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What Leading Challenger Banks Learned While Building a Digital-Only Bank

As part of our ongoing #WomeninFintech series, and to celebrate International Womens’ Day, we sat down with several women leading the way in their sector and picked their brains on their role and the future of the industry. First up is Michal Kissos Hertzog, CEO of digital bank Pepper on the challenges of… challenger banking.

Finovate: What key lessons have challenger banks learned on their journey to be digital only?

Michal Hertzog: One key lesson businesses have learned is that you can’t just paste a “digital core” over an incumbent bank. They have to be truly digital or there will be limitations and barriers. The benefits of having a business model that is digital to its core is that banks can adapt quickly to constantly evolving customer demand, technology, and innovation. Incumbents with legacy systems need to adjust quickly or partner with tech and fintech companies, or innovation will always be slower.

Finovate: Why have we seen such a boom of “digital-only banks?” Do you think these challengers have the ability to take on the more entrenched players?

Hertzog: The profit and loss model no longer works. Unlike the incumbents, digital-only banks have the advantage of being able to utilize data to operate on customers first, profit second basis. Customer needs and demands are changing and they expect so much more from the companies they engage with on a daily basis. For example, Pepper’s research found that two thirds (67%) of Brits don’t feel well-equipped to make the best financial decisions for themselves, yet nearly half (47%) believe it’s a bank’s duty to help them make better financial decisions. This shows that banks need to do more in providing the necessary tools to help consumers make the best financial decisions.

This is something that many challengers have already achieved and are excelling at, so for the incumbents, it really is a question of adapt or die. Ultimately, this customer-first approach will benefit the bank, as their customers are more likely to opt for greater profit-producing solutions such as mortgages or investment products. For example, Pepper Invest provides customers with tips, guidance, and insights to break down the barriers to the investment market for all consumers, regardless of their financial ability.

Finovate: How do you ensure a great customer experience when you are a digital bank?

Unlike traditional banks who have implemented technology solutions to improve how they currently work, digital banks tend to do things differently. They work hard to identify customer pain points and then implement tech solutions to solve them.

Another way is by leveraging data. Digital banks might not have the long history of data that the incumbents do, but they are far better at utilizing it to adapt to consumer demand and offer personalized services. This typically creates a much better experience for the customer. For example, we know that debt is a huge problem for many people, so at Pepper, we use data to provide our customers with the necessary guidance before this happens, such as suggesting cheaper loan alternatives to an overdraft.

Finovate: How do you see fintech as a whole evolving over the next decade?

In the next decade, we can expect to see a lot more partnerships and collaborations – not just between banks and fintechs, but also fintech-to-fintech partnerships. Many successful businesses realize the importance of collaboration, so they can focus on what they do best and use other companies for the rest.

The other trend we can expect from fintech is increased personalization through the use of AI. At Pepper, we envisage a world where a consumer enters their favorite coffee shop, and we drop money into their account to pay for their coffee as a reward. This level of personalization and customer obsession will dramatically reform the banking industry in particular, as consumers opt for products that truly understand them and their needs.


To promote the gender goal of 50/50 diversity in financial services, women who register by this Friday, March 13, can purchase a ticket to any 2020 Finovate event at a 50% discount. Just enter the code EQUALITY on the booking form.