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Vaidik Trivedi
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Riley Wolfbauer
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Vaidik Trivedi
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Bank Automation News and banking data and analytics platform FI Navigator have released the latest ranking of the top five most innovative financial institutions.
The dataset ranks the top 25 financial institutions across four asset tiers — $500 million to $1 billion, $1 billion to $10 billion, $10 billion to $100 billion and FIs over $100 billion — based on FI Navigator’s “innovation score,” which analyzes more than 100 products, services and channels across U.S. financial institutions.
The following are the top 5 most innovative financial institutions with over $100 billion in assets as of May 2023. Each FI listed received an innovation score of 100:
Visit Bank Automation News’ FI Innovation Ranking database which lists the top 25 institutions in four asset tiers based on products, services and channel innovation.
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Whitney McDonald
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Vaidik Trivedi
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Whitney McDonald
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Vaidik Trivedi
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Victor Swezey
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Victor Swezey
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Vaidik Trivedi
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The self-regulation guidelines from the Swiss Bankers Association (SBA) on the promotion of energy efficiency in mortgages have shone a sudden spotlight on the subject of ESG in financing. While the current guidelines are limited in scope, they nevertheless present challenges for banks in Switzerland, as they may well be extended in the future. Banks are well advised to adjust their lending operating model not only in the short term, but also strategically for the longer term.
With the Paris Agreement, Switzerland set a goal of reducing greenhouse gases by 50% from a 1990 baseline by 2030. However, this is only a stepping stone to the net zero target for 2050.[i] Despite making significant progress, Switzerland narrowly missed its targets for 2020.[ii]
Buildings account for a significant proportion of greenhouse gas emissions (roughly 25%) and an even higher proportion of energy consumption (approximately 45%).[iii],[iv] Heating, much of it powered by fossil fuels such as natural gas and oil, makes up the bulk (68%) of this energy consumption.[v] Achieving climate goals will necessarily entail building renovations with focus on energy efficiency, but the 0.9% renovation rate in Switzerland remains far too low despite the incentives of a carbon tax and a building energy renovation programme.[vi] This suggests that there may be an “information deficit”. Unsurprisingly therefore, mortgages and mortgage providers are increasingly attracting attention from regulators — after all, mortgage providers have regular contact with both new and existing property owners, and consequently have opportunities to discuss sustainability issues with their clients. But while in the EU clear rules on dealing with potential climate risks from financing already exist (EBA/GL/2020/06, 4.3.5 and 4.3.6), Switzerland has so far limited itself to disclosure of climate-related financial risks, and only for category 1 and 2 banks (FINMA Circular 2016/01). Sustainability is an increasingly important topic in the political arena, fuelled among other things by the debate around UBS and CS. For example, a bill of targets in climate protection, innovation and energy independence was adopted with a substantial majority of 59.1% in the referendum of 18 June 2023, and this is likely to further intensify regulatory pressure. The SBA self-regulation “Guidelines for mortgage providers on the promotion of energy efficiency” that came into force on 1 January 2023 introduce ESG-related lending requirements for the first time in Switzerland, requiring banks to address the topic of energy efficiency in buildings with customers for mortgage financing.[vii],[viii]
It should be noted that there are two limitations to the guidelines. First, they are voluntary self-regulation by the Swiss Bankers Association (SBA).[ix] Unlike other self-regulation (such as CDB 20), the guidelines are only binding on SBA member institutions. This means for example that the Raiffeisen banks are not directly affected by the guidelines despite their large share of the mortgage market (approx. 17% in 2022). The same goes for insurance companies and pension funds (approx. 5% market share in 2022).[x] There are also limitations relating to the properties concerned. The guidelines apply exclusively to owner-occupied single-family and vacation homes. Nevertheless, the new requirements are sufficiently comprehensive to present banks with challenges that should not be underestimated — not least because the guidelines also apply to existing loans. The guidelines concern five main topic areas: (see Figure 1 for detailed contents of each section).
With the exception of the “Terms and conditions”, the requirements in each area are compulsory and member institutions must implement them appropriately. However, implementation is complex because the guidelines contain principles-based requirements (thus leaving room for interpretation) while also covering matters that have an impact on the overall process (such as capturing energy efficiency data). Figure 1 provides an overview of the key contents along with selected implementation challenges for each topic area.
Figure 1: Overview of key contents of the new guidelines and selected challenges for banks
It is unsurprising that some Swiss banks have made more progress than others with implementation, particularly in view of the transition period up to 1 January 2024. Nevertheless, banks would be well advised to obtain clarity as soon as possible as to what changes will be needed by the end of 2023. If they fail to do so, they run the risk of having to implement a large number of tactical auxiliary measures shortly before the end of the transition period, which could impair their competitiveness. An interim analysis by the exclusive Deloitte Mortgage Survey in early June (see Figure 2) found that some 88% of institutions indicated that they had already incorporated ESG issues into their consultations. Where further-reaching measures are concerned, however, the picture is more differentiated. Just 21% of respondents use ESG as a criterion in property appraisals (for mark-up/write-down purposes), while only 33% have special terms for houses with a good eco score. By contrast, 25% of respondents plan to define ESG-related KPI targets for their mortgage portfolios, while 42% intend to introduce customer incentives for ESG renovations in 2024.
Figure 2: Survey on implementation status (as of 30 June 2023, n=24)
While banks have the option of relying on particular tactical measures in implementing the new guidelines (e.g. manual entry of certificates and labels in customer files, fact sheets/links to subsidy programmes), this approach is likely to fall short in meeting changing regulatory demands. The provisions in some other markets go considerably further than those in Switzerland. For example, the draft of the seventh MaRisk amendment (published in September 2022) adopts parts of the previous German Federal Financial Supervisory Authority (BaFin) memorandum on managing sustainability risks, such as adjustments to credit risk strategies and appetite considering ESG risks, as well as ESG risk measurement at the portfolio level. The requirements will be subject to audit. At present this is not the case for the new SBA guidelines, but it is quite conceivable that FINMA will take similar measures in the years to come. The scope of properties affected is also likely to expand (to include, for example, investment properties). Last but not least, it is also clear that Switzerland will not be able to avoid the international trend towards better measurement and reporting of climate risks. Banks are therefore well advised not to take the changes associated with the SBA guidelines too lightly. The opportunity here is to use the momentum to achieve a better strategic alignment of their lending business with future challenges, such as those related to their future operating model (see also https://blogs.deloitte.ch/banking/2021/03/strategic-trends-and-implications-for-bank-operating-models.html). There are already examples in the market of banks with innovative, comprehensive solutions, such as home2050, a collaboration between Basellandschaftliche Kantonalbank and the canton’s leading energy supplier: among other things this offers a solution for assessment of the potential, financing and installation of solar equipment and the associated energy system.
In deciding what to do next, banks should specifically ask themselves the following five key questions:
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[i] https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/emission-reduction/reduction-targets.html
[ii] https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/emission-reduction/reduction-targets.html
[iii] Federal Office for the Environment [FOEN] – CO2 statistics (2022)
[iv] Swiss Federal Office of Energy [SFOE] – Analysis of Swiss energy consumption 2000-2020 by specific use (2021)
[v] The Federal Council – Switzerland’s long-term climate strategy (2021)
[vi] https://www.sia.ch/de/politik/energie/modernisierung-gebaeudepark/
[vii] Requirements are only binding for SBA member banks
[viii] A transition period until 1 January 2024 applies for adaptation of internal bank processes
[ix] Cf. https://www.swissbanking.ch/en/topics/regulation-and-compliance/self-regulation
[x] Market share based on own calculations using SNB and FINMA data
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Lena Woodward
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Victor Swezey
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Victor Swezey
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This blog is the second publication in our blog series. In our previous blog entitled ‘Challenger banks: Disrupting the Swiss market’, we outlined the history of banks, the different categories of Challenger banks and how they can mitigate the risks they are facing. In this blog, we further explore the various obstacles that Challenger banks are facing today, such as economic and political difficulties, and provide recommendations on how to navigate these hurdles and grow in the years to come.
Challenger banks are facing significant threats to their survival due to economic obstacles. Their growth has slowed, and most have not yet achieved profitability or are currently operating at a loss. Overall business development strategy, regulatory & compliance, and data security have developed into important focus areas if they are to become sustainably profitable and compliant. To withstand the current economic and geopolitical uncertainties, Challenger banks should act promptly by revaluating their strategic course.
The financial sector is grappling with challenges posed by major players such as FTX, BlockFi, and Celsius, resulting in a “crypto winter” that wiped out over $2 trillion in market value. This not only impacted the digital asset market but also affected the broader financial industry, including challenger banks . In addition, two California-based financial institutions, SVB and First Republic, experienced a sudden exodus of customer deposits, thereby indirectly threatening the banking sector’s stability. Finally, UBS acquired Credit Suisse amidst the financial turmoil caused by the collapse of the two US banks.
Furthermore, macroeconomic setbacks such as high inflation and increasing interest rates, coupled with microeconomic factors like rising energy costs, have arisen from global geopolitical tensions. This resulted in a slowdown in investments and increased risk aversion, impacting Challenger banks. This stands in stark contrast to the high valuations seen in Fintech firms at the end of 2021. With decreased investor participation and public scepticism, Challenger banks must now address profitability issues, improve customer retention, ensure compliance, and enhance data security.
In recent years, Challenger banks have been confronted with the reality that once abundant investor funding is now dwindling, down by 45% in 2022 as compared to 2021. In addition, the number of global Challenger banks launched has dropped to an all-time low (a 46% decline between 2020 and 2022), as the market matures and becomes more consolidated and less attractive for new entrants.
The decline in funding can be attributed to decreased investor appetite and major players reaching maturity, hence not needing further investments. Early pioneers, like Revolut, have secured enough backing to focus on profitability rather than raising new funds.
Profits of Challenger banks are linked to scale: generating revenue from an expanding global customer base across diverse products and services while minimizing prospect acquisition costs.
In recent years, there has been a rise in M&A deals, which has led to market consolidation, indicating that some Challenger banks depend on financial acquisitions to achieve the necessary scale and profitability. Prominent examples include Starling Bank’s purchase of buy-to-let mortgage provider Fleet Mortgages Ltd. in 2021. From 2021-2022, the number of annual Challenger banks launches has steadily declined and so have the number of M&A deals completed (a drop of 43%). Regulators have also played a role by implementing regulations (e.g., PSD2) that aim to level the playing field, challenging the dominance of established players.
It can be argued that the core issue lies in revenue generation. According to industry experts, the estimated revenue per active customer is around $30 per year. Challenger banks, such as Monzo, Revolut, and N26, offer limited product portfolios with lower fees, including subscription fees, foreign exchange fees, and card fees. They lack more lucrative products like mortgages, business loans, or investment products, which traditional banks typically offer. This limited range may constrain their revenue potential. Recent economic situations have also strained consumer spending, further affecting digital bank revenues.
Despite Challenger banks’ popularity, many retail customers are still hesitant to use them as their primary account. According to industry surveys, 25% of respondents cited data security as their main concern, followed by fraud (22%) and “not being perceived as a bank” (20%).
Revolut’s 25 million client milestone is an exception, as many Challenger banks face difficulties acquiring new clients. Traditional banks now offer similar services and products after significant investment in digital user experience. For example, UBS’s commission-free “key4” credit card appeals to frequent travellers, while Zak by Bank Cler and CSX by Credit Suisse provide more options for clients in Switzerland. Additionally, unified mobile wallet solutions like TWINT, offered by most major Swiss banks and used by 5 million users, cover various financial needs, leaving few unfulfilled niches.
Challenger banks face fierce competition, constantly introducing new features. However, recent scandals involving digital asset firms such as FTX, including some Challenger banks, have eroded public trust. Industry experts don’t consider them “proper banks” and express concerns over fraud, resulting in low penetration rates in certain regions (e.g., US) and some banks exiting markets (e.g., N26 exited UK and US).
One major cost driver for Challenger banks is increased spending on regulatory compliance. As these banks attract more users, their responsibilities towards regulators and clients expand. They have made progress in financial crime control measures, but regulators expect further improvements in areas like customer due diligence, transaction monitoring, and Suspicious Activity Reporting (SAR). The Financial Conduct Authority (FCA) states that financial crime control resources, processes, and technology should match a bank’s expansion. To address this, Challenger banks are creating new positions in their Compliance department.
Challenger banks must also manage requirements related to their banking license, such as renewing a license from FINMA (the Swiss regulator). This can be challenging due to capital requirements, which depend on the bank’s category and risk profile. A minimum of 8% of total Risk-Weighted Assets (RWA) and suitable financing sources are required. Management must find a balance between the significant regulatory costs of maintaining their banking license and managing costs for scalability purposes.
Challenger banks have long operated with a “scale first” approach, often overlooking other critical aspects of their business, such as fraud prevention and cybersecurity. Traditional banks allocate around 20% of their annual budgets to IT-related expenses, including data protection, according to a J.P. Morgan study. In contrast, some rapidly growing Challenger banks struggle to maintain a strong technological and security infrastructure for customer data protection.
These banks also face a shortage of skilled back-office employees, like fraud and cybersecurity specialists. Consequently, many rely on third-party vendors, increasing their vulnerability and dependency due to insufficient internal cybersecurity capabilities. As a result, numerous Challenger banks have encountered security challenges, including fraud attempts, scams, phishing, and client data breaches. For example, in September 2022, Revolut suffered a cyber-attack that affected around 50,000 clients, representing 0.2% of its 25 million customers. Although the percentage is small, such attacks have significant privacy and reputational consequences.
Challenger banks, particularly in the Swiss market, must implement a strategic approach to sustain growth and maintain competitiveness.
Firstly, they can boost revenues by revising pricing models, such as Spain’s Bnext, which created a marketplace offering for not only financial products but also travel and energy services. They can also target more premium clients, akin to Revolut’s “Ultra” subscription plan aimed at higher income client segments.
Secondly, cost control is critical, encompassing measures such as reviewing cost structures, automating processes, and exiting non-strategic markets, as seen with N26’s decision to leave the US and UK markets.
Thirdly, Challenger banks need to differentiate themselves to attract customers. This can be done through strategies such as offering competitive and profitable products, exceptional support, and implementing client retention initiatives. The introduction of Apple’s high-yield savings account, which offers an impressive 4.15% annual return, is a notable advancement in the financial industry that can significantly disrupt the landscape. This innovative product, initially launched for US customers in April 2023 and accessible via the Apple Card in the Apple Wallet mobile app, not only signifies a transformative step in the financial industry, but also holds the potential for expansion into other global markets, bringing its potential for disruption to a worldwide scale.
Lastly, enhancing data security is paramount to reduce data breach risks, as highlighted by Deloitte’s Global Future of Cyber Survey 2023. A combination of these strategies, including the introduction of new products, cost control, customer attraction, and enhanced data security, will be key to surviving and thriving in the ever-evolving Swiss banking landscape.
As Challenger banks face key operational hurdles on their road to success, they should carefully evaluate the root cause of their profitability challenges and fraud and cyber risks to reframe their company strategy. By adopting strategic options such as revising pricing models, reviewing cost structures, offering new products and services and partnering with other companies, Challenger banks can navigate the challenges they face. In a highly competitive and rapidly evolving challenger banks landscape, they must keep agile and innovative to stay ahead of the curve.
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Lena Woodward
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