How Can Incumbent Banks Meet the Neobank Challenge?

It is estimated that there are more than 250 neobanks worldwide. Incumbent banks should focus on faster time to market for new products and services plus new ways to add value and increase loyalty with their customers, says Abdul Naushad, CEO of Buckzy Payments.

The momentum behind the global neobank movement shows no sign of slowing down in its challenge to incumbent banks. Last month, Nordic neobank Lunar raised USD$77M in additional Series D funding, which valued the bank at more than USD$2B. The Aarhus, Denmark-based bank, founded in 2015, also launched a crypto trading platform and B2B payments for small and medium business customers.

On the other side of the world, in February Indian neobank Niyo raised USD$100 million in a new financing round and announced plans to add lending and insurance to its offerings. Niyo was also founded in 2015 and claims to have more than four million customers, with 10,000 new users signing on each day.

The well-known neobank model

After several years, the neobank model is by now familiar. Most operate exclusively online and offer customers digital-first, mobile-friendly products and services, often with lower fees and lower interest rates, and accessible via an easy-to-use smartphone app. Services vary from basic online banking and debit/credit card to loans, investments and savings: up to merchant accounts, insurance – and even equity trading and cryptocurrency.

Neobanks typically start off by specialising in particular products and services. But for many, the ultimate aim is to build a multi-country, full-service digital bank offering multiple products and services – including current accounts, loans, international payments, insurance and investments.

New technology means fewer financial burdens

Unlike incumbent banks, neobanks don’t have the financial burden of staffing and managing traditional physical branches. They also benefit from not having legacy technology assets and overheads to maintain. They can pursue profitability without the cost burdens of infrastructure, physical premises, staff, and – initially, at least – shareholder dividend payouts.

Neobanks’ use of cloud technology means they avoid having to spend heavily up-front on expensive IT infrastructure. And thanks to standardised open banking APIs, neobanks can build and bring to market products and services that enable faster, more frictionless fund transfers between account holders, other financial providers, and transactions with merchants.

With these foundations in place – and sustained by a steady flow of private equity cash – neobanks are free to focus their time and effort on creating and launching easy-to-use current accounts and other products that prioritise a top-notch customer experience.

They also have the freedom and flexibility to come up with other innovative digital-based services for customers to access and use online or on their mobile phones. They can test and then roll out new digital features and products quickly and easily – and then tear them down just as quickly and easily if they don’t work out.

With these foundations in place – and sustained by a steady flow of private equity cash – neobanks are free to focus their time and effort on creating and launching easy-to-use current accounts and other products that prioritise a top-notch customer experience.

Taking on customer frustrations

The rise of neobanks comes at a time when customers have become dissatisfied and frustrated with established incumbent banks for a number of reasons – a lack of transparency, an absence of useful new features, plus hidden or expensive fees for everything from overdrafts to closing your current account and moving to another bank.

Focusing on customer frustration and other pain points is central to neobanks’ ongoing success. As consumer trust in neobanks grows and users become more confident and familiar with technology, incumbent banks are set to lose customers and market share.

Reaching niche and underserved markets

The retail banking market is overcrowded. But neobanks are finding pockets of opportunities with significant but underserved sub-markets – such as millennials, gig economy workers and micro-businesses.

It’s an approach that’s paying off. Neobanks are squeezing the market share of older established banks from both ends: at one end, with personal accounts and other consumer-facing services, and more recently at the other end with business-focused offerings such as buy-to-let loans for property investments and bridging loans for small businesses.

Banking after the pandemic

Neobanks were already in a strong position before the Covid-19 pandemic. But the consequences of the pandemic have created new opportunities for them.

Small and medium businesses need access to extra credit to help their recovery from the economic slowdown caused by Covid-19. In addition, people who were stuck at home during national lockdowns are now using online and mobile banking services significantly more than they did so previously. These changes have reportedly accelerated digital banking’s progress by up to ten years.

Neobanks are set to benefit from these developments. But if neobanks can benefit, so too can incumbents. However, to do so, they must abandon their outdated methods, overcome their reluctance to change, and adapt their operations and their mindsets to customers’ changing needs and wants.

Make digital the priority

Wherever possible, incumbents need to emulate their younger, more agile rivals. They must prioritise digital – in particular mobile. Many incumbents currently spend their money in the wrong way, on large, multi-year IT projects that eventually lead to the launch of new services. But this approach takes too long and is too expensive.

It’s a similar story with new apps and features. At the moment, a new app developed by an incumbent gets held up for at least a month in a staging area where Risk and Compliance will test and check it. That’s crazy.

Accelerate time to market for new services

The answer is to implement test-driven development. Here at Buckzy, we want our developers to write code: submit it: and 30 minutes later it’s in production. We’ve automated black-box testing and UAT (user acceptance testing), to ensure that the new features and functions we introduce are secure and don’t interfere with existing systems.

Time to market has to be the priority. At Buckzy, risk and compliance experts are part of our development teams and validate new code as it’s created, which accelerates the entire testing and resolution cycle and so reduces the time to market for new features and services.

Importantly as well, incumbents should take on board the idea, “don’t make perfect the enemy of good”. By this we mean that rather than delay the launch of a new product or service because it’s not complete, banks should not be afraid to launch it anyway, but then be prepared to make small incremental changes, updates, and improvements on an ongoing basis.

Fresh ideas and new approaches

In their ongoing contest with neobanks, the principal challenge for incumbent banks is to be more open to fresh ideas and new approaches. These might initially seem costly with no guarantee of an immediate financial return. But their value is longer-term and lies in restoring trust, retaining existing customers – and even gaining new ones.

Incumbents can ensure they stay trusted service providers to their customers by creating useful and worthwhile services that generate new incremental income, and which also define and drive the future direction of the wider industry.

For more information, visit https://buckzy.net/

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