken to complete an application while delivering a high level of confidence in the authenticity of the data.

Prove Pre-fill™ can simultaneously solve application abandonment and security issues associated with consumer applications. In addition to reducing friction in the form-filling process, it mitigates identity fraud and minimizes the need for costly manual reviews.

Integrate CIP, Auto-fill, and Fraud Checks on a Single Platform: Most customer onboarding processes are plagued by redundancies and inefficiencies caused by umpteen software tools and applications—each addressing specialized functions in identity verification, KYC, and fraud checks. The result: higher operational costs that reduce CAC.

Rationalizing the onboarding application landscape and optimizing the onboarding tasks onto a single identity and fraud management platform deliver lower CAC and guarantee agility and efficiency gains.

Silent but Stronger Authentication: Most challenger banks today rely on legacy 2FA practices for authentication, the most prevalent being SMS-based OTPs. With a rampant increase in identity takeover fraud of late, especially those involving SMS interception and SIM swaps, challenger banks should leverage stronger 2FA methods based on mobile-based authentication and behavioral biometrics. While both these methods can potentially be used to phase out SMS-based OTPs for 2FA, they could also be used to fortify an existing OTP-based 2FA process, where there is a risk of disrupting an existing customer journey.

The passive nature of mobile auth and behavioral biometrics increases convenience and improves the overall user experience. The results are particularly pronounced in user logins, password resets, and financial transactions, where the risk of compromised ownership is high.

Prove’s Mobile Auth™ connects with mobile networks to verify that an activity is coming from an expected device, authenticating customers without the need for easily compromised passwords or PINs. Since the technology is built on a core network infrastructure, it is a secure and frictionless method to strengthen a customer’s authentication flow, either as a replacement for OTPs or fortifying them.

This article is a synopsis of a blog published by Prove.