With the emergence of challenger banks and big tech
companies, traditional financial institutions are facing a rising number of
competitors in the increasingly crowded payments space.

These competitors have begun to address some of the unmet
needs of consumers, such as those of the largely underserved gig economy
workers. However, traditional banks can find opportunities for themselves in
big tech companies’ payments endeavors and through the utilization of API
digitalization to streamline customer experience.

To talk more about the rise of challenger banks and what to expect in 2020, PaymentsJournal sat down with Eric Brandt, Senior Market Analyst at NCR Corporation, and Aaron McPherson, VP of Research Operations at Mercator Advisory Group.  

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Digital and challenger banks took off
in 2019 and are predicted to grow

2019 was defined by a combination of big tech companies—like
Google, Apple, Amazon, and Uber—entering the financial services space, and the
take-off of digital-only brands created by challenger banks.

In 2020, Brandt anticipates the challenger banks that are
“doing it right” will rise: “I don’t think that these traditional financial
institutions can just create a digital-only bank and people are going to flock
to it. They have to provide value and give people a reason to come and join the
bank.”

Big tech companies will continue growth in the space as
well, especially because they are particularly good at utilizing data. This
could mean trouble for traditional financial institutions because they struggle
to do the same.

Citing Mercator Advisory Group’s 2020 Outlook document,
McPherson noted that another major emerging theme is the rise of
virtualization. “We’re studying something we call ‘banking as a service,’ which
is something that some of the legacy prepaid platform brands like Green Dot,
Blackhawk, and Galileo are providing because many of these challenger banks are
virtual brands—there are no physical assets.”

McPherson added that “this has also been accelerated by the
open banking regulations in the European Union, which have enabled challenger
banks to gain traction and grow rapidly to the point where they are looking to
expand into the United States.”

He noted that while the U.S.