What is a neobank?
A neobank (also known as an online bank, internet-only bank, or digital bank) is a type of direct bank that operates exclusively online without traditional physical branch networks.
It is the latest technological advancement which places an emphasis on the technology and removal of traditional means. A neobank is what Amazon was to the high-street, what Uber is to the local taxi ranks.
In the UK we have Monzo, Starling Bank and Revolut to name a few of the latest Fintech neobanks.
Why are they becoming so popular?
The banking industry traditionally been a monopoly with high barriers to market with big names like JP Morgan Chase and HSBC having roots going as far back more than 150 years. However due to the EU’s progressive approach to financial regulation. This has opened up the sector to greater competition.
I will explore some of the reasons why and how neobanks are making their mark on the banking industry.
These institutions allow customers to control their finances via their apps has resulted in lower overheads which allows to provide lower fees. One of the ways neobanks have been able to attract customers is through the promise of lower fees. Because they do not have to pay the costs of running physical branches, they are able to offer services for free that more established institutions charge for, such as withdrawing money in a foreign currency.
Better Customer Service
The reputation of neobanks is based on superior customer experience and reactive support, these two features require extensive investment in human resources. If customer support is an attitude it is nonetheless a major cost center which can’t be supported by the classical Freemium or low-cost business model adopted by most of neobanks.
To balance the books, it is mandatory to increase the per-customer revenue by proposing premium services or more profitable products. N26 and Revolut have opted for a broaden offer with metallic bank cards. More than this the support services available through superior online chat systems allows Neobanks to effectively resolve customer problems. This superior customer service has been implemented by a mixture of good user interface design and smart artificial engine to power the chatbots.
Further to this forgetting a pin or needing a card replaced is much quicker and efficient through these apps. Monzo provides two-step authentication of your id and a video of the user requesting unblocked.
Another example, just last week I lost my wallet and had to reapply for a bank card from Monzo and my local banking branch. The Monzo card arrived in 2 days compared to the 5 business days of which my local bank card arrived.
Although internet banking has been available for the past decade, the apps offered by high street banks have been hampered by poor functionality and security concerns. Old banks have legacy systems weighing them down, they’ve found it tough to develop innovative user experiences. More than this I believe those at the top of the traditional banking leaders have been reluctant to embrace and leverage the power of technology.
Banks are acting too slowly in the move to comprehensive digital services. On the one hand, they can commit to investing a lot of money to FinTech; on the other, conservatism and bureaucracy seriously hamper putting effective FinTech in place. Some banks still can’t believe that the majority of customers use mobile apps and “even worse” — want to use a tablet or wearable for banking. Maybe that’s why not every bank has mobile banking, and those that do offer only limited functionality.
According to Julien Jaillon, CEO of Carrefour Bank & Insurance; 30% of C-ZAM customers have less than 30 years old, and 75% are lower than 50.
For Revolut and N26 figures speak for themselves: 42% of Revolut’s users are between 25 and 35 years old; while N26 claims to have 59% of customers under 35 years old and even expect to peel away 5 to 10% of retail customers between 18 and 35 from established banks in Europe before 2020.
Even if we estimate that neobanks do not own more than 5% of the retail market, they appeal up to 35% of new customers per year. Why these 35% are making a difference? Because these new customers were previously unbanked, meaning that neobanks manage to enroll customers with high financial development potential.
Consolidation and the Future
To ensure neobanks boost their uptake beyond digitally savvy Millennials, they will need to commit more of their income to marketing. This will, however, be a difficult battle to win, particularly as traditional banks can invest far more heavily in this area.
A more fruitful approach could see neobanks adopting niche selling points, as opposed to competing on all fronts with the major established banks. There is already evidence of this taking place, with neobanks like Monese targeting “nomads, expats and migrants” and others, like Soldo, focusing on parents.
What is becoming apparent is that neobanks are driving further market segmentation. If a neobank focuses on one particular service they can outperform banks on customer service, products and margin. To try compete on a wholistic level with major banks would be dangerous as the financial muscle for neo-banks is simply not there yet.
The danger traditional banks have made to date is being unconcerned about new entrants, satisfied that they can complete with their size or range of products. But they could start to struggle if new entrants continue to pull customers away from these revenue-generating areas.
To conclude I believe Neobanks will be a real force to be reckoned with. Perhaps I have bias of being a technology enthusiast but this reminds me of the recurring theme of stubborn traditionalists showing blissful ignorance towards the power of technology.
You only have to look at the not so distant past for example Blockbuster vs Netflix. What Neobanks have is a data driven system which can provide real insight in to what customers really want. However currently they simply don’t have the financial muscle to compete at large scale. I am not a banking expert and I am coming at this from a technology point of view but I would keep a look out for Neobanks in the future.
A combination of good UI design, niche features which excel against their competitive counter-parts, a data driven engaged, personalized experience and excellent customer service have all the components to rival the banking industry.
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