Neobanks: Can They Maintain Their Pulling Power?

Last Month, We Looked at the Competition Between Neobanks and Incumbents. Now, We Explore the Ways Neobanks are Staying One Step Ahead of Their Rivals

Neobanks have been disrupting the status quo in banking for some time now. Last month, we drew the battle lines between neobanks and incumbents heading into 2024, exploring how challengers have taken significant market share from their legacy counterparts and what incumbents are doing to catch up. 

Now, we hone in on neobanks and look at the technologies and innovations they are deploying to stay ahead in the technological banking race, and ask: can neobanks keep the ‘neo’ tag and maintain their pulling power? 

Neobanks: Their pulling power today

Today, it’s clear neobanks hold an advantageous position, technologically speaking, leveraging AI, machine learning and cloud services to provide more convenient customer services. 

But, as we explored last month, legacy banks are in the process of overhauling legacy architectures and repositioning themselves in today’s digital landscape with the latest tech.

Their staying power has been customer loyalty, but Jeremy Grinbaum, Area VP for EMEA at Amplitude, suggests incumbents have somewhat shot themselves in the foot during the process of transforming their operations.

“Now, bank branches are shutting, but the desire for personalisation remains,” he says. 

It could be, then, that now is the time for neobanks to further capitalise on a legacy banking sector in a state of transition. 

Making gains on old traditions

To do so, challengers “need to recreate these personal, small-bank experiences digitally,” adds Grinbaum. 

“With long-established banks still overcoming encumbered legacy systems, this opportunity truly falls to the cloud-native, agile neobank.”

So far, this is where neobanks have been thriving. After all, they were “built around the core aim of customer-centricity,” notes Louise Potts, Head of Banking Customer Advisory at SAS UK.

“Their focus is not limited to providing the best transaction experience or pricing, or bundling their core products,” she adds. “Neobanks go far beyond this, delivering complementary services such as flagging better deals, or providing cashback rewards and loyalty programmes.

“This superior level of customer experience is cited time and time again by consumers as a reason for switching.”

And there is so much more neobanks are capable of doing to prize customers away from incumbents. 

Grinbaum continues: “Challengers can serve notifications and recommended actions where and when appropriate. For instance, delivering an in-app push notification about progress toward a financial goal. 

“Pairing this with a recommended next-best action can be a game-changer for retention — and trust. If a neobank understands its users’ goals and why they take the journeys they do, then it can tailor communications to improve the product experience. 

“Establishing this type of trust will increase retention and present opportunities to cross-sell into more areas of financial portfolios.”

Several other factors allow neobanks to more effectively curate and design products and services when compared to incumbents. Namely, as Potts notes, “the ability to engage target users based on their interest and spending patterns.”

She explains: “Klarna is one such example. Using a machine learning-based recommendation system to determine consumer purchase patterns, Klarna can offer appropriate shopping recommendations or financing offers.

“We are also seeing neobanks deploying technology designed to track customer engagement performance, allowing them to more effectively measure the success of initiatives and products, helping to inform decision-making.”

Neobanks: Reaching lofty heights

The market truly is primed for neobanks to capitalise on the slower pace of incumbents and establish their position as challengers. 

In fact, the global neobank market is expected to grow at a Compound Annual Growth Rate (CAGR) of 54.8% until 2030 – from US$66.82bn in 2022 to US$292.7bn in six years’ time, according to Grand View Research. 

But how will neobanks achieve this mid to long-term growth prediction? What innovations will get them there? While they can capitalise on a legacy banking sector which is in transition at present, legacy players will inevitably catch up to match the tech employed by neobanks today.

For Potts, this boils down to continued leverage of the latest technology, such as AI and machine learning (ML), and tailoring it to meet ever-changing customer needs.

“To deliver a stronger level of engagement with customers, neobanks need to be able to leverage customer-specific insight in their client interactions,” she says. 

“AI and ML allow neobanks to get this insight from the data they hold about their customers. Leveraging that insight at the point of engagement – especially in real-time – allows them to have a contextual, relevant and timely engagement via the optimal channel.

“As well as allowing neobanks to address current customer needs, the insight gained through AI and ML will help identify emerging customer needs and enable banks to drive proactive engagement with customers. 

“For example, in the area of collections, understanding customer behaviour and changes in their circumstances can help identify those that are potentially moving towards a stressed financial situation. 

“By picking up on potential indicators, banks can engage with the customer and help before that situation becomes a collection or recovery engagement. This is better for the customer and the bank or financial organisation.

“Whether banks can successfully use AI and ML to hit these ambitious growth targets depends on several factors beyond just investment in software – for example, correctly prioritising which areas of the business to target first, and making sure they have sufficient in-house skills to fully exploit the technology.”

Retaining pulling power

Leveraging technology for use in real-time, then, is a future that neobanks should continue working towards – engaging with customers when necessary and taking pre-emptive action to protect both their own and their clients’ interests. 

They can go even further, too, according to Grinbaum, staying ahead of the curve by understanding the financial end goal of every customer they serve. 

He says: “Take the example of someone using a product to pay off student loans. While the transactional component of making payments and saving money is important, the way to go above and beyond is to ask the question, ‘why does a particular person want to pay off their student loans?’. Maybe to buy a house, start a family or open a savings account for their kids.

“Challengers need to view their product from the user’s perspective: start with a financial goal and then build an exceptional product experience to support that.

“The question then shifts to, ‘is the product helping users achieve their desired outcomes?’. Success metrics used to track the customer journey include acquisition, activation and engagement. 

“All three hold importance, but measuring engagement often isn’t the main priority for challengers, as their products are designed to be used for a specific purpose and for shorter periods of time. In this instance, a better indicator of success would be task efficiency, where users are both completing tasks and achieving their intended outcome.”

Speeding up the time it takes for consumers to complete tasks and transactions is an area where neobanks should look to hyperautomation, according to Potts. 

She adds: “Hyperautomation enables more sophisticated services to be delivered entirely online, for example securing finance to complete the purchase of a new car. 

“This is the simultaneous use of digital operating systems, workflow, robotic process automation and AI – typically via the cloud – to deliver high-value autonomous processes through intelligent decisions. 

“It enables a faster, quality service where it’s also possible to pass cost savings on to customers.”

Continuing to deploy these technologies with the customer at heart is therefore the key to long-term success for neobanks, as Grinbaum concludes.

“Taking on legacy institutions is no easy feat,” he says. “But, by focusing on understanding their customers’ goals and ensuring their product is supporting users, challenger banks can come out on top and set themselves up for long-term growth.”

The only question that remains is what incumbent banks will strive to do to keep pace with their digital challengers…

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