What do banking innovators have in common?

There have been many studies, blogs, book,s newspaper articles, etc on the qualities entrepreneurs have in common. Now the Digital Banking Report’s “Innovation in Retail Banking” gives us a view of how innovative leaders in banking perform.

According to The Financial Brand, these banking leaders share three important characteristics: they generate greater profits, they leverage new technologies, and those of advanced analytics. As a result they achieve higher satisfaction scores.

Why is this important? The simple answer is, because the financial institutions need to embrace innovation and join the digital revolution. That requires strong leadership and a certain amount of fearlessness. Those leaders will need to challenge the current system, as well as push the limits of the available technology. But, perhaps most importantly, the banks need to put the spotlight on the customer, and they need innovators who understand this.

Complacency is the banks’ biggest enemy, and it is something they are finding it tricky to get around. After all, they have been around for hundreds of years in some cases, and have a sense of entitlement. If their shareholders seem content, and the majority of their customers happy, then why do anything to move with the times? This attitude is what is helping the digital challengers.

The neobanks have discovered ways to deliver a more keenly price service and a better customer experience. As the Financial Brand says, “Unlike the iterative innovations from the past, a premium is now being placed on “big ideas,” agility, and real-time application of data for personalized contextual experiences.”

What the banks need to do

For the banks to embrace innovation, they need to think in terms of interdepartmental co-operation, as well as being prepared to break up their legacy systems and rethink them. They also need to look outside their own world and find more opportunities to collaborate with fintechs and look at a range of more up-to-date solutions. They should be incorporating AI, robotic process automation, blockchain and the Internet of Things amongst others into their thinking.

There is also a pressing need to retrain employees. The Financial Brand points out that we are facing a skills shortage, so the banks not only need to embrace retraining of existing workers, they also need to rethink their hiring strategy and bring in more of those people who have been immersed in digital technology since their early years.

The leaders in banking who will win this game are those who are able to embrace these challenges and take their organisations into a new future. The banks without leaders having these qualities will surely get left behind.


How to be a winning neobank

In Europe the neobank sector is looking very healthy. It has been boosted by the implementation of PSD2 (Second Payment Services Directive)

This September, otherwise called Open Banking. This effectively means that all the incumbent retail banks have to “release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online,” as WIRED reports. Open Banking has been happening in stages since 2017, but now we have reached peak Open Banking.

This new legal framework, along with the creation of EMIs (Electronic Money Institutions) supported by PSD1, is about to revolutionise user interaction, and it will also make a major contribution to the rise of the neobanks. It basically gives them an even greater opportunity to increase their market share in the retail banking sector.

However, there are some issues. The neobanks can’t yet offer all the services that the traditional retail bank does. That is not because of regulatory issues, or an inability to deliver a service, but because they don’t have enough funds. While neobanks may raise capital during funding rounds, and even though it may look like quite a significant amount, the big retail banks already have much more capital than any of the neobanks in their coffers.

Customer trust is another issue, especially for those consumers who are used to having a bank branch to visit. The concept of a ‘virtual’ bank with no branches makes them nervous. This has not been helped by some of the neobanks experiencing security issues. For example, Monzo asked a large proprtion of its customers to change their PIN when an unexpected level of fraud was discovered. Hacking is a security concern, as is data privacy. The latter is a problem for all banks, but neobanks are especially vulnerable.

We are also seeing the incumbent banks step up their digital activities through acquisitions, which they can easily afford. Neobanks cannot compete at this level, not can they become more exposed to risk at any cost just. There is a very real opportunity for neobanks, because they are more agile and can offer a better consumer experience, but what they need to work on now is building up consumer confidence — the neobank that nails this one, will be a winner.

When banks partner with fintechs

How the neobanks tackle banking’s big problems

Neobanks are having the same effect on banking, as quantum theory did on our ideas about reality, Medici suggests. Furthermore, digital banking has become a part of our everyday lives.

Stash CEO, Brendan Krieg, claims that his company has gained over 3 million customers since 2015. He says that the reasons as to why they have become so popular is that they’ve studied the consumer, and discovered that the average person wants to live a better financial life. Perhaps it is unsurprising that Stash’s average user is a 29-year-old who makes $50k a year, not a bad salary for a Millennial these days. But, success, Krieg suggests, is down to the fact that Stash’s app makes it easy for people to invest.

As Medici points out, the neobanks have gained their successes because they are meeting the customer where they are and are finding ways to connect advice, banking, and investing in one experience.

This applies not just to Stash: it’s a global phenomenon. The leading success factor for the major neobanks’ growth appears to be their superior customer experience compared to the traditional banks.

The redesigned mobile and web applications, and smooth customer onboarding, have enabled players like Monzo, Atom and Starling Bank to grow at speed.

Also, by eliminating costs associated with physical branch maintenance, neobanks are able to reduce the fees associated with key products.

However, while the customer experience seems to be the neobanks’ key selling point, there is another factor. They are solving the bigger issues with conventional banking.

For example, they are looking at innovative product offerings and improved customer service. Medici gives the example of Open, a neobank in India. It has integrated automated accounting and payment gateways with their current account offering. Furthermore, its platform enables startups and SMEs to integrate banking and accounting in one place using a multi-bank connect feature. And Open helps startups and SMEs to manage employee expenses in a seamless way.

Another example from India is InstantPay. It is focused on bridging a gap that traditional banks have not looked at since banks opened in India, and that is some time ago. InstantPay drives financial inclusion in a responsible and sustainable way and has reached 10,000+ PIN codes, and caters to 50 million unique customers.

Anish Achuthan, CEO of Open, said, “Most Startups & SMEs generally use multiple dashboards and interfaces for invoices, bookkeeping, and online payments. Making vendor payments and employee payouts have always been a challenge. All of this drains entrepreneurs and finance teams of their time & energy.”

Western neobanks have been successful largely because of the customer experience they offer, while in the Asia-Pacific markets the neobanks have to take a step further by answering core banking problems in the industry, such as like ‘knowledge transfer,’ ‘undocumented logic,’ ‘technical debt,’ and a ‘skills/desire gap’.