Neobanks… are they really the answer?

Anyone who knows me or has worked with me understands my passion for innovation, technology, and the intersection of both with great design in the provision of services, such as in the case of neobanks and digital banking.

I have been an active and passionate advocate for digital banking and the fintech revolution since its beginning.

In the early 2000s, I jumped ship from the world of consulting into the world of finance, joining the team at Egg bank, the world’s first online bank in the United Kingdom. Many of the ideas and products we built back then are still being discussed and pondered today. The key difference is that advancements in technology has now reached the point where many of the things we once dreamt of doing are now very much achievable.

How we would have loved ubiquitous smart phones, cloud storage, apps and Application Programming Interfaces (APIs)! How much fun we would have had with robo-automation, microservice architecture, and data analytics. And the endless possibilities that Artificial Intelligence (AI) and its spin offs present would have been our playground.

So I find myself disappointed by the lack of progress in digital banking two decades later.

As an ROI measure against industry hype and the attendant media coverage, the value returned on neobank investments has been minimal.

Sure, there have been a few scattered cases of innovative offerings — uBank has created a uniquely digital experience for a younger segment; Revolut has deployed some interesting technology in the vertical business-line of foreign exchange (although at the time of publishing this article, there has been some recent bad press and noise regarding technology failures and funding issues); and Australian-based Judo Bank is going from strength to strength with a modern, flexible technology architecture and a business thesis very focused on local small to medium businesses.

However, many of these new financial service providers are actually focused on discreet product verticals such as home loans or forex infrastructure or an under-served segments such as SMEs. They are not neobanks, which are characterised by being online-only financial institutions that offer internet-only financial services and lack physical branches.

The latest payment trend buy-now-pay-later (BNPL) is not revolutionising a customer’s experience of financial services. Rather, it is disrupting the credit card industry. In the world of wealth management, insurance, savings, and small business banking, BNPL does not make an impact — it is purely a product-based disruption, not anything more systematic.

So why are we, the end consumer, not yet reaping the rewards of a host of fintechs and neobanks that are fundamentally shifting the baseline of banking services?

So why are we, the end consumer, not yet reaping the rewards of a host of fintechs and neobanks that are fundamentally shifting the baseline of banking services?

A big part of this issue has long been a bugbear of mine: there is now an overwhelming emphasis on start-ups in the digital banking world that magically spring up and take on long-established corporate behemoths. Coupled with an unhealthy desire to start a company with the aim of simply turning it into a unicorn (a billion-dollar company with a single product or service), this has created a culture that is short instead of long on innovation.

Rather than using smart technology to build a world class credit engine, or a digital identity (ID) algorithm, all we hear about is how many neobanks are chasing another authorised deposit-taking institution (ADI) licence from the Australian Prudential Regulatory Authority (APRA).

This unhealthy desire to start a company with the aim of turning it into a unicorn has created a culture that is short instead of long on innovation.

At what stage do we ask ourselves how many banks do we actually need? Are banks the only way we have to solve some of the complex finance and banking challenges facing customers? And if neobanks are the solution, what is the actual wicked problem we are solving?

Surely this is a question APRA needs to ask. The recent Xinja failure and debacle (harsh but true) highlights the challenge of the neobank but also shines a spotlight on the environment that we have created that drives this type of behaviour. We celebrate big wins and the large capital raisings to the point where anything but a valuation of ten times future earnings or more is considered a failure.

We risk failing to create focused fintechs that can play a crucial role in improving efficiency and encouraging productive innovation within the broader financial services system.

With recent advances in technology, opportunities to build platform-based businesses abound. Ecosystems can evolve around the core components of data and channels-to-market to create amazing experiences for customers when it comes to their money (yes, money, customers don’t say credit or finance). Opportunities exist to rebuild the way money is distributed, how “credit” is priced, how customer loyalty is rewarded, how banks can help customers achieve their financial goals (e.g. owning a home or travelling overseas). Other opportunities exist in how we move money around the global banking systems.

But we don’t need to build a new bank to achieve this.

The introduction of open banking standards across the globe plus the existence of industrial-scale cloud-based platforms like Salesforce, Google, AWS, Mulesoft, and Microsoft — plus a host of banking as a service companies like Mambu, Basiq, and Fidor, have enabled unique opportunities. These systems can integrate a customer’s banking needs with other aspects of their daily business lives such as online retail, payments, health insurance, wealth management or payroll, scheduling, invoicing and inventory management for small business customers.

Great fintech businesses can and should be built embracing the new open banking standards as well as adapting to new societal norms and attitudes around credit, for example. New ways to buy or rent a house can be designed and built. Insurance provision and payment can be disrupted, new products can be developed and algorithms deployed to support financial planning and wealth management. And superannuation and post retirement are certainly ripe for disruption. So get ready.

Great fintech businesses can and should be built embracing the new open banking standards as well as adapting to new societal norms and attitudes around credit, for example.

The fact remains that despite the post-Royal Commission tarnish in Australia, traditional banks still have some key components that neobanks need. They have large numbers of customers; they have built and maintained the necessary technology core banking capabilities; they have smart long-term investors with the capital required to continually run and upgrade a complicated business. Moreover, they have deep connections and networks in both public and private sectors, have experienced risk and compliance teams, deep relationships with technology vendors, smart and passionate employees, buying power across the procurement spectrum, and the extra capital needed to keep the regulators happy under the Basel commitments.

They unfortunately also have inertia in oversupply.

Neobanks can access and build some of this, but key parts of the equation are extremely difficult to acquire. Customers, for example, tend to be in short supply. Regulatory capital, too, poses an issue. Neobanks, on the other hand, have the advantage of a burning platform to build a business, a product, or a service and to build it quickly; they have a more natural affiliation with “test and fail” language; they act in an agile and nimble fashion, unencumbered by legacy systems, processes and policies; and they have a drive to succeed quickly (an “anti-inertia”, if you like).

So, smart individuals with a desire to build a successful tech-enabled business can pick a multitude of entry points into the financial services ecosystem and get cracking.

Instead of competition, collaboration and cooperation should be at the forefront of their work ethos. In this industry, leveraging and learning from other players and spotting potential partnership opportunities are highly valuable.

Certainly, there is a need to take on the inefficiencies and inadequacies of many of the larger financial services players. But simply trying to build a better version misses the opportunity in front of us. It creates competition which drags innovation away from the real target: to evolve the entire financial system to one that serves customers in better ways, delivering products and services that make a real difference to customer’s daily lives, while delivering positive commercial outcomes to the providers.

Pure neobanks are currently a distraction. Yes, a distraction. While their promotors will discover and build componentry that is worthy, they will always struggle to get those to market quickly and in a commercially viable way.

For me, that feels like a wasted opportunity.