By Ewen Fleming, Partner and Head of Financial Services, Johnston Carmichael and Global Lead for Financial Services, Moore Global
Digital banking has put power in the hands of the consumer, allowing them to manage their finances at the click of a button, or a tap on a smartphone, and changing forever the way we interact with money.
It has also led to the rise of the neobank – a new breed of financial institution that operates solely online or through mobile apps. Designed to be user-friendly and customer-centric, they offer instant access, minimal fees, and innovative features such as budgeting tools and handy peer-to-peer payments.
The first challenge for neobanks aiming to take on traditional banks has been securing banking licenses that allow them to operate independently and offer a range of financial products and services. The second has been reaching profitability.
Among those granted a full banking license in the UK is Monzo, which offers an expanding range of banking services to retail and business customers, including current and savings accounts, loans, and payment services.
Last month Monzo completed a fresh round of fundraising that boosted its valuation to $5bn, prompting speculation that it will attempt to re-enter the US market, this time via a partnership to avoid applying for a licence.
Neobanks have kept their bricks-and-mortar predecessors on their toes. By focusing on a few products, rather than seeking to monopolise all aspects of their customers’ financial lives including current accounts, credit cards, savings, loans, and mortgages, they have introduced convenience and flexibility that were previously lacking in the financial services market.
They’ve also taken advantage of the nervousness amongst high street banks around providing advice following the financial crash of 2008-09, and the subsequent gap in the market, for example, Monzo’s simple and popular investment product.
Their biggest advantage is without doubt, customer-centricity, which is built into the user experience as well as agility and speed to market.
But even as the Big Five UK banks continue to close branches, it would be foolish to write their obituaries.
Despite ongoing programmes to replace clunky legacy systems and expensive real estate, high street banks have deep pockets – especially after profiting from the recent high-interest rates – and have been playing ‘digital catch up’. It might take them longer, but we are increasingly seeing them take on the fintechs at their own game.
We recently surveyed more than 250 leaders of financial services institutions, who ranked digitalisation and automation as their greatest priority for business strategy and investment in 2024 and beyond.
In some cases, the incumbents have been collaborating and acquiring fintechs to secure their functionality without building their systems. For example, NatWest bought a majority shareholding in Cushon, a workplace savings pension, and BBVA bought Simple in the US to accelerate its digital banking expansion.
And those costly branches are highly effective marketing tools that providers of online banking don’t possess.
Further still, banks with physical locations and their unique status at the heart of communities, are ideally placed to guide customers through many intricacies of the financial lifecycle from account opening to bereavement and more complex financial products such as mortgages. In an increasingly digital era, it’s reassuring to have more challenging conversations face-to-face.
Physical locations can help tackle financial exclusion and not just access to cash. One of the greatest risks of increased digital banking is digital exclusion due to factors such as a lack of access to/affordability of the Internet and devices, lack of digital skills, and accessibility. A House of Lords report last year found seven million households have no broadband or mobile internet access and four million people are unable to complete a single basic digital task to get online.
I also worry that we may lose much-needed money management and budgeting skills by using less hard cash. I am sure many recognise the ease, and consequences of ‘tap and go’ on bank balances.
While more could always be done to improve financial education, banks and building societies in embracing their role within communities have recognised the need to promote financial inclusion for individuals and communities.
Over the last few years, institutions including Nationwide and Barclays have invested in pop-ups in community spaces such as local libraries. Shared kiosks have helped to retain banking services in the heart of towns and villages that may no longer have physical branches.
Branches offer much more than access to cash. Building out and taking advantage of their unique community role and engaging more deeply with a wider range of customers, while continuing to innovate, could be key to fighting back against the march of the neobanks.
