The figurative smoke from the east is rising as the banking industry gazes upon the horizon of disruption.  Branchless banks, known as ‘challengers’, are literally tearing down the walls of traditional banking. These walls, which represent a mountain of carrying costs, are being replaced by unbundled, individually profitable services and an unlimited range of distribution. Earlier this year, a KPMG report showed UK-based Challengers outperformed traditional banks from 2012 to 2014—8.2% growth as opposed to a reduction of 2.9%. Do you see the smoke now? If not, follow the money.

According to a report by Accenture, investments in financial technology (fintech) nearly tripled in 2014—up to $9.89 billion from $3.39 billion in 2013. In the first half of 2015, Berkery Noyes Investment Bankers reports that volume has improved by 14%, and value gained 63% over the first half of 2014. The increasing capital being invested and the European growth in the Challenger segment should have traditional banks on alert, but not yet in all-out panic mode.



In 2014, as venture capital was pouring into fintech faster than Speedy Gonzales on Red Bull, The American Bankers Association released a report around consumer’s preferred banking methods. Online banking topped the charts with 31%, but comfortably perched at number two was in-branch banking with 21% (up 3% from 2013).




Challenger banks may be the cool new kid on the block, but they’re not replacing the decades of memories and established trust of personal one-on-one banking anytime soon. For everyday account management such as deposits, bill pay, and even savings, challenger banks have a leg up—convenience. But for financial advice or big ticket items like home and auto loans, wealth management, and small business loans, people prefer people because of the trust factor.

As the millennial population matures, expect challenger banks to grow. Traditional banks must recognize this and begin shifting their model to a more high-tech, high-touch approach. Right now, it’s critically important for traditional banks to define what their branches will become, remove unutilized space to decrease cost and maximize profitability, leverage technology and self-service automation, and shift branch employee mentality to a specialized, consultative approach.

The internet has disrupted many, if not all areas of commerce— including banking. But, till now, we’ve watched from the distance as the smoke rose from the volcano. As the old saying goes, “where there’s smoke, there’s fire”— I believe the industry is on the verge of eruption.