Neobanking. What’s next?

The lines are blurring between neobanks and incumbent banks, with both entering the next phase of digital evolution, where there are shared challenges as they vie for market share, customer acquisition, customer retention and revenue growth in a market that is increasingly becoming more demanding and informed. Neobanks are no longer fragile, but are becoming highly dependable. At the same time, incumbent banks are embracing innovation and are accelerating into the digital-first world.  

As banks continue to modernise and become more relevant to their customers, they have evolved from being product-centric, to customer-centric and have most recently been focusing on ‘purpose-driven’ banking. This is paving the way for banks to become more adaptive to changing demographics, customer needs and market dynamics. Neobanks have led this change, significantly in the way they facilitate day-to-day banking. Incumbent banks, in the meantime, have gone through complex transformation journeys at scale to keep pace with the emerging need for adaptive banking. Overall, the industry, including neobanks and digital arms of incumbent banks, has witnessed a mixed bag of success and failures. Success or failure has been defined largely by customer adoption, ability to meet risk and regulatory standards, and resilience to industry dynamics spanning the pandemic, geo-political unease and economic uncertainty. 

As per recent research “.. demand for more tools and better features shows a clear appetite from consumers to manage their money independently, via their online and mobile banking apps. It also highlights that there is ample opportunity for banks to offer empathetic and insightful help to their customers with tools, support and financial education for those who are struggling.” 

The next phase of banking evolution  

Building trust through purpose-driven banking 

There is an ever-increasing expectation from banks to be sensitive and conscious about communities, climate, societal issues and political situations. Customers identify themselves with such topics and make choices about with whom they bank depending on how well they perceive the banks to empathise with these issues.  

For example, GoHenry offers debit cards for kids and teens, helping them to learn practical money management skills, by organising their pocket money and using in-app learning on topics such as banking, investments, spending and saving. Whilst GoHenry cards are issued by IDT Financial Services, which is regulated by the FCA, its funds are held in NatWest segregated accounts *1 

Building trust with customers is a defining factor for the success of neo and digital banks. A deep understanding of the target customer will be key. Customers trust their financial decisions with banks that they identify with. 

Addressing white spaces through vertical neobanks 

Identifying white space amongst certain demographics and becoming relevant to specific sub-segments of customers is a concept that is gaining more traction. The needs of each segment and sub-segment are very specific and often their financial needs remain unmet, especially as they are not always catered for by traditional banking approaches.  

For example, Current caters specifically to lower income groups who may have difficulties maintaining a minimum balance, or those who have a challenge with credit scores, by offering accounts with no annual sign-up fees or credit history. They offer faster access to direct deposits and do not expect a minimum balance. Banking services of Current are provided by Choice Financial Group and Cross River Bank*2 

Vertical neobanks will continue to gain more traction and will be able to address sub-segments of customers by offering products designed to address core financial benefits not addressed by traditional banking approaches. 

Green financing and sustainable financing 

In the wake of COP28, apart from ambitious self-imposed targets, there is even more impetus on the banking industry to drive green financing and the managed phasing out of non-green financing. For example, Aspiration Bank, a US-based, online-only fintech offers a ‘spend and save’ cash management account (CMA) where the deposits are not used to fund any oil or gas projects. It also offers a zero-carbon footprint credit card, whereby the firm claims to plant a tree every time a purchase is made using the card. 

Cloud adoption and decommissioning of datacentres will be one of the key mechanisms to achieve self-imposed targets. Overall, it is suggested that banks who adopt cloud-based infrastructure generate around 95% fewer carbon emissions than those who continue to use a locally hosted system*3. In addition to reducing carbon emissions, adopting the cloud will also enhance the digital agenda of banks, further benefiting the line that challenger neobanks naturally leverage cloud-native core banking platforms.   

Another challenge that banks will continue to face is the availability of meaningful data to be able to make financing decisions. This is especially true for collecting carbon data in small and medium-sized enterprises (SME), as these businesses have traditionally not captured such data. Accessing proxy data and building capacities around it will be the aim of many banks, since this will enable them to make key decisions and design offerings around such data. 

Banks will continue to explore mechanisms and opportunities to access meaningful data, leverage enhanced data analytics capabilities, collaborate more to be able to deliver positive outcomes, and invest in key initiatives that will help them and their clients achieve net-zero targets. 

Accelerating into the digital-first world  

Digital-first banks and financial services organisations such as: Monzo, Starling and Revolut are beginning to see increasing revenues and profit realisation as more customers flock to their flexible and feature-rich offerings. 

At the same time, the maturity of core banking platforms has also significantly improved over the years, with the digital and cloud-native core banking platforms gaining significant traction. Spurred on by the neobanks, many tier 1 and tier 2 banks, building societies and non-banking financial organisations are increasingly adopting these evolving platforms to tap into the fintech ecosystem and build customised and frictionless offerings through a marketplace. 

As banks accelerate into the digital-first world, aspects such as ‘total cost of ownership’ (TCO) and ‘time-to-market’ become increasingly critical, especially given the huge legacy technology estates that many banks operate with. To move forward, these estates need to be modernised, but this brings enormous transformation complexity. Similarly, the neobanks themselves, which offer signature features, are also seeing a need to expand their offerings and markets to remain competitive. 

Sources: 

*1 – https://good-with-money.com/ 

*2 – https://current.com/ 

*3 – Fintech Futures 2023