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Author, Gordon Stanley, Consultant at Leathwaite.
Challenger Banks are not just riding the current economic storm, they are creating their own storm by out-performing the Big 5 in all the key categories: successful public offerings, agile cost bases, superior customer service and higher earnings per share, all of which are driving the popularity and growth of their product offering.

There has been much reported on the impact Challengers are having within the banking sector, however, an area that has not been discussed are the challenges related to talent acquisition and culture fit as these companies continue to grow.

Facing a talent quandary
Why does growth and success create a talent quandary? Because, the entrepreneurial talent that has proved so successful at driving the initial success of a challenger bank is most effective when taking a business through its initial growth period, and in order to push beyond this stage of development, it is advisable to complement such talent with individuals from the Big 5. Such individuals possess traditional skillsets, and can provide a ‘safe pair of hands,’ thereby ensuring adding valuable experience to the leadership team.

The right talent for the right function
On paper this looks pretty straight-forward; for functions such as marketing, product, digital and customer experience, it would still be expected that talent is heavily biased towards an entrepreneurial and disruptive type – forward thinking, unrestricted and entirely focused on the creation of a dynamic organisation that develops a highly-differentiated brand and a fanatical customer base.
Yet, for functions such as legal, risk, compliance and other infrastructure related positions, investors will be seeking the assurance that these are being led by professionals who have a wealth of experience within highly regulated institutions, thus the Big 5.

A potential clash of cultures
However, what works on paper may not translate as effectively into the boardroom due to the potential culture clash that can realistically arise from bringing these two diverse leadership styles together.
A Challenger environment will probably be more akin to Google or Facebook, than an RBS or HSBC.
As such, it is feasible that a leadership team which is not fully aligned could negatively impact performance.

Investors want the best of both
Yet, from an investor perspective, an ideal corporate structure would most likely contain the very best Challenger talent combined with the very best Big 5 talent, and in a period where the Challenger market is entering a phase of increased competition, the need for individual companies to remain an attractive investment proposition is paramount.

Attracting talent is easier than retaining talent
According to research from the Executive Grapevine, average global employee turnover rates are predicted to rise from 20.6% in 2012 to 23.4% by 2018.
Therefore, attracting people to take up a new role, even if this involves moving industry or geographical location, will not be a barrier for development.
The challenge though will be retaining these individuals, ensuring that they embed themselves within the organisation and have the opportunity to utilise their skills and experience.

Cultural Considerations
This is why cultural considerations must become central within any growth strategy related to the human capital within a company.
A starting point for this process is as simple as accepting that people joining your organisation may find your culture unfamiliar, which appears obvious when written down, but is frequently overlooked.
Adopting a more independent viewpoint will help you to structure not just your recruitment and on-boarding processes, but also your operational processes, communication structure and strategic approach, to enable new hires to feel more at ease.

Summary and further information
In summary, the Challenger environment is attractive to ‘traditional’ bankers. Bankers are becoming increasingly disenfranchised with the bureaucracy and uncertainty within large banks, and the concept of moving to a far flatter, dynamic and entrepreneurial environment, where they can impact a much greater level of change, is appealing.
However, Challengers must accept that cultural issues may arise with such moves and in a time when competition for talent is at its highest, there needs to be more emphasis than ever before placed on making the most of talent hiring opportunities, ensuring you attract and retain individuals who will add the greatest value to your business model.

Summary of key trends and references – Q1 2016:

The Times:

  • “Challenger banks face a bumpier ride and squeezed by rising competition.”
  • “Despite having an impressive record on growth, challenger banks have a tougher time, particularly large challengers.”
  • New lenders (post financial crisis) have increased their lending by nearly a third last year, while the big 5 have shrunk lending by 5%.
  • A gap is opening between larger challengers (Clydesdale, TSB, Virgin Money, The Yorkshire Banking Group, Williams and Glyn (owned by RBS), Handelsbanken and Paragon) and the smaller challengers (Aldermore, OneSavings Bank, Shawbrook, Secure Trust Bank).

The Financial Times:

  • “Growing signs that fund houses were increasing their exposure to listed upstarts including Metrobank, Shawbrook, Aldermore and Virgin Money as traditional banking models are under pressure.”
  • Metrobank raised £400 million from investors before its flotation this year, showing the confidence in the business.
  • Asset Managers report a divergence in the lending market, which might result in nimble new challenger banks profiting from traditional banks shying away from lending. Especially those banks offering niche markets, such as second mortgages.
  • “The challenger banks are interested in bespoke lending where bigger banks have pulled out” Alice Cooper. UK Equities Investment Manager at Kames Capital.
  • Challenger banks have been profiting from the mis-selling and archaic technology platforms provided by the traditional banks.

KPMG:

  • Challenger banks face an “increasingly difficult and fragmented journey.”
  • Perhaps the “initial goodwill to challenger banks is wearing thin.”
  • Warren Mead, Head of Challenger banking at KPMG said ‘I would expect the divergence between larger and smaller challengers to widen. Several challengers have targeted profitable niches such as buy-to-let or specialist commercial lending, but competition in these areas is reaching saturation.”
  • There is a suggestion that if 2015 was the year of the flotation, 2016 is the year of M&As, as challenger banks will have to undergo an element of M&A to challenge the top 5 banks in a tangible way.

Changes on the horizon

  • The new government levy, an 8% surcharge, against banks that make more than £25 million in profits, kicks in this year and will cost challenger banks £70 million collectively.
  • A significant number of challenger banks will also be hit with the crackdown on lending to landlords.

Some of the latest moves and hires in the global retail and digital market:

  • Gilles Despas joins Thomas Cook Group as Chief Digital Officer
  • Stuart Haire joins HSBC to run Retail Banking and Wealth Management in the UK. Stuart spent 10 years in RBS in a number of roles, the most recent was running the Direct Bank
  • Sharon Maguire leaves The Commercial Bank of Qatar where she ran products, digital banking and transformation to take up the role of Deputy CEO of Commercial Bank of Dubai where she reports to Peter Baltussen
  • Sara Bennison joins Nationwide as Chief Marketing Officer, she was formerly CMO for Personal and Corporate Banking at Barclays
  • Karen Fawcett, CEO for Standard Chartered Consumer Banking now also has the additional responsibility for brand and marketing in a bid to shake up the business line
  • Kennedy Uzoka is appointed as Group Managing Director of The United Bank of Africa, he previously ran transformation at the bank
  • Zunaid Bulbulia, former MTN South Africa CEO, joins listed telecommunications provider Huge Group as an independent non-executive director with immediate effect
  • Laurence do Rego promoted to Group Executive of Commercial Banking at Ecobank Transnational Incorporated
  • Dotun Sulaiman joins Barclays as a Non-executive chairman in Nigeria. His appointment marks a significant move by Leathwaite into the Nigerian Corporate and Investment banking market. He is subsequently building out his board
  • Eric Holder, the former U.S attorney general, joins MTN to help fight a $3.9bn Nigerian regulatory fine
  • Martin Jennings joins Aberdeen Asset Management as Head of Aberdeen Digital. Martin Gilbert, CEO said that “Martin’s recruitment emphasises further Aberdeen’s commitment to capitalise on the huge technological change the asset management industry is facing and our desire to place platform services at the heart of our business model. In creating a distinct division, we aim to create a culture that can foster innovation, agility and client services”
  • Cyrille Salle de Chou joins online marketplace lender RateSetter as its Chief Risk Officer. He joins from Lloyds Banking Group where he was the Credit Risk Director for mortgages. He is joined by Jim Gunner who has become chair of the fintech startup’s risk committee after leaving HSBC where he was a senior executive for group risk
  • Louise Colley joins the UK Digital business of Aviva as Propositions Director. Louise has worked for Aviva for 26 years and has gained a wealth of experience working across strategy, distribution, marketing and propositions development for annuities, pensions and was most recently MD of the Protection business
  • Tom Woolgrove, former Direct Line Group personal lines managing director is appointed CEO of Premium Credit, a business that allows customers to finance their insurance premiums. He was previously Interim Deputy CEO at OakNorth Bank, which was a new challenger bank that combines traditional banking and digital services, offering debt finance to small businesses. He is also Interim CEO at Flood Re
  • Martin Stead, Nutmeg’s current chief revenue officer, is promoted to CEO, replacing the founder
  • Peter Bole joins Virgin Money as CFO. Peter was CFO at Tesco Bank, where he has led the finance function since 2009. He has extensive experience in UK retail banking, including the migration of Tesco Personal Finance from RBS. Given Peter’s contractual position at Tesco Bank, he joins Virgin Money as CFO in 2017, following which he will be appointed as an Executive Director
  • Peter Jackson joins Santander as head of the business’s innovation area which operated across the group. He brings extensive experience and knowledge of the financial services to the role
  • Laurent Le Moal is appointed as the CEO of PayU, a leading payment services provider within fast-growing markets. Laurent Le Moal will lead PayU’s strategy and development, building on the company’s position worldwide and developing payment solutions which meet the local needs of both consumers and merchants
  • Liam Coleman is appointed as Deputy CEO of The Co-operative Bank. In his new role, he is responsible for the day to day running of the bank and is expected to be an eventual take out for Niall Booker, the current chief executive officer
  • Amer Sajed is confirmed by Barclays as the permanent Chief Executive Officer of Barclaycard, effective immediately
  • Eric Crabtree is appointed as Global Head of Financial Services at Unisys in a move which deepens and widens the company’s exposure outside the US market. He is joined by Tom Higgins who is appointed as Enterprise Solutions EMEA
  • Naureen Hassan joins Morgan Stanley in its new digital role in the wealth management business. This hire provides a clear indication regarding the future direction of the investment strategy of the bank.

How can Leathwaite assist?

With a global network of offices that are constantly communicating with the retail banking market, Leathwaite is perfectly placed to advise clients on the future demand cycle for talent. For a discussion on how the talent landscape is changing within this sector, please call Gordon Stanley on +44 207 151 5151 / gordon.stanley@www.leathwaite.com.