The rise of the neobanks Part 2

Payment transactions have certainly been a winner for the neobanks, thanks to their speed and lower fees, as I mentioned in my previous article. One of the other ways in which these challenger banks are stealing a march on the traditional banks is in the area of lending and credit products. For starters, the neobanks are able to provide their credit products with lower charges and interest rates, and in the Medici report “Neobanks: A global deep dive,” the authors use Brazil’s Nubank as an example of this advantage.

Nubank does not charge fees for using its credit card. It allows its customers to lock and unlock the card, ask for an increase in their credit limit, as well as change the due date for repayments, and all this can be done from the Nubank app. That makes the customer’s life a lot easier. You may wonder how Nubank makes money. The report says that it does this in two ways: first through customer transactions, and second, through financing a part of, or the total amount of, consumer invoices. It relies on a public database for all its customer data and groups customers into hundreds of different profiles. This is its way of screening out unqualified customers. Furthermore, unlike many other credit card providers in Brazil, it does not charge any fees as long as the customer makes their payments on time. And now it has added a current account and a rewards programme to its product offering.

What’s happening with neobanks worldwide?

Another of the things that the Medici report highlights is the geographical location of neobank startups. Where would you guess that most of these challenger banks start their journey? Perhaps you think it might be Silicon Valley, or Seoul.

Actually the highest concentration of neobanks is in Europe, and within Europe, the United Kingdom is home to the greatest number of them. Why and how has this happened, especially since neobanks have shown the most rapid growth since 2016, and the UK has been in political turmoil since that year over the vote to leave the European Union, which it is due to leave at the end of October. Medici explains the situation: “the UK has a high concentration of challenger and neobanks owing to two factors, chiefly.

One: compared to the US, which has very high numbers of large banks, the UK has far fewer. Two: when it comes to digital banking, the UK can be considered an early adopter, going back to the dotcom boom between the late ’90s and early ’00s. This provided it a ‘prime-mover’ advantage, through which the UK came to be at the forefront of challenger/neobanks and alternative models. Another factor providing the

UK with an edge in this space is the EU’s common standards being introduced, which has aided neobanks rapidly expand their customer base while remaining in compliance with regulations.”

The last reason will seem ironic to those in the UK who are against leaving the EU, and if the country is to retain its advantages for neobanks, it will need to retain those EU regulations.

The banks that have led the European ‘Charge of the Neobank Brigade’ are Atom Bank, Tandem Bank, Monzo, Starling Bank, Revolut, and N26.

For full details of all the neobanks worldwide and an overview of their services, I recommend you read Medici report for a fuller understanding of how neobanks are changing the banking sector, especially for the retail customer.

The rise of the neobanks Part 1

Neobank trends in 2019

Neobanks as you probably know are digital-only banks and in the last year they have made significant inroads into the retail-banking sector. In part this is due to the loss of consumer trust in conventional banks, following the global recession and it is also due to growth in the customer’s willingness to use online banking and banking apps, rather than depend on a physical branch for services.

According to the Bank of England, it expects to receive at least 130 applications for banking licences before the UK leaves the European Union at the end of March 2019, which is another clue as to how this sector is growing; indeed, the majority of the most successful neobanks are for the moment, registered in the UK, Revolut being an example of one of the most successful of the new style banks.

Trends in 2019

What are likely to be the key trends in neobanking this year?

Marketplaces

Existing neobanks have set up marketplaces to provide customer-centric products as part of their collective mission to provide more than a digital version of traditional banking. This model is likely to expand and to gain more customers in the small and medium business market.

More accurate customer targeting

Neobanks are data driven and they have access to far more customer data than the traditional banks, simply because they are able to monitor customer behaviour through their use of the banks’ apps: Monzo for example, have their data analytics engine hooked directly onto their front-end and back-end systems. Also, Monzo for example, have their data analytics engine hooked directly onto their front-end and back-end systems, which puts them in a better position than the traditional banks and enables them to serve a bigger range of specific customer needs within their target markets.

More autonomy

Autonomy is the common key driver in each of the neobanks’ successes. The way they are structured and operate empowers each person or team to create products in whichever way they see fit, without the need for excessive governance structures. Even the traditional banks are starting to adopt this model and we will see more neobank offshoots of the big retail banks in 2019.

4 trends impacting banks in 2019

Thought leaders ATOS published “Toward next-generation financial service ecosystems”, which analyses mega-trends in financial services and why we should all prepare for a fundamental shift in the next few years.

As its report says, banks are at a crossroads, and the “rise of non-banking platform companies are now disrupting the most profitable parts of the banking value chains. New players could capture up to a third of incumbent banks’ revenues by 2020.”

ATOS has identified four challenges and opportunities that will have the biggest impact on banking, providing they leverage the emerging technology.

1. Faster response to customer demands

Retail banks that adopt digital tech will see a 5% to 20% boost in revenues thanks to an improved service. They will also reduce their network costs by anything from 15% to 35%, and increase customer satisfaction by 10% to 15%. In advanced economies, two-thirds of banking customers execute half their financial transactions online. Customer loyalty is becoming elusive and branches are less relevant as a result. To respond, banks may shift from a product-centric to a platform- centric approach focused on customer-driven strategies.

2. Optimise costs

Fintechs are more agile and have lower operating costs than banks, making for strong competition. Digital banks can enjoy a cost-to-income ratio of below 30%, whereas banks are in 40% to 60%. Banks have some options, including shifting to lower-cost, standardised utility processes for selected administrative activities and using AI to improve customer response times and reduce employee redundancies.

3. New revenue streams

With banking business models changing thanks to neobanks, there is a need for traditional banks to reassess their position. They could position themselves as a hub platform and introduce new services for underserved segments of the community, such as mobile only banking for Gen Z and the unbanked.

4. Develop security and compliance systems

Customer data has now become a ‘product’ for financial institutions and this requires enhanced security and insights, which could be provided by AI. For example, PSD2 requires banks to implement secure application programming interfaces (APIs) to make account transactions and data available to third parties. Developing system using AI-generated insights from civil and military intelligence could dramatically reduce the cost of cybercrime and enhance consumer trust.

There is nothing here that is earth shattering; it is what many have been saying throughout 2018, yet the banks continue to be slow in their response. Perhaps 2019 will the year they wake up and start moving forward.