How are Neobanks Disrupting the Traditional Banking Industry?
The new wave of neobanks entering the market has challenged every part of the traditional banking model, increasing competition to gain market share and exceed customer expectations. But how are neobanks disrupting traditional financial service firms?
- Neobanks typically focus on a narrow use case or product. They identify gaps, problems or pain points within existing offerings and engineer more complex services to attract clients by improving that service.
- Their focus and ability to provide more innovative services quickly and conveniently—at a lower rate with a better user experience—has reinvented the processes and practices of traditional banking models.
The need for neobanks in today’s market arises from society’s growing expectations for stronger, more seamless digital journeys regardless of device, location or consumer needs. The inflexible nature of traditional banking services—deriving from unsatisfactory digital and in-person experiences, barriers to completing transactions and the disconnect between services inside business units—is a significant pain point for customers.
The limitations of traditional banking models have created a gap in the market, allowing challenger banks to capitalize on the negative perception of the industry. They need to offer a positive service that makes it easier for customers to interact with and consume services, while also offering a more cost-effective and convenient service in order to attract customers. To do this well, neobanks need to address several challenges both internally and externally:
Internal Challenges
Scale – A lack of funding and initial resources can be a considerable limitation for many neobanks first entering the market, as they face pressure to build scale and attract customers faster than competitors.
Customer Acquisition – While consumers are looking for better experiences, they may initially be hesitant to move their entire banking relationships to a new, “untested” challenger bank, making it difficult for neobanks to grow quickly without an existing large customer base.
New Models – Since every offering is built from scratch, it will take significant time and resources to establish a broad product and service portfolio, hindering the speed of expansion within the company.
Regulations – While neobanks are keen to move quickly and be disruptive in the marketplace, they still need to remain compliant with regulations across all jurisdictions.
External Challenges
Existing Banks – While there is a need and opportunity for neobanks, competition from traditional banks is still a significant barrier – whether it’s from incumbents that have been trying to build innovative services to withstand disruption or tech giants who already have these digital capabilities and are looking to enter the industry.
Market Resources – Traditionally, incumbents have major resources (both within their workforce and budgets), regulatory credentials and most importantly, loyalty from their customers in an industry where trust is extremely important.
Offerings – Incumbent banks have built their product and service offerings over many years, and while they may not be engaging or flexible, they still are available from a single bank provider – unlike neobanks who do not have this luxury.
Re-Engineering – Several neobanks have been burned by moving too fast because their platforms were not scalable, robust or flexible. Money and time have to be spent re-engineering these solutions to expand product and service offerings, improve reliability and enter new markets.
What traditional firms are demonstrating is that scale matters. The breadth of product offerings is important to consumers. If convenience is your main selling point, forcing a customer to go elsewhere for products that you don’t offer is a major impediment. Brand and reliability are also important—and we’ve seen what traditional banks have faced with recent platform outages or security breaches.
By focusing on innovation, speed and differentiation, neobanks can offer experience-based value and address customers’ existing pain points, completely differentiating their current offering. Their core banking systems are built around a network of microservices and form an agile working model that can implement new features and changes with a shorter lead time. While neobanks cannot expect to enter the market at a high profitability rate, they must plan to monetize beyond the current offering, and their agile workforce must transform into an environment for constant innovation.
In Asian markets, we’ve already seen that non-traditional banking services are attractive to consumers—social media platforms are proving that there are many financial transactions that can take place outside of a bank or even a banking app. Neobanks that are still maturing in the current market need to broaden their product offering as quickly as possible while also maintaining quality, reliability and trust. While neobanks will continue to fight to gain significant market share to become self-sustaining, there is still a huge opportunity to change the very future of banking.
Fueled by open banking, AI and the emergence of API-enabled architectures, neobanks have the tools and motivation to focus sharply on the actual needs of customer and provide a better digital experience; one where banking becomes invisible, enriched and embedded into customers’ everyday lives.
