In his latest book Breaking Banks, Brett King boldly predict the death of retail bank due to the disruption caused by digital-only banks (neo-banks). It is true that neo-banks have changed the industry, but the situation is more nuanced that King predicts. Neo-banks cannot survive alone. Without partnerships and collaboration with traditional retail banks their future is doubtful. To paraphrase Mark Twain – news of the death of retail banks is greatly exaggerated.
These two types of organizations can have a symbiotic relationship. Neo-banks lack the customer base of retail banks. On the other hand, retail banks are saddled with legacy assets hindering their agility. Banking is an industry where the disruptor has found it difficult to displace the incumbent this is in-part due to high switching costs, reputations and trust built over generations and the regulatory influence of incumbents.
To be successful neo-banks must abandon their unspoken mission to “break” retail banks. Instead they must collaborate. There are three key strategies neo-banks must adopt to survive:
- Form New Alliances: Neo-Banks cannot grow exponentially without existing bank’s support. As King pointed out on his blog, applying for banking license in each market consumes too much capital. At example of this is Moven. To compete, Moven became a software/platform company that sells tools that enable banks to better serve their customers. This symbiotic relationship is one that other neo-banks should explore. In addition, neo-Banks should explore partnerships not only with large banks, but also other fintechs. The number of start-ups is expanding and a portfolio of alliances will allow neo-banks to compete in a crowded landscape. Moven recently announced partnerships with marketplace lender CommonBond and credit card consolidator Payoff. These alliances will motivate Moven users to pay their credit balances through these app partnership and improve the lot of those who struggle to improve their financial health such as those managing student loans.
- Attract the GenY Segment: Neo-banks typically have small market share of this segment. However, they have gained some traction with GenY customers in recent years. This is a crucial and profitable demographic that traditional banks need to convert urgently. A good example is the recently-launched digital-only bank Mondo. It has attracted GenY’s attention on social media and is branded as the bank for those who hate banks. If you had doubts on Mondo’s popularity among both investors and potential customers, check out the £1 million Mondo raised from investors in just 96 seconds on crowdfunding platform Crowdcube.
- Provide Digital-centric, not digital-only, Services: Montise recently proposed the idea of “digital-centric bank” in its white paper entitled The Rise of the Digital-Only Bank: A Challenge or Opportunity for Existing Banks?. They argue that digitization is unavoidable but that digital-only is a tough stage to reach in short-term. Instead, traditional banks should follow the trend set by disruptors like Moven, Simple, and Fidor, to either partner with neo-banks, or develop a banks’own own digital channels in-house. Thus, neo-banks should actively seek out opportunities to service the short term non-digital needs of their consumers. This is important if their customers are to enjoy a seamless, trusted digital service.
Therefore, King was correct that challengers are thriving in the banking industry, but traditional banks are moving fast in the same time. It’s evolution than revolution.
Author: Shuyao Kong