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.