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Customer experience – game changer for neobanks in retail

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In the new banking world order, Neobanks continue their impressive march northwards.  With Brazil reporting  43% adults with digital-only bank account, India at 26%, Ireland at 22%, Singapore at 21%, Hong Kong at 20%, and UAE at 19% (online bank adoption survey by Finder), the transaction value for Neobanks worldwide is expected to level out at $ 9 trillion by 2027 (based on Statista). 

Aided by typically lower fees, quick online verification, and customer-centric applications, customers, especially tech-savvy customers (18-34 years), trust the innovative services Neobanks offer.  The crucial differentiator, without a doubt, is customer experience.

As a growth indicator for neo-banks, customer experience ranks just after fees/charges and security or risk-related considerations.  This becomes crucial when seen in light of the 2021 Plaids report.  The study posits that 30% of Americans use some form of online banking, and while neobanks may not be their primary FI, they are being increasingly sought for their banking products.  Furthermore, the J.D. Power Direct banking satisfaction study shows neobanks lead traditional banks in personalization and tech innovation but must close the gap when it comes to customer service.

So much, so that neobanking customers are more unforgiving as compared to those who have accounts with full-service traditional online banks.

The critical dimension of customer experience can be seen in detail by taking a closer look at the following 3 areas.

Differentiated Financial Products

Neobanks’ tech innovations, rapid iterations, and nimbler mindsets mean faster go-to-market outcomes.  Contextual to the customer segment, neo-banks are more likely to get the product-market fit right.  Take, for example, Chime customers who belong to a younger demographic.  Traditional banks serve them poorly due to their unpredictable life situations regarding income, education, employment, and expenses. They are better served by the low-cost innovative financial products that resonate with their needs - products that Chime offers. 

Higher customer acquisitions and retentions come from the agility to understand the target segment’s needs and rely on the robust back-end IT setup to cover emergent needs seamlessly.  This is where traditional banks falter, as they grapple with legacy structures and always end up playing catch-up with the features that neo-banks already offer.

Needless to say, the pace of introducing best fit products is higher in neo-banks. They create a USP by identifying an unserved or underserved segment and move beyond banking to package other services quickly e.g., the US-based Step adding crypto and stock investing for teens.  Many such use cases proliferate across mortgages and lending portfolios.  There is a flip side to this as well.  Adding a significant customer base and matching offerings brings complexity to customer servicing – an already pain area for the neobanks.

Additionally, the ability to spot trends early and make course corrections to their products holds equal importance.  Some neobanks - Volt and Xinja - thrived on their initial product innovations but overlooked the changing customer needs, only to lose out on their promising starts.

Low-Cost Basic Banking Functionality

Neo-banks derive their advantage by focusing sharply on bringing down costs by enhancing the experience through hyper-selected product sets like checking accounts, loans, savings with credit cards, etc.  While the ease of access via mobile channels is multiplied by user personalization built on customer context, neo-banks embrace cloud-based architectures far quicker than traditional FIs.  This translates into easier infrastructure scaleups and need-based costing.

So, for their end clients, while neo-banks can offer lower and more flexible cost structures, reducing the cost base also means acknowledging an inherent difficulty in servicing customers. A revealing statistic from a current study validates the above argument.  47% of neo-bank customers felt it convenient to reach a banking customer service representative, compared to 61% of direct bank customers.  Neo banks customers further reported higher challenges in resolving problems through customer service channels like human, email, or messaging interventions.

Superior Experience

Lower cost structures that feed innovative product-market fit underpin the neobanks success story globally.  While this is true, the third dimension of this narrative relates to the need to simplify the overall user experience as contextual to the target segment.

A financial insights survey of 17 new banks showed that nearly 80 features were uncommon, and 386 were rare among the surveyed list.  But still, the bank, with the lowest unique app functions, had the most extensive customer base.  What is the learning here?

More than spending time on developing special features, neobanks are better off enhancing the overall customer experience.  Clootrack analysis of 80k+ customer reviews and conversations show that convenience and app performance are the top two factors driving customer experience across traditional and neo banks. So , what does the ‘customer experience pie for Neobanks’ look like?

To begin with, UI/UX is one such component.  There are others – like data usage for hyper-personalization, maximal multi-channel reach, seamless omnichannel experience, customer servicing effectiveness, AI for engaging customer interactions, and employing advanced analytics to unearth functionalities to the customers' unarticulated needs.  Then there are the privacy, security, and trust considerations, which become even more crucial in today’s cookie-less internet.

In essence,

The neo-banking landscape has shown tremendous promise for the past few years. However, with 400 new banks serving close to one billion clients and high valuations, as per Simon-Kucher & Partners, they are far from being profitable. Only a few (less than 5%) are breaking even like Starling Bank, atom etc.

While the focus is squarely on profitability through an intelligent strategy mix of acquisitions and enhanced product line-up, more is needed. What might work is a solid approach that not only combines a focused product set contextualized to specific customer segments but a best-in-class customer experience executed through a superior servicing mindset.

In the case of traditional banks, a tremendous amount of data based on their long association and purchase history with customers is available.  Still, their ability to analyze or leverage that data could be improved. Till such time, neo banks can get their game right and capture larger share of the market.

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