There are two important things I attribute as the major factors in this disruption.
Firstly, the decline in the average customer visits to a branch. It has been more than two years since I opened a bank account and I haven’t visited any branches yet. A survey revealed that 75% of millennials either never visit branches or do so once a month or less. Secondly, the increased adoption of smartphones. According to GSMA’s Mobile Economy report, by 2020, around three-fifths of the global population will have a mobile subscription, with close to one billion new subscribers being added over the period.
At the same time, we can’t neglect the high failure rate among the fintech startups. ING’s head of fintech, Benoit Legrand, says, “Those guys [neobanks] are competing not only with the big banks but also with the Amazons, the Googles, who have an immense power. We look at Alipay for instance. It’s a tricky game.” Of course, app-only banks need deeper pockets if they’re going against Goliaths. Nevertheless, I see three main reasons that will help Neobanks conquer the future.
1. Innovation
Innovation is at the heart of this fintech disruption. The credit score calculation is one such example that shows how innovation is changing the game. Gone are those days when there were no proper methods to calculate the credit score for the customers with no credit history. Predictive and social media analytics are being used these days. Peer-to-peer lending, home and education loans are also following suit.
2. Near-Zero CAPEX
This is one of my most favorite terms that I use to describe cloud-only enterprises. For app-only banks, there is no need to set up branches, scale the infrastructure and buy assets. All they have to do is to develop a brilliant app and scale-up the resources in cloud as per the demand. This almost-zero capital expenditure (capex) helps neobanks cut huge costs and pass on these benefits to customers in terms of very less or no fees for transactions.
3. Customer Experience
The world around us has changed a lot. We are well aware what Amazon and Uber did to our lives. Whereas we are still banking the same way our parents did. Neobanks are doing a remarkable job in completely changing the banking experience of a customer. Though the products neobanks offer are same as traditional banks, they impress customers with features like real-time analytics and cash flow forecasts. These banks are basically technology companies with a banking license and they’re digital first. The speed at which one can open a savings account, using their apps, is amazing.
Though neobanks have their own challenges like attracting customers, long-term cash flows, security concerns and so, I can see a lot of potential for them, especially in developing countries. In a country like India, where half a billion population is financially excluded, I see more opportunities than problems. Hence, I do agree with Bill Gates when he says that, “Banking is essential, banks are not.”