They basically have four avenues of approach with respect to the rise of challenger banks.
- Buy them out. Most challenger banks will merge or become part of a larger group and may operate independently, etc. Incumbent banks have a lot of money, power, pull, institutional memory, etc. that can be a huge asset to these challenger banks.
- Work with them: Provide high-street banking services to these challenger banks. A common misunderstanding is that challenger banks are able to do everything themselves, because of their technology stack. This is not true. A challenger bank in many cases has to rely (heavily?) on incumbent banks for many of the services they might need. Foreign exchange, cross-border payments, lending, treasury services, Vostro/Nostro accounts, etc.
- Imitate Them: Pressure tactics may for the bank to put s stop-gap measure and try to imitate the same that the challenger bank is offering. Try to outmaneuver them and drive them out of business. This is usually a sign of desperation and does not bode well in the end. The incumbent-bank-mimicking-challenger-bank would continue to use the same rails, thinking, mindset and technology stack as the incumbent, so nothing challenging about it.
- Succumb to them: It will invariably happen, some of the smaller (and even mid-sized) banks will slowly start to see an erosion of customers. They will simply not be able to keep up the pace or retain customers in comparison to the larger incumbent banks and challenger banks. These challenger banks would be offering a whole suite of services, usually for a whole lot less and much more intuitive UI/UX. Many incumbents will buckle under the pressure. The ones who are astute will merge with other incumbent banks to ensure survival.