If you are outside the confines of East London or the fintech community, it is unlikely that you would have heard the term ‘neobank’. Put simply, a neobank is a branchless digital-only bank. Unlike traditional banks, which focus on what financial products or services they can sell to customers, neobanks aim to get the whole ‘job done’ by focusing on fulfilling a core set of customer needs.
Over the last few years, the pace of start-ups creating digital-only banks has accelerated significantly to the point where the Bank of England expects at least 130 applications for licenses before the UK leaves the European Union. Here are some of the key trends we expect to see over the next year…
More than just banking
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. N26, Starling, and Revolut all have implemented a marketplace model that offers direct integration via APIs to third parties, such as loan and insurance providers. This type of marketplace model has also started to show up in the small and medium enterprises business market. Indeed, Starling Business recently announced integrations with online accounting software provider Xero.
The marketplaces may be in their infancy, but they are growing in terms of the products they offer and level of integrations. In doing so, neobanks will service a far wider segment of customers than a traditional bank as they vie to become the centre of solving the wider customer need rather than just a bank they use to get part of the ‘job done’.
Neobanks are data-driven in their decision-making and the modern platforms they are built on allow them to collect and analyse far more data than traditional banks. Monzo for example, have their data analytics engine hooked directly onto their front-end and back-end systems.
This allows them to see how their customers behave in the app, what they spend on and how much. The potential, however, is to use this information to create behavioural cohorts that group customers based on all their actions with the product, rather than segmenting them with one or two data points, such as a credit score.
For example, traditional banks serve business banking customers based on their turnover range (£0-2m £2m-£7m etc), neobanks have much more information available to them and can target customers with high cashflows, who use their app a certain number of times and spend in certain locations. The impact is that neobanks are in a better position than traditional banks to serve a bigger range of specific customer needs within their target markets.
Autonomy & execution
When neobanks first popped up, they brought about a new way of working to a traditionally bureaucratic industry, adapted from principles used by software developers and start-ups.
Autonomy is the common key driver in each of the neobanks’ successes, whether they be in product teams, engineers themselves, or the tools used in the organisation. They empower each person or team to create products in whichever way they see fit, without the need for excessive governance structures. The speed at which they can deliver their customer-centric products, therefore, increases as does the number of firms as they each address a niche customer problem.
This way of working can be seen in almost every neobank in the market today and is even starting to spread to traditional banks, who look to seed their own offshoot neobanks. Autonomy will be one of the biggest trends over the next year in the neo banking market and perhaps even the wider financial services industry.
If you want to learn more about neobanks, please feel free to reach out to Dan Jones, Partner, Capco Digital.