The rise of neobanks, fintechs and what sets them apart from the big banks
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Investors can see that the tide in financial services is beginning to shift towards neobanks and fintechs.
The regulatory backdrop is in place, with new Open Banking laws set to foster increased competition in a sector long-dominated by the incumbent players.
And on the ASX, evidence suggests that a number of listed fintechs are beginning to get some serious runs on the board, if recent share price performance is anything to go by.
But just because momentum is increasing, can investors be sure they have a full grasp of what comes next? Do we really understand these new competitors and what their value proposition is?
To learn more, Stockhead spoke with Benjamin Weldon — Australia-New Zealand regional director at AppDynamics — about the rise of neobanks and fintechs and how they are different.
AppDynamics is a Cisco-owned app performance management (APM) solution provider. It has served several companies in the financial sector from traditional global banks such as UBS to local fintechs such as Moneysoft.
Knowing your customer is based on companies proactively gathering information about their clientele as they use their services, just as Facebook and Netflix do.
Neobanks say utilising data allows them to create better customer experiences. But how does this look in practice and is it useful?
Weldon pointed to examples such as warnings when an account balance was low or when free trials (which needed a customer’s credit card details to begin) were about to expire.
But while the traditional banks also have data capabilities, it’s more a case of they just aren’t as equipped to capitalise on them, according to Weldon.
“Consumers are looking for richer data insights and personalisation in order to make better, more informed financial decisions,” he explained.
“While many banks are already investing heavily in applications to drive customer loyalty and revenue, it’s the failure to monitor the performance of these digital services that is putting them at significant risk of losing customers to another bank, or emerging neobank.
“Through Open Banking and APIs, neobanks will have the advantage of leveraging these rich insights without the added requirement of years of data capture and storage.
“The nature of the subscription economy we now live in also means hyper-personalisation, transactional insights and other more tailored products and services will become faster to release.”
One of the reasons Australia’s big banks are big is because they host multiple divisions in addition to retail banking. Private banking, insurance and superannuation are a few examples of additional services they offer.
But neobanks in Australia have a simpler business model, concentrating mainly on retail banking and to a lesser degree loans. Fintechs, meanwhile, are typically focused on specific applications such as payments and accounting.
“It is no longer necessary to be everything to everyone,” Weldon said.
“Neobanks and fintechs have effectively broken up the ‘banking experience’ into more manageable, consumer-friendly blocks.
“Banks and financial institutions are instead becoming specialists in certain domains, offering different products tailored to different market demographics and the changing needs of their individual consumers.”
Weldon also noted that it wasn’t just neobanks seeking to specialise, but that the traditional banks were also simplifying.
But neobanks and fintechs don’t necessarily sell themselves, with the fact that they’re online and new being a liability as well as an asset, according to experts.
Swinburne University professor Steve Worthington said last year 40 per cent of Australian adults never switched from their first bank.
“Challenger banks, fintechs, neobanks all face this challenge — they don’t have the history or scale or government backing (real or implied). Many are joining with incumbents to get that brand recognition and scale,” he said.
But there are advancements that are supporting new entrants. Over two years ago the federal government handed down its budget and asked APRA to open the doors to new market entrants.
And that has enabled neobanks to become authorised deposit taking institutions. All five Australian start-ups have in the last year. This means in the event the bank goes bust, the government will cover up to $250,000 per person.
Brand recognition is another challenge, particularly when online.
“Neobanks have to rely on ‘first impressions’ rather than the long-term relationships Australians may have had with their bank since they were children, for example, the Commonwealth Dollarmites program,” Weldon said.
“Arguably, consumers are more willing to accept slowdowns and outages from their traditional bank over that of an emerging neobank they are trialling, based purely on an established level of trust and the length of their relationship with a bank.
“However, if there is significant instability that impacts a bank’s net promoter score (NPS), it is likely that this will encourage customers to search for alternative financial services providers.
“If traditional banks take too long or fail to act on the changing needs of their customers, there is an opportunity for neobanks to acquire new net customers.”
Weldon said the key for neobanks was monitoring, identifying and resolving issues before they cropped up.
But just the risk of a tech breakdown could hurt neobanks more. An AppDynamics study in 2017, revealed 45 per cent of Australians would change their bank if the mobile app was not up to scratch.
Because it’s only early days in the emergence of neobanks and fintechs, Weldon said only time would tell how long it would take them to become profitable because of the significant investments required.
He pointed to the UK as an example of an ecosystem a few years ahead of Australia and noted neobanks there were still addressing this. But Weldon still believes local neobanks will see “incredible growth” over the next five years.
At the moment there are no neobanks directly listed unless you count Up and UBank. These are subsidiaries of listed major banks Bendigo Bank (ASX:BEN) and NAB (ASX:NAB) respectively.
But stand alone neobanks may be on the ASX sooner rather than later. Over the weekend as, it closed its most recent capital raise Volt CEO Steve Weston said he wanted to list on the ASX later this year.
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