I’m always struck when I read research about how neo and challenger banks are about to take over human hearts and minds, because there is always that element of surprise, as though wow, banks losing out to the upstart newcomers, whatever next?
And a recent research report crossing my desk had the headline Three in five likely to use digital banking offered by neobanks and challenger banks by 2025. The only surprising thing is that it’s not four, or four point five people think that.
This is not another bit of bank bashing I might add, before you pen a questioning email. Some years back I once interviewed a senior City of London fund manager who gave me a treatise of how good banks were. He made some good points and I found myself nodding along in unison.
Thing is though, he enjoyed a salary package that was around half a million pounds a year. He was considered by banks as ‘prime’ material and I doubt he had any problems getting the service he wanted. For him banks delivered.
But for most people, who earn a considerable lot less than half a million a year, banks don’t always deliver. Years ago banks knew they had to attract volume customer bases in order to grow, but their attitude always reminded me of what one of my old lecturers used to say: “University would be a great place without the students.” Banks would be great businesses without having to deal with the hoi polloi. Clunky tech, expensive branch networks and huge staff payrolls, means that an individual bank account is very expensive to offer and maintain, and upselling into loans, mortgages and insurance products was their only route to decent profits.
Banks are just not built for the modern customer, especially in developing countries. It’s not just not just that they don’t get their customer’s needs, it’s that they don’t even really see that their customers have needs. A customer for them is a potential pay day and unless that particular customer is profitable, then they don’t really care. Forget the adverts which show happy customers, cuddled from cradle to grave with a range of customer centric products. That’s a myth peddled by marketing personnel looking for the next shiny advertising industry award.
Big banks like the prime and super prime market, and the quicker they get back to doing that, which they do well, the better. Also, banks can also become the bastions of money, the places of safety where money is stored and sent to the wider market, funneled down to the next level, the neo and challenger banks, the real distributors.
Let the challenger and neo banks have the majority of customers because they are not only built on a truly digital model, which means an account can cost a few cents to run, but they like to put their customers first.
And this is not about a customer service department on the end of the telephone line. Customer care for fintech is an app which lets you receive and send money instantly without issues, and do so without costing you an arm and a leg. And an app which lets you do lots of cool things that give people a feeling of empowerment, not the usual confusion and dread.
And let’s be honest, a lot of the ‘new’ banks have had their fair share of teething problems (not least that their initial customer base is made up of people with weird sounding names who have a lot of cash to shift), but they are the future, especially in developing economies. They are the perfect vehicle for the non banked and under banked.
By the way, the headline to which I referred to at the top of this piece was from the just published Fintech and Digital Banking 2025 report by Backbase and IDC.
It said that digital banking in the APAC region is set to be widely adopted with over three in five customers (63%) willing to make the switch to neobanks and challenger banks in the next five years. The report also found that the region is expected to see 100 new financial institutions by 2025, ushered in by liberalization of several markets and issuance of new banking licenses.
Interestingly, 70% of APAC banking customers continue to view banking processes as tedious. This is a result of incumbent banks’ focus on legacy systems and disregarding digital-first integration. Only 30% of the banking customer base in APAC are active on digital banking channels.
The report said: “Today, incumbent banks across APAC are faced with the pressing need to up the ante on digital-first banking due to intensified customers’ need for availability, access, and control of digital channel interactions.”
Well, good luck to them. And let’s take what happened in Indonesia when the Covid-19 pandemic struck as an example of a machine which ain’t working. The country knew it had to get emergency payments out to SMEs, yet the incumbent banks could only do it through their branch network and during the crisis, guess what, the branches were closed! Traditional banking does not join up the dots.
The stage is set for the final phase of the financial revolution, as the banking giants return to happier pastures and the newcomers tap into a truly mass market of customers who know that their smartphone is their bestie.
It’s the age of the neo and challenger banks, when the traditional banks need to quietly exit stage left, happy in their knowledge that they can push the world’s wealth around, take their margin, and focus on the cream.