Banks are winning the digital war but for how long

  • By Christine St Anne

While consumers currently trust banks more than digital only providers, there are a number of factors at play which makes the newer digital entrants well positioned for the future.

Latest research from the RFi Group Global Digital Banking Report has revealed that consumer trust in new digital-only banks is slightly lower at 6.5 – out of 10 - compared with banks on 7.5.

However, newer entrants will benefit from emerging themes in the market such as the rise of consumer comfort with digital-only providers and the emergence of the multi-banked consumer.

For RFi Group head of strategic partnerships Gerald Ferguson, the outlook for neobanks and fintechs is further strengthened in the current environment where the big banks are driving their customers to embrace digital banking.

“Digital banking was always about the future of banking but that has quickly become a reality ‘now’ as the banks have responded to the [Covid-19] crisis by further encouraging their customers to adopt digital banking,” Ferguson said.

It comes at a time when a recent global study (The Global Digital Banking Report) by RFi Group has revealed that consumer comforts levels with digital banking continues to grow.

 


Source: Global Digital  Report, RFi Group

Interestingly the study was taken before the pandemic and for Ferguson the shift in consumer preference towards digital banking is a big positive for the neobanks.

Importantly comfort levels around digital banking is also growing across all age groups and not just the millennial segment.

“The market was already moving towards the digital world and it was only a matter of time before the incumbents would really start to make their play in terms of ringfencing their customers by better meeting their growing digital banking needs. The crisis has provided a further impetus to that approach.”

The other emerging trend that could play well for neobanks is the emergence of the multi-banked customer.

Again, RFi Group data from the Digital Banking Report has revealed that a growing number of consumers are now using more banks.

While salaries are likely to go to an established bank, more and more consumers are starting to use digital only providers for everyday spend.



Source: Global Digital Report, RFi Group

Again, there is an opportunity here for the neobanks as they tend to focus on a particular product or solution which solves  a particular problem,” Ferguson said.

He adds that the customers that are most valuable to banks – the 25 to 35 and even 40 year olds are also now multi-banked.

“They are more likely to hold their mortgage outside of their main bank. They are more likely to go to another provider outside their MFI to buy another product.

This does not mean they are shifting away from their MFI, but it does mean that the share of wallet conversation is now even more important,” Ferguson said.

“Moreover, this conversation will not just be about interest rates but also about the best type of services or value a customer can get from banking.

That’s why I think neobanks still have a huge part to play in the market. 86 400 is a great example of that through their service which allows customers to look for the best energy plans.”

It also comes down to giving consumers a choice.

“Consumers still want the ability to compare products which will keep the big banks honest. I think that is an important function of the neobanks.”  

For Ferguson, this was ultimately the objective of the government’s decision to greenlight the entry of challenger banks – giving consumers choice and boosting competition.

Here, Ferguson notes that there is still money flowing into fintechs, highlighting the recent $433 million backing received by Xinja.

“The market still believes there is room for these banks. That is important. Similarly, consumers will still use neobanks because they still see value in them and still see them as convenient.”

Going forward, there could, however, be scope for consolidation but not among the existing neobanks, rather it will be about “peripheral players in the value chain” – around onboarding and credit decisioning – that will come together to provide a one stop solution that could actually challenge a larger bank.

Ultimately however will the neobanks be able to remain sustainable on the slice of the pie outside the MFI relationship?

Ferguson notes that at some stage neobanks will have to start offering lending – 86 400 is already in market and acknowledges that in a low rate environment the sector does confront funding challenges.

However, neobanks like Judo Bank are already making inroads into SME lending. Despite the current challenges, the likes of Judo Bank and digital lender Prospa have received government COVID-19 funding support.

“It’s going to be an incredibly competitive market going forward. But that will only mean that this will drive bank propositions to be even better. It’s going to drive value for the customers and challenge everyone it the market to offer a service or product that needs to be truly unique if they want to take market share.”

For further insights on the latest global digital banking trends from RFi Group, contact Gerald Ferguson at gferguson@rfigroup.com.