Updated: March 14, 2023 - 10 min read
Chances are you tried out a challenger bank – especially if you’re tech-savvy. Challenger banks are financial institutions that aim to compete with traditional, established banks by offering innovative products, services, and technology. Typically, they focus on customer experience and convenience, often using digital channels to reach their customers. Their business model is designed to offer a more flexible and customer-centric alternative to traditional banks, and they often target specific niches such as small business owners, millennials, or digital natives.
Some of the top challenger banks in the USA are: Chime, VAro Money, and Venmo (focused on payment space); in Europe Monzo, Revolut, and N26; and in Asia WeBank, founded by the Chinese giant Tencent. They all have millions of users, (hundreds of) millions in funding, and billions in valuations.
On the flip side, reports show that only 5% of challenger banks are profitable, and although the market is valued at $300B, it seems it’s hard to fulfill the high expectations in praxis, and valuations are nosedive as financing becomes more scarce.
As a part of the summer 2022 cohort of the Senior Product Management Certificate course, we were tasked to work on a final project that would be presented on the last day: either a case for a new venture or a new feature for an existing product. Challenger banks were interesting as they operate in a competitive and innovative space they offer both financial and technical products and solutions. Finally, as mentioned above, they face challenges as the focus moves from growth to profitability.
We decided to explore possible feature enhancement we would build for a challenger bank, based on the usual portfolio for leading challenger banks in the general niche (e.g. not specialised in trading and investing such as Robinhood, or in payments such as Paypal or Venmo). In this blog post, we will share the process and feature idea we came up with..
1. Understanding the space
We must admit that although we were familiar with different challenger banks from a user perspective, we didn’t have a deeper understanding of their offerings and business models. We never spent time studying a company’s earnings calls, watched founder interviews and detailed news coverage, or conducted any form of detailed research. Thus, we set out to understand these companies better - their vision, product direction, revenue streams, and success metrics.
A typical challenger bank that is not specialized for a single niche becomes a “Swiss army knife of an app” in most cases, packed with features that at the time of our project included accounts, peer-to-peer payments, currency exchange, multi-currency cards, day-by-day in-app insurance purchases, and even options to buy stocks and cryptocurrencies.
Their vision is to become a single place for all things money and finance. For the consumer market and (small) businesses alike.
2. Setting a directional outcome
For the purpose of the final project, we assumed a change in course in the future: increasing average revenue and earnings per user. This felt like a natural step after capturing market, and when facing the harsh reality of just a tiny portion of the challenger banks being profitable. This turning point might vary from bank to bank (as some are still focused on user growth), but to simplify the case, we chose 2023 and onwards.
3. Finding opportunities
Two key factors informed our decision on potential opportunity:
Typical revenue share of paid subscription business line vs transaction and exchange fees
Market trends on the rise of passive investment.
Factor 1: Revenue share of paid subscription business line
Stagnation in the share of paid subscribers, or even worse - decline, would be detrimental in the long run for any challenger bank. Especially in terms of the continuous trend of smaller profit margins on exchange and transactions (if any), due to high competition in the space.
Factor 2: The rise of passive investing and retail investors
Although the overall number of people trading in financial markets around the world soared during the pandemic, experts believe that passive investing will continue to grow and will likely overtake active investing in the near future.
Additionally, Credit Suisse estimates that retail investors accounted for one-third of all the trading on the US stock market in 2021, with those using investing apps making up a sizable portion of this number (Financial Times). The number of people using these apps grew from 35.6 million in 2017 to over 137 million in 2021 (Business of Apps).
“Passive likely overtakes active by 2026, earlier if bear market”
”– Bloomberg Intelligence in a 2021 Analysis by James Seyffart ”
To achieve the desired outcome - increasing average revenue and earnings per user - we decided to focus on increasing the number of paid subscribers, and to achieve this we wanted to focus on expanding the product offering in paid subscription plans.
We looked at leading challenger banks and tried to find a good fit to expand their typical offering.
When it comes to investments and savings, we can highlight 2 segments:
On the savings side, at most challenger banks, and even some traditional banks, users can choose to automatically transfer funds from round-ups and/or cashback to their savings account (also called ‘vault’, ‘wallet’, or similar).
On the investments side, users can manually trade stocks and/or crypto and manage their portfolios.
These offerings cater to different types of users with their needs. Automated savings are more geared towards casual, but financially aware users. Manual investment is geared towards retail investors that are more savvy and active in their (day to day) trading.
We believe there’s space for a third path: automated investment.
Automated investments would let users redirect their funds from roundups and cashback straight to their investment portfolio, instead of their savings account. This would cater to more casual users who don’t have knowledge or interest in active investing but have an appetite for potential gains (remember the rise in retail and passive investors).
By tying this feature (or a different variation of the feature) to paid plans, we hope to convert more users and drive revenue improvements through uptake in paid subscription plans.
Additionally, we would hope to increase ‘our’ bank’s market share and position for new niches, such as trading and multi-asset investment.
How we would measure success
In alignment with the strategic goal (increasing revenue and earnings per active user), we chose the following product metrics:
North Star metric
Number of paid active subscribers of the highest tier
Free to paid conversions
MoM Growth / Churn in Active and Paid users
MoM Revenue Growth
Average Revenue per User (ARPU)
Additionally, we chose 3 metrics grouped in 2 types to track the performance of the ‘automated investment’ feature:
% of Activation of the feature
Number of feature active users
% increase in paid subscriptions
How we would experiment
We would look into 3 phases:
launch (either POC or MVP)
In the pre-launch phase, the goal is to have a proof of traction/interest or product/market fit. This could not only be done before, but is actually recommended to be done before actually committing to building a feature, or doing any actual work.
For instance, we could experiment with adding a call to action (CTA) icon to the app interface, that would lead users to a “Coming soon” page or a waiting list. We could use push notifications for a quick survey. Waiting lists are a good signal for interest, as well as a marketing tactic to build up a buzz. Many challenger banks have used waiting lists when entering new markets.
In the second phase, the launch of POC or MVP, and development in the short term, we would track the aforementioned feature metrics through different experiments. For example some (or a combination) of the following:
A/B test of subscribe/upgrade page with and without listed new feature, to compare conversion rate
Split test in single, or multiple markets to compare the increase in paid subscribers
Full launch in a single market and comparison with historical data
Long-term possibilities would encompass further feature development and its full lifecycle – as it gets tweaked, improved and further developed based on user feedback and continuous experiments and discovery.
Long-term possibilities and the scope of work
From the very beginning, an incremental, agile approach with short feedback loops and quick learning would be preferred. Even before committing to the solution, we would measure traction as described in the “How we would experiment” portion. If the results are good, the feature would be launched and incrementally developed further.
In its rudimentary form, the feature would let users redirect funds from round-ups and cashback to invest in stocks or crypto, with regulatory and security aspects covered, but not much logic or options further from choosing X stocks or Y crypto, that would automatically be purchased.
From there, we could go in a number of directions:
More detailed investment preferences that users could manually set
Different risk profiles that users could choose
AI support to optimize the portfolio and preferences
Gamification and social features to motivate users
AI chatbot for support and/or advice
Options to invest even more
To sum it all up…
We also believe it will give meaningful value to users, and democratize investment in terms of both funds and skills needed. By lowering this threshold, a portion of casual users trying the feature could convert to active traders, which will help better position the bank in the investment niche.
Do you invest? Is this a feature you would try out? Are there any other features you would like to see?
Share your thoughts!
Written by: Stephen Okoye, Milos Belcevic
Milos Belcevic is Senior Product Manager at Clarivate and Toptal, previously having worked with clients ranging from an MIT startup to international corporations. He's writing BuildYourWay.me, a newsletter, and a coming book on applying product thinking to your private life. He was part of the spring 2022 cohort of the Senior Product Manager (SPMC) course at Product School.
Stephen Okoye is a Senior Product Manager (SPMC) graduate with over 10 years of experience working with awesome people and building digital products. He is currently a Product Management Advisor at ExxonMobil IT, where he works with senior leadership as part of the Digital Transformation of a $185B enterprise. He is also a Product Management evangelist, trainer, coach, speaker, and community organizer.
In his spare time, he enjoys writing about agile and product management at www.stephenokoye.com, traveling, reading, long walks, and volunteering.
Updated: March 14, 2023