In the last 5 years, we’ve seen the number of digital banks grow at a terrific speed: today there are more than 400 digital banks worldwide, with the top ten neobanks boasting a combined customer base of 100 million customers. Their modernized services, unrelenting approach to customer-centricity, and innovative tech stack have taken the banking industry by storm, encouraging the entire industry to rethink how financial services are done.
Although still many neobanks may still struggle due to business model issues, competitive landscape and limited differentiation, we do believe the neobanking market could take a 5-10% market share from the banks, depending on the geographic market. At Fincog, we recognize that neobanks are setting the benchmark in banking and that incumbents can learn a lot from their approach to selling financial services. We put together four of the main lessons incumbents can learn from the new digital banks:
1. Customer-centricity
Banks have a strong revenue model with large existing business and a substantial customer base, as well as a healthy amount of profits. However, they lack a mentality of customer-centricity, and this is what differentiates them from neobanks. Neobanks are known for asking first for feedback, listening to customers, and then implementing their lessons learned.
We can see this in Chime, for example, a neobank based in the US, which takes its community of early adopters very seriously. The neobank has its own private Facebook group, where users can talk about money, ask questions, and request new features. This tight feedback loop is what led Chime to implement innovative features such as the “get paid early” and round-up features - the latter of which allows users to save money automatically on each purchase.
Banks should opt for a better balance between revenue and customer-centricity. Building a mobile-first experience is an important starting point: a lot of the younger generations do most of their admin on a phone, so banks should ensure the experience is as seamless as possible. At the same time, banks can leverage their physical distribution networks for a true omni-channel experience and try re-imagining the bank branch for the new generation, like ImaginBank did by turning branches into co-working spaces.
2. Lifestyle branding
Branding is at the core of the challenger bank proposition. Not only are neobanks managing people’s money, but they are building an emotional connection with their customers through non-conventional marketing channels. This is because they focus on building a banking lifestyle product that is attractive to new generations. Incumbents are often too traditional with their approach to marketing and engage with customers using marketing tactics that date back to the 80s.
We can see this with many fintech platforms such as Robinhood, which markets itself as a brokerage that is all about “investing for the people”, or Monzo that aims to stand out with its “hot coral” card. Fintech platforms are going one step further and turning their name into a verb (Rev me, Venmo me). Turning financial services into a lifestyle is what makes neobanks’ satisfaction ratings a lot higher than what’s normal in the industry.
With competition getting fiercer, banks can no longer differentiate themselves just by providing reliable services or stating they are ‘different’. They need to adapt to current customer needs and learn how to approach customers on an emotional level. With Covid-19 and increased digital adoption, the digital marketing landscape is shifting rapidly and incumbents need to explore new marketing opportunities to remain ahead.
Incumbents can execute a better brand strategy by first doing in-depth customer research and finding out what an “ideal bank” means for their customers. They can then use this as an opportunity to revamp their marketing messages and explore new media channels that are more appropriate for the modern consumer.
3. Modern technology
Challenger banks have an advantage over incumbents: they are often startups that are nimble, fast, and flexible, with a modern IT infrastructure that allows them to adapt quickly and launch new products while being more cost-efficient. Incumbents, on the other hand, are often faced with lengthy and costly development cycles that are more prone to errors and regulatory risk if not properly maintained.
Within just 3 years, Starling bank managed to build an entire range of retail and business banking solutions. Thanks to their light tech stack, they were able to partner with over 25 other fintech companies, offering new features such as insurance, accounting software and receipts management.
Since many banks spend 70% of their IT budget on traditional IT services, this fast-paced launch of product suites is practically impossible. This further proves why incumbents have the most to gain from becoming more technology-centric: it helps lower the cost of infrastructure, streamline technical setups, reduce compliance risk and shorten timelines to product launches.
In order to overcome this huge technology burden, banks must prioritize replacing their legacy IT infrastructure. Although this will take years, a big budget, and complex restructuring, banks can use this as an opportunity to implement their vast knowledge of banking products and build their own banking technology solutions. They can then turn this into an additional revenue stream or use it as a strategy to partner with other financial organizations.
4. New way of working
The new generation of digital banks was born in the age of Bitcoin, social media and APIs, which means the workforce has a different mindset when it comes to working. Digital banks often operate as self-managing and cross-functional teams, with a constant eye on the customer. Employees are younger, have soft and hard skills, and like to use lean methodologies to work. This is different from traditional banks, which often have an older workforce and hundreds of employees. Processes and teams are often organized in siloes and treated in isolation, while back-offices aren’t very focused on the customer.
We’ve seen this happen in real-time throughout the Covid pandemic: many traditional banks struggled to shift to work-from-home policies due to security concerns and lack of customer service backup. Neobanks such as Revolut were able to easily switch to a completely remote-working model since their entire system is already on the cloud and employees could work from their computers at home.
A workforce that is more adaptable and lean can think in a more modern and digital way. Although new hires can bring in the necessary skills into a bank, it’s really the whole workforce that needs to transform in order to remain competitive. If incumbents want to maintain their position in the market, they need to learn how to launch new products and propositions rapidly.
A few ways banks can do this is by educating older workforces on both hard and soft skills and encouraging employees to work in small horizontal groups, rather than vertical hierarchies. They can also consider hiring managers who have experience using lean methodologies and can teach team members other lean techniques. Other ideas include running hackathons for developers and building new hiring processes that are better adapted to the required skills.
Banks have a lot to learn a lot from neobanks, but that doesn’t mean they should strive to become one of them. Instead, they should focus on leveraging their competitive advantages. Banks still serve as a one-stop-shop for the consumer and are often the first point of contact for people’s finances. Banking customers still maintain a high level of trust in their bank, which means there’s still an opportunity to leverage the primary customer relationship and offer other services through partnerships. Incumbent banks also have physical distribution networks, which have the potential to offer a great multi-channel experience.
By implementing these lessons, incumbent banks can find practical ways to improve their own working model, allowing them to leverage their strengths, adapt successfully to the new era, and therefore remain relevant in the world of tomorrow.
