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There is no need for brick-and-mortar banks. The days of traditional banks are gone. The reasons they have not disappeared yet? Three major reasons:
Luckily for the digitally-native consumer, banking-as-a-service has lowered barriers to entry for neobanks which are popping up all over, most of them not being profitable (yet). Out of 400 reported neobanks, only 5% are breaking even. But it’s clear they serve a customer need that traditional banks don’t, and once they successfully tweak their business models they will become profitable.
One size does not fit all
The majority of digital banks only fulfill one of the needs of consumers: to be served digitally with a simple user experience. Some digital banks, such as Revolut, go further with their offering to add premium features (for example travel insurance) and good FX rates. But that’s only useful in a market where customers travel often and they value this feature, like Europe. In a different market, like the USA where international travel is less common, different features are needed to attract very different consumers. One size does not fit all, which is why European neobanks are struggling to succeed in the US market – with N26 and Monzo recently admitting defeat.
This is why some describe Niche Banking (also referred to as Vertical Banking) as the future of banking. If you could cut customer segments into different verticals and develop banking products specifically for that vertical, that will be called a niche bank. Instead of offering a broad range of products to a wide audience, assuming “one-size-fits-all”, niche banks know their customers very well and specialize in products that serve their particular needs.
A niche bank has a strong brand and targeted marketing at a specific segment through the channels best suited to reach those customers. It would design specific products to fulfill the needs of the segment (examples later on) but also offer basic financial services associated with commercial banks, including custody, payments and lending.
The segmentation
The segmentation for niche banks could be based on:
The products
The products are carefully designed and targeted to meet the needs of a specific segment. The products will be a mix of high-margin lower volume and high-volume lower margin to ensure the profitability of the bank. Here are examples of products that will fulfill the needs of specific segments, or “verticals”:
Current niche banks
It’s all about market positioning
Niche banking is less about the feature set and more about the market positioning. It is about the soft association and relevance to the user with some direct financial benefit. An example of the direct benefit we have seen is for an ecosystem of truck drivers, giving them discounts on fuel. Or giving low-interest loans to gig workers.
We have seen more and more niche banks being founded and I will analyze, for my next article, what it will take for niche banks to become successful and how neobanks can use segmentation of the market to better meet customer needs and drive profitability.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Patrick Bermingham CEO at Adflex
29 August
Ben Lane VP of Colleague Experience Group at American Express UK
28 August
Alex Kreger Founder & CEO at UXDA
27 August
Luigi Wewege President at Caye International Bank
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