Things could get worse for Neobanks

This article published on Linkedin is the second part of the previously published article “Neobanks growth factors, why they are here to stay...” . Both articles are a shorter version of the white paper “Are Neobanks poised to stay in the financial landscape?” I published on Initio’s corporate blog. You can read the full version here.

Neobanks may face tough time because…

Disappearances and consolidations cannot be avoided

As demonstrated by the successful acquisition of Nickel by BNP Paribas in 2017, when fast growing and disruptive competitors are arising it triggers traditional banks to act. BBVA already purchased the digital only US-based SIMPLE bank in 2014 and is also present in branches of ATOM’s and Holvi (a digital bank in Finland addressing the SME market).

N26 is also facing complex decisions, as Tencent, a Chinese behemoth of digital services who already own a payment service widely in use in China (TenPay) is part of its major shareholders. This participation is undoubtably a strategic move for the berlin-based Neobank to ensure its survival but is could also ring the death knell of his independence.

All Neobanks won’t be lucky enough to be backed by a powerful funder, and without solid short-term strategies to generate profit the most vulnerable should not see 2020.

Last Minute update:

On late October 2019, the French banking giant BCPE announced he was selling challenger bank Fidor which it acquired in july 2016.

Mains reasons invoked are the difficulties to integrate neobanks mind and culture into a century old banking corporation and the essence of Fidor business model. A substantial part of Fidor activities is about developing a banking platform “as a service” for others Neobanks. Obviously BPCE does not see himself as a B2B banking solution provider and is not ready to provide support and solutions to potential competitors.

An traditional bank who buy a fintech to accelerate his digital transformation, it's a dinosaur who think that the best way to learn how to climb on trees is to eat a monkey...

Innovation is limited

Most fintech solutions are so far from current business models and structures that it is hard for traditional banks to picture the innovation curve and target the right innovations.

Yes, the onboarding process of N26 is superfast and friendly. And Monzo has done remarkable work on its open and transparent communication but beyond performant mobile applications and real time payment notifications, it’s business as we know it.

Because of regulatory constraints and barriers to entry, Neobanks and Fintech must be disruptive to outperform current business models. Using Blockchain in combination with Crowdfunding or crowdlending options could be examples of deep transformation able to build sustainable profitability.

The Brexit could stop the European expansion.

Atom, Starling, Revolut ... are all British Fintechs operating on UK banking licenses. In case of Hard Brexit - which is more likely to happen every day - they will no longer be able to access the European market. A catastrophic scenario for Revolut for whom France is its second largest market. As a backdoor, the bank is actively working on the obtention of ane-money license in Luxembourg (and a “full” license in Lithuania).

Good Customer experience is hard to build and harder to maintain

From the pessimist’s point of view, for traditional bank’s customer “Bad experience comes with the package”. But still customers’ loyalty is related to that same package, despite bad experiences habits and long-term relationships cannot be broken that easy.

Neobanks are starting from scratch and must convince with the promise of optimized customer relationship and as smooth-as-possible user experience. If they fail to deliver, it’s the core perceived value which is at stake.

For a long time, it was not possible to use Debit-Mastercard provided by N26 or Revolut in many park meters or with highway payment terminals. These interoperability hindrances were treated as top priority for both of them, knowing that such restrictions could be serious growth-killers. 

 Reputation is a double-edged asset.

As Neobanks are operating online we can assume that they will have to build strong data security processes to avoid suffering from reputational damages. If their incumbents’ counterparts have yet wide customers databases with quite high client loyalty, as newcomers these online players could be killed by such incident and will not be able to benefit from years of notoriety.  

We could take the story of “Hush” as an example of what could ruin a promising market entry. The poor reputation of Its funder, Eric Charpentier, after failing to launch “Payname” has scuppered the French fintech ICO-based fundraising. It works the same for well-established companies when they get involved into public scandals, such as Facebook with the Cambridge Analytica case. These reputational factors are key to build and maintain trust in the market.

 Being Online only may be insufficient to maintain strong customer relationship

Amazon and Apple have learnt that already, when products become more complex, online sales must be supported by brick and mortar point of sales.

According to a study conducted in 2017 by Mastercard , on average 6  out of 10 consumers across Europe already use digital banking apps, (vs. 9 out of 10 consumers in the UK), but only 14 % would agree to switch to an app-based only bank with no branch network.

Being mobile only may be deterrent for customers adoption; N26 the “Mobile only” bank is maintaining a fully operational web app while Revolut might propose a web-based alternative to his app soon.

Even if millennials and digital natives are accustomed to online only services, there is a gap between using a smartphone for streaming service subscriptions and to commit to a financial institution exclusively through chatbots or app notifications.

An interesting way to avoid this pitfall could be the balance between online services and some kind of agile-network of point of sales and support. Nickel rely on a growing network of point of sales located in tobacconists, and C-ZAM or GoBank are building customers’ journey from trusted sales points such as Carrefour or WallMart stores.

With these innovative models where clients will be given the opportunity to open bank accounts or subscribe car insurances from supermarket’s front desks, we can foresee that standards are about to change.

 Transparency has its limits

Transparency is part of the DNA of fintech and often used as a major sale argument. Online banks are building customers centric communicate on strategies based on transparency and private media channels.

Monzo used wisely such strategy, including communication about fraud prevention or customer insights crowdsourcing. But these private channels could also may also backfire. Starling, for instance, discovered that forums could be diverted by a hyperactive minority using the communication space for private issues putting at risk data protection of sensitive customer information.  

To keep the control of its communication, Starling decided to discard the forum and to focus on newsletters. If these abuses and drifts do not question the core value of the bank, they demonstrate that when it comes to customer support and complaint management it is not always easy to find the right path to differentiate from traditional financial institutions.

Incumbents are not dead

Many “influencers” and innovation-guru from the web claim traditional banking is (almost) dead and that the future of banking rely now on Fintechs (or GAFAM). It would be presumptuous to ignore the capacity incumbent banks to react and thrive to maintain their market position.

In Belgium, the digital leadership is already owned by incumbents such as KBC or Belfius, who can afford to pursue massive investment for many years in order to maintain their advantage without sacrificing their profitability. In France BNP Paribas will invest from 2 to 3 billion euros in its digital transformation within the next 2 or 3 years and has already launched its spin-off Hello bank in several European countries aiming at drawing millennials’ and digital-migrants’ attention.

To read conclusions and details about 5 possible scenarios for the future of Neobanks, I invite you to read the full white paper “Are Neobanks poised to stay in financial landscape?”, published on Initio’s corporate blog.