Banking isn’t boring anymore!
The history of banking dates back to around 2000 BCE when merchants provided grain loans to farmers and traders. Today it remains a critical component in the economic system, without which global commerce would grind to a halt. However, for the end customer, there has been relatively little change and the industry has been ripe for disruption for a long time. Enter the world of 'Fintech' start-ups and in particular 'Neobanks'. Buzzwords aside, a Neobank is a digital-only bank, free of the traditional branch infrastructure. They offer a slimmed down set of services (although this is changing rapidly) at an attractive price - all accessible from a computer or mobile phone. As digital adoption continues to increase, these businesses pose an ever-increasing threat to traditional banks and their lucrative revenue streams.
In this article, I'll discuss why these new businesses are gaining such traction, what the downsides are and then conclude with some of the ways that traditional banks can (and are) competing against this threat. The beauty of this disruption is a better service offering for all of us as individual consumers and a smoother method of doing businesses for corporates (particularly SMEs) in this increasingly global world.
Why the 'Neobanks' are gaining traction?
Customer centricity - Designed from scratch with the customer experience front of mind and without the hinderance of legacy structures, Neobanks have been able to design services that are clean and simple for the end user. Customer centricity is central in how these new banks approach process. Compare for example, taking a selfie and snapping a picture of your passport with the reams of paperwork that used to be required to open a traditional bank account
Lack of legacy infrastructure - IT systems can be designed to fulfil a focused set of purposes and to integrate seamlessly with new systems and offerings. This enables cross-selling and a 'one stop shop' for consumers for all their financial products from salary payments to Crypto-trading.
Lack of legacy commercial pressure - Foreign exchange is a fitting example; Traditional banks typically take a 3% fee on retail forex transactions - a lucrative source of revenue. The incentive to cannibalise this and drop rates is low for traditional banks. Enter Neobanks who have exposed this and shaved the rates down to fractions of 1%.
'Something different' - Just being 'not another traditional bank' is often enough to pique interest, as consumers are often tired and frustrated of the service levels and bureaucracy inherent in traditional banks. The excitement of a new competitor is a strong pull factor for new customers, who are also able to switch quite easily given the enhanced technology. Add in contemporary design and a considerable budget dedicated to brand and marketing, and the ‘something different’ becomes increasingly attractive as an alternative.
Lack of legacy cost - By building a new 'greenfield' platform, Neobanks can cut significant costs in design and maintenance, increasing efficiency, and enabling a lower cost base and thus cheaper fees for the end customer.
The downsides of the 'Neobank' - Growth and innovation has a price!
Most of these risks are due to the 'break things and learn fast' mentality of tech start-ups. This is a fantastic mindset to grow and break barriers. However, when you are talking about people's money, one misstep can be disastrous.
Cyber-attacks - Banks are unsurprisingly the biggest target of cybercrime. With the focus on growing and innovating versus security, this can leave the newcomers open to security vulnerabilities. Budgets are often spent on growth and not protection.
Personal data - The pursuit of growth can also lead to a lack of rigour in the protection of personal data. This can be disastrous from a brand perspective and due to regulatory fines and legislation such as GDPR, it can also be extremely costly.
Capital adequacy - As one expands the customer base and product offering, regulatory capital requirements increase. This can depress returns and put off investors who modelled their funding on a capital light tech model.
Money laundering - The ease of account opening can cause serious risks in relation to criminal activities such as money laundering. Regulatory clampdown on a business which becomes known as a haven for these activities could shut the business down overnight.
Breadth of services - launching new products can be costly and time consuming, pushing consumers back to their traditional providers that may be able to provide everything from transactional banking to mortgage loans. Alternatively, this leads the Neobanks to develop partnerships where they don’t have full control over the end-product – potentially putting their brand at risk.
Where to for traditional banks? Don't write off the incumbents just yet!
Whilst the demise of the incumbents is often predicted in times of change, a lot can be said for the strength and market position of traditional players. The rise of tablets and increasing market share of Android and Apple lead to many spectators predicting the death of Microsoft; Yet the company innovated, and their Azure and Office platforms have gone from strength to strength. The same can be said for automakers who are leveraging their design and manufacturing scale and expertise to take on start-ups such as Tesla.
By learning from Neobanks, whilst leveraging the strengths of traditional banks, a hybrid approach can become a very compelling offering. Some of these actions include:
Start with the customer journey - Build a Façade over the legacy offering by creating a clean front-end. Banks are traditionally very siloed, so using a low-code product to consolidate the broad offering of the traditional bank in a more digestible format could be beneficial. This will also require a revamp of some of the key underlying processes (such as account opening) to make an impression. At Lancia, we have helped many clients use these platforms to profound effect and combined with process optimisation, the business case has paid off handsomely.
Leverage the brand - Safety and security of money remains paramount and as much as traditional banks can frustrate consumers in some respects, the trust factor remains high. A (New Brand) powered by (Traditional Bank) can be utilised to leverage the benefits of both.
Leverage regulatory benefits and expertise - Protection against hacking and management of personal data are two key elements that should be retained, optimised, and leveraged to protect the longevity of the business.
Buy their way in - The statistics behind Mergers and Acquisitions (M&A) are woeful as many buyers overestimate synergies and underestimate the cost of achieving them. However, a strategic acquisition to steal a march on the competition by buying an up-and-coming business could make lots of sense. Particularly to inject a more innovative mindset. In this case it is important to keep it far enough away to avoid 'legacy think' from the traditional business to crush innovation. However, it needs to be close enough to leverage the benefits mentioned above - a very tough balancing act, but one that could pay off in spades!
One thing I know about predictions – they are always wrong! But whatever the various players end up doing, we can be assured it will leave the marketplace better off. The bankers may have swapped grain loans for Crypto assets, but the business of bringing borrowers and lenders together remains critical for the functioning of the global economy. There will no doubt be some bumps on the road, but anything technology can do to make this a more enjoyable (and efficient) process can only be a good thing.