Challenger banks, is the business model sustainable?
Industry trends reveal that challenger banks have grown in presence in the marketplace, leading to the question, is their business model sustainable? In aggregate, I believe the challenger bank model is indeed sustainable. That is, there will always be opportunities for new players to fill a niche need.
The next question is, can an individual challenger bank sustain in the long-term when it is forced to broaden its product and services suite to achieve positive cash flow and the growth needed to sustain high valuations?
I believe the answer is Yes, challenger banks are not burdened by legacy technology like the brick and mortar incumbents; however, as an individual challenger attempts to morph from a point-solution to a more full-service provider they will, for a period, be in a no-man’s land where they are vulnerable to disruption by a new challenger and at the same time don’t have a robust suite of services to compete effectively with the established banks.
There are a few niches that are big enough for a challenger to survive in the long-term, such as QuickenLoans, however the broader retail needs of consumers means challenger banks need to adapt quickly.
Without their own deposits, the challengers will always be vulnerable. A likely long-term model for challengers is to be the engine of innovation for the financial services industry, but then get subsumed into the existing established ecosystem.