Neo Banks: Innovation and Trends shaping its future

Introduction

Neo banks are app based fintech firms which are customer experience-driven with focus on providing superior customer support and appropriate solutions. Neo banks came into picture to enhance the quality of traditional banking and to provide much needed improvement in customer expectations. Every innovation, trends, opportunity in neo banking industry is focused towards achieving the best possible customer experience. Every neo bank in this planet is working hard towards achieving best CX. The neo banks provided users option to think beyond traditional banking.

Neo banks have not only been getting massive attention in the banking industry, but also heavy investments. Not just before the pandemic but also during the economic slowdown in 2021. According to an article “An Analysis of FinTech VC Funding Mega-Rounds in 2021” published by MEDICI in March 2022, Neo bank holds close to 12% of total investment in 2021. Neo Banks raised $10 billion in 29 funding rounds. The US, UK and Brazil were the top investors.

From the report it is observed that Neo banks are getting lot of attention and huge investments. Never ending innovation by neo banks is one of the reasons and they have been doing good even during the pandemic. Desire to do more and push towards achieving excellence would help neo banks to attract more investments in the years ahead.

Nevertheless, in the past decade, not many neo banks have been able to achieve great success. According to a report published by Simon-Kutcher: Only 5% of the neo banks across the world have achieved break even. Some neo banks are losing $140 per customer annually. And it’s not only because of the peers/competitors in the industry. Ineffective product usage is one of the factors behind their failures. It was observed that many digital customers are inactive after opening their account. The report further adds that superior customer experience alone is worthless unless combined with attractive loyalty programs. So, what neo banks have done in the past decade is not enough. Neo banks need to innovate and overcome challenges to prove their mettle.

Neo banks should bring in more innovative thoughts and strategies to improve their position in the market. Amongst many strategies, targeting niche segment could be one the important strategy. There is quite a few neo banks who are targeting niche segments such as LGBTQ, Teenagers, Asian Americans, etc. Such kind of niche offerings would require more than just investment to survive in the cutthroat market where incumbents are already scanning to acquire niche neo banks. This could be one of the areas of improvisation.

The thing which could help neo banks to overcome such challenges is innovation. Providing something unique in a most profitable manner is the real demand in the market. The product or service should be beneficial for both customer and neo banks. This blog would focus on areas like Innovation, Challenges, Disruption and Profitability which the neo banks should pay attention to.

Innovation in Neo Banking

Technology is King: Technology has always been proven as a boon for the banking industry. Technology has helped neo banks to be more effective, efficient, and innovative. It is no hidden fact that technology has helped Neo Banks in reducing cost and improve customer experience. Neo banks being all digital helps in automatically acquiring transactional data which would allow neo bank to focus more on innovative products and services. Integrating latest technology like Analytics, Artificial Intelligence, Voice Interfaces etc. have transformed neo banks to maximize their potential. Integrating such technological advancement could help neo banks boost their customer experience. Technology would not only provide round the clock services, but it will also help in providing resolutions in much faster and efficient ways. Technology would also help in determining the right financial services faster and hence overcoming the long wait.

Banking with the Unbanked Population: Traditional banks have never focused much on the unbanked population for various reasons. Sometimes, there is lack of a formal ID, not having enough money, past financial mistakes etc., to name a few which kept traditional banks away from unbanked population. This has led significant percentage of population remained unbanked. Study by Federal Reserves in America claims that close to 22% of population are either unbanked or underbanked. Low credit worthiness, minorities etc. are the major reason for non-banked population in the US. Neo banks target such demography who fall under lower economic status, undeserved communities etc.

Many neo banks made use of such noble cause and created their strategy around it. There are Neo banks which are targeting immigrants or LGBTQ, or African American communities specifically. Some of the examples are lined up below.

• Neo bank Dave has included a job search feature in their platform called Side Hustle. This helps user to discover jobs and at the same time apply for it. According to an article published in BankingDive this feature has helped users earn more than $160 Million
• Another neo bank app called Jassby provides opportunities to improve their financial knowledge for kids through various channels such as videos, games, puzzles, and courses.
• Majority, which has raised close to 27 million in Series A funding, and 37 million in Series B funding is a neo bank specifically for immigrants with bundled services.
• Nerve created world’s first neo bank for musicians. Their mobile application is designed to meet unique needs for professionals in music industry. Nerve’s app merges financial technology and user experience which helps artists to create careers and build network through music communities.
• Purple neo banks are specifically designed for people with disabilities. Purple has created an easy-to-use tool which help them to achieve financial independence.
• Daylight a unique neo bank for LGBTQ community provides features such as Debit Cards with chosen names (No matter what their ID has), telling their customers if they have spent on outlets that were rated LGBTQ unfriendly stores etc.

Offering more than just Banking: Neo banks need to offer more than just banking to remain in the banking business. Traditional banks follow similar strategy to remain competent in the market. Incumbents are already offering conventional banking along with additional services such as Insurance, Asset and Wealth Management, Trading, to name a few. It has been more than a decade and analysts have already questioned the profitability of neo banks. Neo banks must think something special that would help them to remain afloat in the industry.

Across the geography, neo banks are operating with their own banking license (with certain outliers such as neo banks in India who are still dependent on traditional banks). So, global neo banks need to make use of their core banking services by providing additional features. The neo banks should look to innovate in select services to improve their customer experience. Few of the services are identified below:

• Automatic Saving/ Crediting: Neo Financial of Canada offers a feature which, enables customer to automatically pay off credit card debt to avoid paying interest. It in turn helps in maintaining credit score as well. Some neo banks are enabled with automatic savings in their offered debit cards. They transfer the amount charged for purchase from spending account to savings account automatically.  
• Partnership Driven Models: Neo banks should adopt partnership driven approach and offer services such as Lending, Wealth Management, Insurance etc. A startup in Bangalore named Cabdost (a niche service provider Exclusively for Taxi Drivers Community in India) has merged with Dvara Money to provide tax filling for Gig Workers.
• Personalization: Neo banks could offer certain products which could be customized based on individual’s requirement. Even if the above statement looks far-fetched, the least neo banks could do is offer choices to customers. Neo banks are in a liberty to offer some options for customers which could help in every possible way.

Future Trends

Staying informed on trends and following them would create value for neo banks as they head towards future. Following the latest trend could provide acceleration for neo banks to achieve greater success. Given below are few trends which could also help define the future of neo banks in the banking industry.

Banking Super Apps: Neo banks have always embraced the importance of doing things differently. Super-apps are one of such niche thing which does the work differently but also efficiently. Banking super apps are proving that today’s customers are looking at more than just banking. Customer’s choices have become highly integrated. Keeping this demand into consideration, neo banks have started collating various services such as banking, insurance, real estate, mobile payments etc., into one platform and calling it ‘Super-App’. These super-Apps holds superpowers. They hold high customer centricity, work on customer needs, and have great user experience design.

Some of the super apps which is making all the difference in the industry are: WeChat (China), Kakao (South Korea), Lime (India) etc. These apps offer many services in one app. Wallet, Shopping, Payments, and Banking in one single app

A BCG survey found out that mobile usage has increased considerably in 2020 and customers are increasingly turning towards digital banking. Post pandemic too mobile phone usage is higher than ever. That means the branch visits are going to be lesser. In this case, the super-apps could prove to be highly beneficial. In this world where usage of mobile has accelerated to such greater extent, offering super-app like platform will strengthen the integration of financial services in a single platform for neo banks.  

Banking On Hyper-Personalization: Tailoring financial products as per customer’s requirement would be one of the deciding factors for neo banks in future. Neo banks have abundant amount of transactional data. Neo banks could harness their data analytics skills and collaborate with app details and transactional data to personalize customer’s offerings. Usage of AI and ML would help neo banks cultivate hyper-personalized data and add value to their customer experience.

Below are certain set of examples which are already prevalent in the banking industry and could prove trendy for neo banks as well. These examples show how hyper-personalization is trending in the industry.

• Netflix of Banking – Bank of Ireland has announced that they are going to be Netflix of banking. Just like Netflix, customers are presented with customized movies and shows, BOI is using data science, AI, ML and Analytics to create a recommendation of right product and services to meet the needs of their customers.
• Subaio FinTech with ABN Amro – This partnership is based on insights of customer’s payment data. Based on the inputs from the data, ABN Amro can offer various customized loan offers to their customers. The offers are based on customers’ recurring payment data.

Advanced Analytics/ Predictive Analytics: Advanced analytics examines available data and offers actionable insights; Implementation of such technological tools can further enhance the customers’ experience. Advanced analytics can work on neo banks’ customers’ transaction, spending, investment data and provide a solution which could help the neo bank to enhance neo banks’ skills or weak spots.

These data need to be utilized to predict the requirement of the future. This would help in gaining and predicting a better tomorrow for customers. And this is not just a one-time approach. The neo banks are garnering such data points to create a practical insight specifically for future customers’ requirement. This would not be restricted to predicting but also adapting experience to suit customer’s need. And that would be the real future for pure CX and neo banks.

Conclusion

Neo banks are future of the banking industry. This has been the case in the last 10 years. However, post a decade of various technological advancements, pandemic, etc., neo banks were not able to create a success which was expected from it. Yes, there has been definite improvement in the industry, but it is far from creating a noticeable impact.

Analysts, VCs, investors have still faith in neo banks and are putting their money into neo banks. However, to continue getting investments, neo banks need to be far more innovative than it is now. They need a clear vision, work on that vision with full efforts. They need to believe in the ongoing trend and make use of technological advancements to create a better future. The journey towards providing superior customer experience, achieving excellence is still work-in-progress and there is more to achieve!

Sources

• https://teknospire.com/neo-banking-exclusive-digital-bank/
• https://timesofindia.indiatimes.com/blogs/voices/the-neo-banking-trends-and-innovations-that-will-shape-indias-d2c-ecosystem/
• https://www.forbes.com/sites/tomgroenfeldt/2022/05/19/neobanks-are-plentiful-but-rarely-profitable/?sh=9e4a8be7aa95
• https://tavaga.com/blog/neo-banking-advantages-disadvantages-examples-future/#what-is-neo-banking
• https://bullandbearmcgill.com/neo-banking-on-innovation/
• https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-banking-and-credit.htm
• https://www.businesswire.com/news/home/20210819005060/en/Nerve-World%E2%80%99s-First-Neobank-Created-for-Musicians-Launched
• https://en.neobanking.info/news/new-banking/what-is-purple
• https://www.wired.com/story/daylight-fintech-lgbtq/
• https://www.americanbanker.com/list/5-new-challenger-banks-with-ultraspecific-niches
• https://bcgplatinion.com/cema/insights/super-apps-in-banking/