Author of Digital Era, CEO of Lugera Ukraine, CEO of FinTech Solutions
While traditional banks “built muscle” in financial monitoring, security and compliance with all regulatory standards, new players appeared in the banking market. Some call them mobile, some non-traditional and some online banks or non-banks.
To begin, all Nobank can be divided into three categories:
Group Number 1. Freestanding nobank
The most prominent representatives of this category are Starling (UK), Atom (UK), Tandem (UK), Monzo (UK), Revolute (UK), Loot (UK), Paytm (India), Neet (Hong Kong), etc. As a rule, such banks do not provide a full range of banking services. Most often, Neobank is launched with niche products – they select 1-3 key services they can offer to users. At the same time, such services are ten times more convenient and better than similar offers from traditional banks. For example, Revolut operates in the credit card niche with a very interesting proposal for currency conversion.
Group 2 Neobank created by traditional players
Under pressure from customers, technology, smartphones and new players, Classic Banks is curious about the need for change. But they are not able to change themselves quickly. Existing legacies – IT infrastructure, banking systems and technologies, zoos, digitally digitized processes, branch networks – are taking back the digital future. In this situation, a great way is to create a stand-alone new product – Nobank. Examples include ING’s Di-Ba (8.8 million customers), BNP Paribas Hello Bank (the project started in 2013 and has already accumulated over 2.5 million customers in 5 countries, of which 1.5 million are customers. – in Germany ), And, of course, Monobank from Universelbank in Ukraine. Often, such projects are targeted at new customer bases and migration of existing customers is minimal.
Group No. 3 New Player Behind GAFA (Google, Apple, Facebook, Amazon) or Bat (Baidu, Alibaba, Tencent).
Clearly, those NeoBanks that have tech giants behind them have serious advantages. First of all, technology companies are already very good at attracting customers, and for them the digital environment is their natural habitat. Secondly, due to the limitation of their other products, they can easily increase market share.
An example: Beginning in 2017, KakaoTalk (Korea) gathered 2 million subscribers in the first 2 weeks. By 2019, their customer base has reached 6 million users and represents 15% of adult people in Korea. China did not lag behind its banks. The representatives of the Middle Kingdom are MYbank and WeBank, which are the brainchild of Alibaba and Tencend. WeBank currently boasts 60 million customers in 500 cities in China, thanks to the campaign’s extensive social network. MYBank, which is behind Alibaba’s most powerful trading platform, also did not lag behind, offering loans to 5.7 million customers from the micro and small business segment. Another major advantage of tech giants in terms of financial services is their ability to subsidize financial services of non-banks, for example, lending due to the marginality of their other services. Thus, the cost will be much lower than traditional banks. It is difficult for banks to answer this, as financial services are their core business.
Experts from the largest international banking groups believe that digitalisation will lead to a 30–50% reduction in costs at banks, mainly due to a reduction in workforce (estimated estimates – up to 45% by 2030). At the same time, competition and new players will reduce the profitability of traditional banks by 10–30%. Neobanks often choose a payment niche. It is therefore not difficult to predict that, first of all, traditional banks will start losing profitability in this service. The other two pieces of the pie that banks will have to share with new players will be lending and deposits. Fintech startups and a financial management service are equally active in winning back.
Why is Nobank good?
Main benefits of new players:
- Intuitive navigation in the application and ease of access to financial services.
- Transparency in product line and competitive pricing.
- Personal banking with a niche product or service for a narrow segment of customers.
- A dynamic and open ecosystem capable of rapid scaling. The new product is launched in the market in a short period of time.
- Very fast and easy collaboration with tech startups.
Factors determining growth of Neobank:
- Change customer expectations. Neobanks often build a more comfortable seamless service while meeting customer needs.
- New technology. Cloud solutions work with new generations of platforms, artificial intelligence, big data, biometrics.
- Regulation. Due to tightening regulation, banks tightened their belts. And it’s easy for new players – regulation or “light” requirements often don’t apply to them.
- Growth of large technology companies and platforms. New players enter the financial market, and their customer base is very wide.
- Funding. Fintech attracts attention, and consequently, significant investment. Favorable financial support is an excellent condition for the growth of Nebank.
In traditional banks, everything changed as a result of several financial crises – profitability dropped significantly, business growth slowed, and at the same time, the cost of compliance with regulatory standards increased.
Banking in the old way for a long time, as they say, went into vogue. Imagine: the “ninth wave” of storms in the banking system. Thanks to the first wave, there is the rise of Nebank, created by former bankers and immigrants from other business sectors, who are tired of banking bureaucracy. During the second wave, Neobank became a new business project for traditional banks.
Interestingly, talented employees outside the banking sector are often talented. At the same time, a real surge of new players was seen in the UK. This is due to the fact that the response to the 2008 financial crisis was different in all countries. For example, in the United States, the regulator “tightened the nuts” to banks so much that it became almost impossible to obtain a license. At the same time, the UK made a strategic decision to create a more competitive market by facilitating entry for new players.
Beginners have a very interesting approach to launching products. Yes, and the pace of market capture, they are different from traditional banks. Take, for example, Monzo Bank in the UK. In order to get the earliest customer reviews and fine-tune the products, Nebank began to work on the pay card very quickly. And with an already formed customer base, the bank launched fully retail products. The Neobank Starling was only launched in the mobile version, and very dynamically built a complete set of APIs, which eventually grossed well.
What is the target audience that is targeting NeoBank?
- Of course, SMB. Medium and small businesses were not lucky at all, banks were not engaged in their attention and good service. They have so much “pain” associated with banking services that they will gladly go under the wings of Nobank.
- Banks are yet to be serviced by banks, including the younger generation.
- A growing middle class, millennials, freelancers, developers and geeks.
- Helping working immigrants and their families in other countries.
Are Niebank the winner?
However, everything is cloudless in Nobank’s firming. Among the main difficulties facing new players, we can name the following:
- believe. Neobank has no history, so it is more difficult for them to resolve trust issues with users. True, if a traditional bank or a large tech platform serves as the “core” of a neo-bank, customers will have no doubt about its reputation.
- High cost of customer acquisition. The market is still crowded with banks and other players. And if they do not have their own client base, attracting new users is expensive.
- No offline presence. The cost of a network is minimal for non-banks, but to ensure a complete cycle of financial services for customers, you will need ATMs and in some cases branches and managers.
- Profitability. This is almost a major problem. Originally, he is concerned about Niobank freestanding. All salt in their launch strategy. To win new users and markets, new people provide the most popular service, often for free. The objective is that customers should love the new bank, switch it to servicing and keep their deposits and account balances in it. However, this did not happen.
People’s willingness to try new things and their love of innovation is greatly diminished. A person is willing to make an additional movement to change the bank if he sees very significant benefits. Better yet, just a free service. We are hostages to all habits. But then a misfortune happened – customers started using the services offered by Neobank, but only much cheaper, and better – free. And traditional players still rely on their money. And Nobank already has millions or millions of users behind its back, but each of them generates a loss, as they only use free or low-margin services for the bank.
With Neobank, users can easily and comfortably, moreover, usually these players’ tariffs are clear and transparent. In addition, new players often collaborate with other startups, and their service becomes more flexible, faster, more intuitive.
What are banking services essentially? In fact, all services come down to payments, deposits, loans and financial management. Not so much, as customers, we need to. But what if all these services are automated and thanks to artificial intelligence, users can easily choose from the best offers already analyzed based on our behavioral characteristics? Presumably, only 20% of customers require more advanced personalized services.
We all feel the fruits of the monetary revolution, during which, in the way of barter and coins, money first turned into banknotes, then into payment cards, and now we are more than comfortable in our smartphones. The world’s largest players in the mobile payment market are Alipay (Antifinential) and WeChat (Tencent). Each of these companies has more than 1 billion active users. How many banks can claim for such customer base?
Big tech companies are moving towards financial services for their users. More often than not, they provide loan or cash accumulation services to customers.
Next to traditional banks, new players appear – tech giants, fintech startups and Nobank. Their influence will change the world of payments and investment. The expected loss in volume by traditional players in the payment market can range from 30% to 50%. At the same time, the reasons for these disadvantages will be very diverse: robotics, online platforms, new scoring models, lower tariffs for non-bank services. Fintech startups are difficult to compete with, as they often operate on the principle of a small team, very high speed, and very low cost.
As a result, banks are likely to modify their business models, considering options for new roles for themselves – to become a member of a platform or platform, or to provide banking-as-a-service to new players.