June 4, 2019
Studying the properties and composition that make up the FinTech ecosystem
Welcome to this week’s industry analysis with the FinTech Chemist. While I may not be literally mixing solutions and preparing reagents, I am studying and testing out the latest and greatest in FinTech. My most recent experiment has led me down the not so linear path of neo-banks, not to be confused with Neo from The Matrix. Although a fully digital bank does sound a bit Matrix-esque… But I digress.
The concept of neo-banks is said to have truly started in 2009, with the UK as the standout. The FinTech-meets-science-geek in me not-so-secretly enjoys the fact that some of the first players were Monzo, Starling, and Atom Bank. While places like Europe and Australia have embraced these new challenger banks, the US still lags. However, are they finally ready for the spotlight?
When it comes to testing a new concept, it is best to follow the scientific method:
Make an observation
Ask a question
Form a hypothesis, or testable explanation
Make a prediction based on the hypothesis
Test the prediction
Make an observation: We all remember the financial crisis of 2008. What started with a subprime mortgage crisis in the states, led to a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers in September 2008. Observation? Scarred and unhappy people were going to shun the larger banks in favor of smaller, disruptive competitors.
Ask a question: Why didn’t consumers immediately jump at the chance to embrace digital-only, mobile-forward banks?
Form a hypothesis: While the US has seen more and more challenger banks pop up, there still seems to be a trust gap. Lately, the US seems keener to build solutions around payments, lending, and investing, not opening an account with an unknown name or brand. Consumers still seem to gravitate towards the incumbents because the already-established players seem to be enjoying the best of both worlds. They’ve been working hard to adjust their full-service models with digital banking. Neo-banks are also facing the reality of now needing to be profitable. While the majority, such as Chime and BankMobile, have been successful in signing up millions of users, the trick is holding onto them while generating a profit.
Make a prediction: Charles Keenan said it best, While mobile banking startups might be perceived as a threat to larger banks, they still have yet to show they can make a profit. In the US, there are around 40 digital banks. It’s shocking that more haven’t cropped up, but that’s because we’re seeing US startups join banks, not challenging them. Banking and payments consultant Faisal Khan stated, However, it will take more than a better customer experience enabled by technology to motivate customers to open an account or switch from their current bank, despite their general dissatisfaction with the current financial system. These new experiences need to focus more on customer behavior – something banks get, but startups need to work on more. What will ultimately make a digital bank stand out from legacy banks that are improving digitally is the way it handles data.
Test the prediction: While we’re clearly still in a testing phase in the US, I genuinely believe millennial are at the nucleus of this phenomenon. According to a Gallup poll, millennials are 2.5 times more likely than Baby Boomers and 1.5 times more likely than Gen Xers to switch banks. According to an article in The Balance, The primary appeal of neo-banks, particularly for millennials, is their streamlined and tech-centered approach. Neo-banks offer mobile banking, but they can go beyond the standard features and offer things like faster loan approval and funding compared to regular banks, low or no banking fees at all, broader ATM network access or ATM refunds and built-in money management & budgeting tools that give millennial banking customers more control over their finances.
While neo-banks are still evolving, they at least seem to be having a positive impact on how consumers manage their finances for the time being. Now, onto my next scientific… I mean FinTech hypothesis adventure. Also, as always, remember to take your vitamins!