Since 2008, there has been a marked rise in the number of new lenders aggressively targeting niche customer segments, offering products and engagement uniquely suited and personalised to those customer’s needs and lifestyle.
They have widely been welcomed by consumers, media and the regulator as increasing competition to the big 5 banks and are at a number and size now where these big banks must start to consider them as a serious long term threat to volume and margin.
Of all the banking 'challengers', specialist lenders are emerging as arguably the most commercially successful. They remain in the traditional ‘lending model’ (as opposed to peer to peer lenders), do not seek to offer a ‘full service’, nor use the current account as the foundation on which to build success, instead they listen carefully to niche customer demands, provide attractive products and cherry-pick these profitable segments.
The range of lending products, and key features offered, is now considerable from Mortgages and Buy to Lets products, through to SME Lending and Asset Finance.
In addition to providing attractive tailored products, central to the success of these lenders has been the manner in which they have engaged their customers, clearly understanding how and where their customers want to transact and offering a range of digitally enabled channels to do this. This does not have to be complicated, generally their business models are relatively simple, cost effective and command a shorter payback time when compared to the cost of setting up a full service bank.
In contrast, traditional banks have been slow to identify, embrace and leverage these niche customer segments, hampered by their scale and continued reliance on legacy estate. In an understandable drive for cost efficiency they have not fully exploited the wealth of customer information able to them to build niche’s based on customer need. Instead they have deployed a top down approach to data analytics rather than construct customer segmentation ‘bottom up’ – best summed up as ‘one size fits all’.
However, all is not rosy for specialist lenders, they too face technology and cost pressures and their initial success has seen competitive challenges from a rise new market entrants. Perhaps the greatest pressure they face is adhering to the changing regulatory demands (including Senior Managers Regime, BASEL and MIFID) - which risk them becoming less agile through a combination of greater evidencing and more robust governance structures.
There is no doubt the big banks are able to fight back using their existing customer loyalty and considerable knowledge to inform credit risk and customer behaviour models. But in an era of transparent banking, where image, trust and customer understanding at a granular level is key, specialist lenders have now proved the concept – it is now down to the big banks to embrace the concept and out compete their small rivals - how successfully they do this will determine the shape of the industry over the next generation.