Neobanks (digital-only banks) are an exciting new addition to the financial services landscape, but they have yet to fully encroach on incumbents’ turf.
Indeed, whilst consumer preferences are shifting, and challenger sign-up rates are rapidly rising, customers are reluctant to choose a challenger bank to be their primary bank. Reportedly, the average Monzo customer has less than £150 in their account.
So, what should be the neobanks’ next move? An obvious solution would be to move away from the ‘freemium’ model to monetisation through marketplaces (commissions), charging for non-basic products and services (fees), or offering premium services (subscription).
…Or, they can use their newfound popularity for a good cause and enter an untapped market - the underserved.
Last year, World Finance reported that Europe still has around 40 million people lacking access to basic banking offerings. One of the principle reasons being that many people must still travel long distances to their nearest banking branch. Challenger banks circumvented this problem by making the branch redundant – customers can simply ‘talk’ to their banks via digital channels.
In the so-called digital age, this is hardly rocket science. But now even more complex products such as loans are on offer, therefore substituting payday loan stores or pawn shops, which are often the only option for people with poor credit history or living in remote areas.
Initial estimates place the potential targetable segment in the UK between 10.2 million and 13.6 million consumers! There is clear opportunity here, and this customer segment only gets bigger by including disabled customers, who constitute another important yet underserved group.
In our Accessibility: Banking for the 21st Century report, we estimated that improving accessibility for digital banking would result in an additional $24.1 billion in annual global banking revenue.”
Indeed, quality of life technologies are providing a cost-effective way to drastically improve accessibility. These include talking ATMs, AI-powered sign language translation and virtual assistants.
The accessibility challenge is much easier to overcome for challengers, as most accessibility issues are already solved by third-parties, whom they can partner with to reap the benefits of their solutions.
Imagine what can be made possible if neobanks used technology to detect health issues and use the insights and data that they collect to forecast challenges and protect the customer? Perception could easily shift from just a financial services provider to an organisation of a major social benefit.
Another underserved segment often overlooked are SMEs (small and medium-sized enterprises), which are increasingly asking for a wider product offering to satisfy their changing financial needs, such as accounting, payroll, analytics and forecasting, as they grow.
Basic online banking is not cutting it anymore. SMEs require a partner who will go through the growth journey with them and provide customised services to match their development stages. They now expect seamlessly integrated additional services, either in-house or via marketplaces. The lack of these is perceived as an additional unnecessary burden which should have been removed long time ago.
The likes of Starling, Tide and Revolut are partnering with various fintechs and getting access to innumerable additional features that can revolutionise their customers’ experience and differentiate them from their competitors. So how can they join the hunt?
Neobanks have a few distinctive advantages over the incumbents. They have no infrastructure limitations and tend to be less risk-averse in their thinking. They also employ ‘agile’, reiterative ways of working and are not afraid to experiment and learn from their failings. Additionally, they aren’t constrained by time-consuming bureaucratic procedures and ask their customers what they want before launching any new propositions, therefore avoiding anything that is undesirable or suboptimal.
If incumbents are to join the hunt, they need to fully commit to becoming digital-first banks. Otherwise, neobanks are free to roam - yet again.
If you want to learn more about neobanks, please feel free to reach out to Dan Jones, Partner, Capco Digital.