Neobanks still need to build personal relationships

Catalan neobank 11Onze has taken a novel approach to training its recruits in the art of building personal relationships with customers. Anyone who has used  a neobank is aware that without physical branches it is far more difficult to achieve that very thing consumers value in traditional banks – someone they can talk to, and who is designated as their personal banking advisor.

11Onze decided on a pop up Acadamy to take 50 recruits through a 250-hour training course focused on building personal relationships in a digital age.

11Onze COO Darren Smith, who is leading the training, said, “Our philosophy for the whole bank, not just for the campus, is about creating something truly exceptional. The first experience a customer will have with our organisation will be digital and we place a lot of emphasis in the technology and the user experience. However, we wanted to go much further than this. In a digital age we are worried that the personal relationships we build over time get lost and at 11Onze we wanted to bring relationship into fintech banking. We want our customers to have a long and meaningful, personal relationship with our representatives.”

Another reason for setting up the course is Covid-19 and the prevalence of remote working. The neobank’s agents will continue to work from home for some time, which is why 11Onze wanted to ensure that the recruits could also have a means to forge relationships with each other and with senior team members, as well as learn how to build robust client relationships. The bank also wanted the team members to build support networks, which James Sene, Chairman and founder of 11Onze says is impossible to do on Zoom calls.

He said: “The pop up academy was designed to provide a Covid safe and secure environment to give them all the knowledge, skills and tools required to be able to deliver an exceptionally high quality customer service experience. The Academy trained the “whole person” – and our programme places as much emphasis and priority on personal skills, mental and physical health and well-being, as it does on technical and professional skills.”

The importance of teaching customer relationship building

The Academy course delved into psychology and philosophy alongside learning to use new hardware and software. And it included yoga classes. A production team followed the new recruits and asked them to share stories of their journey and development. There is a marketing purpose behind this as Sene points out: “11Onze customers will be able to review and follow the personal journeys of our agents and this will help them develop a real relationship with the customer services representatives.”

He added, “In the digital age, we are concerned that the personal relationship we build will be lost over time, so, at 11Onze we aim to recover that “relationship” aspect that a traditional bank offers to establish links with the community in addition to withdrawing money or depositing it. We want our clients to have a long and meaningful personal relationship with our representatives.”

11Onze makes a very important point with its pop-up Academy idea: whilst challenger banks are often perceived as offering a better service than traditional banks, there are elements of the traditional way that mustn’t be overlooked, particularly customer relationships, because human psychology is very attuned to that need, and fantastic technology won’t easily remove it.

AI can lead financial services to more inclusive lending

Upstart, an AI-powered fintech lender that launched in 2012 has received a ‘blockbuster’ earnings report that has made a new billionaire of Dave Girouard, the firm’s cofounder and CEO.

While there have been concerns about sky-high valuations, Upstart’s stock “ended the day up a staggering 89%, lifting the fortune of 54-year-old Girouard, who cofounded Upstart in 2012 and owns about 14% of shares, to an estimated $1.3 billion,” according to Forbes.

Based in California, Upstart “reported fourth-quarter earnings that nearly tripled average analyst expectations and posted full-year 2020 revenue of $233 million, 42% higher than in 2019.” Girouard said, “Last quarter was monumental for us as we took the company public in the midst of a historically complex and challenging time for the world.” Moreover, Upstart forecasts its revenue will more than double this year to $500 million.

Wall Street is so happy with the figures that Bank of America and JMP Securities upgraded Upstart’s stock on Thursday, and the future promises even grater things as Upstart moves into the auto lending sector. To facilitate this, it has acquired San Francisco-based Prodigy Software, a cloud-based platform that lets customers buy cars online. Girouard said, “While Amazon and Shopify have modernized the online shopping experience, the auto industry has been left behind. Auto retail is among the largest buy-now-pay-later opportunities, and together with Prodigy, we aim to help dealers create a seamless and inclusive experience worthy of 2021.” He added, “We see at least as much inefficiency in auto lending as we have seen in personal lending. Millions of people spend far too much for car loans.”

Upstart makes loans of $1,000 to $50,000 at interest rates ranging from 7% to 36%–but it is different to some of the other main players in the way it assesses borrower risk. It uses Artificial Intelligence (AI) and other data, such as education and employment history to assess a person’s creditworthiness. This is something that Girouard believes is the future of lending: “We believe virtually all lending will be powered by AI in the future, and we’re in the earliest stages of helping our bank partners successfully navigate that transformation.”

This is not a new idea. In 2020 the Harvard Business Review published an article by Sian Townson, ‘AI can make bank loans more fair’. This examines the problem with bias in AI, as Townson says, “Lenders often find that artificial-intelligence-based engines exhibit many of the same biases as humans.” The reason for this is that the AI has been fed a “diet of biased credit decision data,” according to Townson, adding that this data has been “drawn from decades of inequities in housing and lending markets. Left unchecked, they threaten to perpetuate prejudice in financial decisions and extend the world’s wealth gaps.”

Townson believes that there is a way that AI can encourage a more inclusive economy: “The key lies in building AI-driven systems designed to encourage less historic accuracy but greater equity. That means training and testing them not merely on the loans or mortgages issued in the past, but instead on how the money should have been lent in a more equitable world.”

Banks oblivious to clients’ app-led, shadow financial lives

Information gleaned by Cornerstone Advisors in its recent study reveals “Much of consumers’ day-to-day financial lives take place “off the radar” of the traditional financial institutions that they work with.” Whilst the study carried out in October 2020 is American, it seems likely that the results are echoed in other countries and regions.

To start with, 76% of smartphone owners use fintech-created mobile apps to manage their finances, from companies such as Robinhood, PayPal, and Credit Karma.

The generational differences in use are predictable: “93% of Gen Zers and Millennials (21 to 40 years old) use mobile financial apps, 81% of Gen Xers (41 to 55 years old) are fintech users, and even 56% of Baby Boomers use at least one mobile app to help them manage their financial lives,” the study states.

Banks unaware of new customer behaviour

However, the research does throw up some surprises. It points out that although traditional banks are aware of the growth of consumer use of fintech products, they are much less aware of the ways in which this impacts them. Banks have lost some business to fintechs, but they also share customers with fintechs, and this appears to be something they are blissfully unaware of. Ron Shevlin in Forbes says, “ They think that because customers have an account with them that they’re the only bank their customers do business with.”

That is certainly not true. Consumers “don’t close out and switch accounts—they simply add another account,” the study says, and “Challenger banks – Chime, most prominently – are gaining market share among consumers and are rated extremely highly by consumers on the value they provide.” As a result, a quarter of a trillion dollars annually is flowing through payment mechanisms outside of those provided by traditional financial institutions.

Shevlin also cites the story of HNWI behaviour. One bank CEO urged a client to diversify his $5 million investment account. The client’s response was “you have my funny money—my play money. The majority of my holdings are with a different investment management firm.” This is called a ‘shadow financial life’ that is defined as “Financial behaviors and activities that evade observation from the other financial institutions they do business with.” Mobile apps play a major role in helping to create clients’ shadow financial lives.

For example, , 30% of Americans with an investment account (25 million) also have an account at a digital brokerage or robo-advisor, e.g. Robinhood, Acorns, or Stash. Furthermore, one-third of JPMorgan clients and 27% of Merrill Lynch clients have an account at a digital brokerage or robo-advisor – and the big guys don’t know anything about it.

Another factor in shadow financial lives is the adoption of digital bank accounts as a second string. About 1 in 6 Americans have second bank accounts with digital-only challenger banks, and amongst consumers with three checking accounts, 30% of the third account are at digital banks.

How does this impact on the traditional banks? First, Americans with more than one checking account keep a lot of their money in their additional accounts, as much as 35% of their total deposits. And those with three accounts, keep an even larger amount of money in their secondary accounts. The second and third accounts are also preferred for making payments by 1 in 4 consumers.

Digital banks are not completely immune from shadow banking. Among consumers who consider a digital bank their primary bank, 42% have more than one account—and half of them have that second account with a traditional bank.

Shadow finances change banking scene

One consequence of the emergence of consumers’ shadow financial lives, largely enabled by financial mobile apps, is that the function of a current/checking account has dramatically changed. It also means that the banks with  ‘primary’ account status no longer have the same opportunity to deepen customer relationships, as the customer is now more interested in “best-of-breed features, not accounts,” Shevlin says. Consumers now want the new savings apps, because they don’t want a savings account – the want to save more money, a service the apps supply. Laslty, banks still believe that marketing accounts, savings and other types of accounts are the most important focus, whereas the truth is that for everything they offer, the consumer replies, “There’s an app for that.”

Private finance is taking crypto mainstream

Last year was a turning point for cryptocurrencies. It turned blockchain from being a space for geeks into one where governments, institutions and retail traders now had a seat at the table. The 2021 GameStop story also played a major role in a change of perception.

Most interestingly, as Alex Shipp explains in an article for Cointelegraph, “cryptography and its primary feature, privacy, have been relegated from the front-and-center role they once played as cryptocurrency’s main attractions.” This has been replaced by the enticements of DeFi apps that offer “enhanced liquidity, yield farming and unprecedented economic models.”

Will 2021 be DeFi’s big year?

DeFI has become the Shangri-La of cryptocurrency it seems. Its allure is pervasive across the cryptocurrency landscape, with investors enchanted by its “double-digit APRs and seamless user experience,” which holds better long-term prospects for them than the “subtle, systemic benefits conferred by a privacy-centric exchange.”

Privacy is no longer the primary reason for entering the crypto space. Moreover, as the perceived benefits of DeFi grow, consumers are more than happy to make trade-offs to keep it growing. They really don’t want to forfeit these for the sake of privacy.

DeFi is the current Disruptor-in-chief within an already disruptive community. Now we can expect another to emerge – PriFi, or Private Finance. This, says Shipp, “brings privacy back on-stage by bringing it back on-chain — that is, into the Ethereum and Polkadot ecosystems — to integrate privacy into a robust network of rapidly evolving applications of decentralized finance.”

It’s significant because until now, “privacy solutions have remained siloed on standalone, privacy-oriented blockchains, isolated from the ever-expanding features of the DeFi landscape.” This ‘movement’ wants users to be able to have access to privacy without any trade-offs. Shipp says it could not have come at a more critical moment. Why?

The answer is GameStop. I won’t reprise the story, because I’m sure you know it. However, one critical factor is that after the hedge funds got caught over-leveraged in short positions, centralized companies, such as Robinhood, Charles Schwab, TD Ameritrade and others, restricted trading “thereby protecting the remaining capital of the exposed funds.”

This caused outrage amongst the retail investors, because these companies had essential hung them out to dry. What they learnt was, as Shipp says, “For retailers in 2021, that has meant awakening to a pair of sobering realizations: that centralized markets only remain free as long as they serve centralized powers and that surveillance is a primary supporting feature employed by such power structures.”

The trading restrictions placed on the retail traders highlighted the need for “a new line of emergent derivatives: fully private, on-chain synthetic assets whose values are securely pegged to traditional financial instruments — stocks, commodities, bonds, insurance products and more.”

The crypto space is opening up in ways the first enthusiasts probably never dreamt of, and while it may not suit purists, it is driven by the demands of the market. You could say everything has changed, and nothing has changed – depending on your perception.