The term “neobank” has only existed since 2017, yet the forces that have led to this phenomenon have been a long time coming. Consumers are accustomed to 24/7 online services, whether it’s ordering goods through Amazon or streaming movies on Netflix. Why should banks be any different?
Thus, consumer demands have fuelled the creation of banks that are entirely digital, “open” for business at all hours, and rely entirely on convenience, remote agents, and innovative services to attract new customers.
Traditional banks have typically been slow to adopt new technologies, but learning from neobanks and incorporating digital-first processes is no longer a bonus –– it’s a must to ensure continued relevance in the coming years.
Neobanks are surging because they put the modern customer first
According to one study, neobanks offer 42% more features in their mobile apps than traditional banks, and boast two times the login speed. While many of these digital-only banks started off by providing prepaid credit cards, they have since expanded to include a bevy of other useful and convenient services. In some cases, the most innovative banks offer services that far surpass those of traditional banks.
For example, Starling, Revolut, and Monza all offer a feature called “pay people nearby,” a peer-to-peer (P2P) system that uses Bluetooth to find and pay other users in the vicinity. Low or no monthly fees, easy international money transfers, real-time balances, and instant spending notifications are just a couple of other features commonly found in neobanks.
Neobanks are known for conducting consumer research before rolling out new products, ensuring that everything they do will directly benefit the customer’s actual needs –– rather than assumed ones. Developing capabilities that save today’s busy customers precious time and effort are of paramount importance. As such, a clean frontend, useful customer-centric features, and a streamlined digital experience characterize neobanks.
Deepak Shukla, founder and CEO of Pearl Lemon, observes that when it comes to areas like investing and account opening, customers “simply want to do it on their terms,” he says. “They don’t want investments to require a $3,000 deposit, they want them to be easy to understand and easy to access.”
Kim Martin, Vice President, ID R&D agrees. “The future of banking is about ease and convenience –– enabling customers to remotely open new accounts, access existing accounts from anywhere, and perform transactions across an expanding array of digital channels and devices.”
There’s little doubt among industry experts and observers that neobanks are onto something big. But to what extent is the trend taking off?
The surge of neobanks’ popularity –– and what it means for traditional banks
Around 9% of UK adults have already opened up an account with a neobank. This number is only poised to rise, as 16% plan to switch over to a neobank within the next five years.
U.S. retail banks are hardly spared. One study finds that if the top 10 consumer banks in America continue on their current path and fail to sufficiently enact a digital transformation, they will lose 11% of their clients to digital-first upstarts. This translates into $16 billion in lost revenue and $344 billion in consumer deposits.
It’s not just banking customers who are enamored with digital-only banking. Investors are placing their bets on the growing trend. Recently, Starling announced a £60 million injection of investor money, and Revolut is currently in talks to raise up to $1.5 billion in debt and equity. Monzo is also looking to raise $130 million later in the year.
Both Monzo and Revolut are looking into moving into the US market, where the potential for success is great. In 2018, US neobanks received four times as much funding as they did in the previous year, and a dramatic 10 times more funding than in 2015. Names like Varo, Empower, Aspiration, and Chime are dominating the alternative banking market across the pond. It’s only a matter of time before they capture a significant market share, particularly among digital natives such as Millennials and Generation Z.
Despite challenges, borrowing from the neobanks’ playbook is a must
For traditional brick and mortar banks, taking a page out of the neobanks’ book is a necessity. It will likely take time before digital-only banking is the default option, but taking lessons from neobanks and other fintechs will ensure a competitive advantage is maintained as customer expectations for digitization grow in the coming years. Here are a few of the big challenges traditional banks are dealing with as the contend with competition from neobanks:
Challenge 1: Complacency
One obstacle that traditional banks face on the road to modernization is a sense of complacency around areas that are perceived as having been “addressed.” For instance, some banks believe they are digitally advanced due to mobile apps or paperless bank statements. But these modest innovations are hardly enough to satisfy the modern consumer.
According to Amy Finlay, co-founder of Edinburgh IFA, “Traditional banks are living in the dark ages when it comes to their mobile apps. For the most part, this is something that neobanks and fintechs really get right and can often be one of the main reasons consumers choose them over the traditional banks.”
Challenge 2: Onboarding processes that are still broken
In addition to an incomplete mobile app experience, industry experts say that traditional banks are missing the mark when it comes to online account opening. While many large banks allow prospective customers to begin the account opening process online, they are frequently forced to interact with multiple, non-digital touchpoints to complete the process.
“A service that I see banks offering more frequently, but still at a relatively slow pace is online account opening,” says Ben Premo, founder and CEO of TrueFees. “There are a number of fintech companies that provide effective onboarding services. But outdated platforms and operational processes continue to be a hurdle for a lot of traditional banks.”
When banks fail to offer a fully digital onboarding experience, they wind up losing customers who otherwise would have opened an account. Deloitte found that 40% of customers have abandoned a bank onboarding process, and in the majority of cases it’s due to slow, cumbersome paperwork.
Challenge 3: Security concerns
In today’s era of increased compliance requirements from bodies such as the FDIC, customer experience often takes a back seat to satisfying regulations. Kim Martin notes that “a significant challenge is balancing the need for strong security with the frictionless experience customers expect.”
On the other hand, trying to keep the bad guys in the usual ways often offers a false sense of security. “Traditional methods like passwords and ‘secret questions’ are failing banks and users on both fronts,” adds Martin. “As such, we see more banks adopting biometrics –– including voice, face, fingerprint, and behavioral biometrics –– to make authentication an effortless part of the digital customer journey.”
With the rise of AI-backed ID verification and other security-focused technologies, hard paper will no longer be seen as the gold standard. Traditional banks who investigate alternative security processes will soon realize that they can both more compliance and more customer-centric.
Challenge 4: Resistance to change
Often, banks are slow to innovate and learn from neobanks simply due to organizational resistance. Large banks, like all large institutions, are notoriously slow-moving and bureaucratic. While everyone agrees that digitizing is important, there’s a gap between what many banks claim to prioritize and what they actually do. Lack of executive support for implementing meaningful fintech is rampant.
To overcome resistance, “change needs to be implemented in stages,” according to Ethan Taub, CEO of Goalry and Loanry. “Giving the staff time to learn, practice and review new strategies and technologies. Once they have attained competency in this, you can move them on to the next process.”
Making major changes in one shot can have detrimental effects, leading to rollbacks of hastily-released features and systems. “Slow and steady wins the race,” Taub advises.
Challenge 5: Legacy systems
Adding technologically advanced features when the underlying system is outdated is like putting lipstick on a pig. “You need to ascertain what systems and technology will sync and fit well with what you currently use or have the ability to upgrade,” Taub says.
Digitally advanced customer innovations need to be connected securely to robust, core systems. Developing such systems in-house is an option, but many banks lack an innovations-focused R&D team.
Partnering with fintechs or using an API to connect with strong digital solutions may be the answer for many banks seeking to enact innovations that are actually adopted and loved by customer-facing employees.
The bottom line: Neo-fying your bank is a good investment
At least for the foreseeable future, traditional retail banks still have a place in the consumer landscape. Brick-and-mortar organizations carry brand recognition, familiarity, and prevalence that gives them an edge over neobanks for now. Yet the tides are turning, and a fast-growing minority of consumers are tired of broken digital journeys and excessive paperwork.
Likewise, traditional banks are wasting valuable time and resources over gathering multiple physical signatures from several parties, onboarding new accounts, enabling fast and low-fee payments, and many other tasks.
Lightico has found that traditional banks who switch to mobile, all-digital customer processes see a 33% faster onboarding process, a 67% reduction in abandonment rates, and a 25% increase in conversions. As it turns out, adopting technology associated with the neobank space isn’t just good for customers, but for banks’ bottom lines.