Has COVID helped Neobanks make an impact in Australia?
It’s almost two years since the Hayne Royal Commission’s report into the banking sector’s misdemeanours was published. The 70+ recommendations provided plenty of opportunities for Neobanks to tempt the customer to make a move to a new provider. But how much has changed since then? Has COVID hindered or helped? History suggests it might take more than a massive slap on the wrist and a pandemic for the traditional banks to be worried.
In the UK in the late 80’s the then Midland Bank (now part of HSBC) launched a telephone bank — First Direct. Backed by a colossal advertising budget, striking monochrome branding and innovative approach to customer service, founders Peter Simpson and Mike Harris took the market by storm, reaching 500,000 customers in less than 20 months and 30 years on service 1.3m customers via a web app and phone. Many have tried to emulate the First Direct formula, few have got close. First Direct has consistently topped the table for customer service in the industry and it is their world-class service above all else that created 1.3 million customers who are justifiably called fans; referrals are still the main source for new customers.
Ten years after First Direct appeared, co-founder Mike Harris went on to launch Egg — the world’s first internet bank — providing savings, mortgages and general insurance products. Again, branding and simplicity for the user were key factors for success. In just five years they became the largest internet bank with 2 million customers, before being bought by Barclays and Prudential. In their case, they got swallowed up by the incumbents, perhaps as a defensive play, but evidence of the threat they presented to the incumbents. Even in the 1990s and early 2000s, disrupters threatened the status quo, albeit in not a particularly profound way and the incumbents were more than capable of handling them.
Neobanks are pure-play digital banks. They don’t operate on traditional banking platforms or infrastructure, preferring to adopt their own or white-label cloud-based Software as a Service (SaaS) approach. Funding and developing the necessary technology platform and in parallel addressing the needs of local banking regulators and compliance officers is a costly and time-consuming business. Still, a surprising number are emerging in most major markets globally.
In the UK there are now over 40 licensed Neobanks. Not all are operational, but it’s clearly an attractive market for those with deep pockets and a dream of a better way to do banking.
In Australia, Neobanks are gain ground. Xinja, Volt, 86 400 and Douugh, and Revolut from the UK are all either launched with licenses from APRA or about to launch. Their main challenges are:
Funding to get off the ground — 86 400 reckon they need $250m in the first three years from their private and public investors. Douugh, on the other hand, is trying the crowdfunding route.
Time to scale and profit — Revolut in the UK took five years to reach break-even month by month. They have 2 million customers. Starling took four years to get to 950,000 accounts and are still not making money.
Cost-to-serve as they grow — Monzo added 750,000 customers in 12 months, but their losses quadrupled to £33m ($AUS 60m).
Getting customers to switch and stay — most Neobanks find themselves being used as an add-on bank rather than a replacement. Monzo’s average customer deposit value is £150. ($AUS 272.00).
The impact of the COVID-19 pandemic has been to push Neobanks to cut their interest rates — one of their strongest selling points versus traditional lenders.
Westpac reckons there are around 100,000 people in Australia who think it’s cool to have a challenger as their bank. For sure, the potential market is bigger than that. In the UK, research shows 11% of the adult population either use or plan to use Neobanks. The equivalent in Australia suggests a market size of approximately 2.7m. The difficulty is in getting them to switch — particularly given the pressure on interest rates.
Getting customers to move is difficult. A mere 17% of retail banking customers expressed a desire to move their accounts away from the top 4 banks, according to research done by GrowthOps a couple of years ago. To put this into context, in his seminal book Crossing the Chasm, Geoffrey Moore describes how new product adoption happens in retail markets. He reveals that the early adopters — those who buy simply because it’s a new shiny thing — represent 16% of the total market. They need little or no encouragement to purchase.
And in response to all this, it’s actually not that hard for the traditional banks to address competitive threats with their own armoury of digital marketing, neo-style products of their own or perhaps gobble up and aspiring Neobank through acquisition. Incumbents have deep pockets, customers and broad reach. Provided they too focus on continually improving their mobile experience, simplifying and cost-cutting their operations, collaborating and innovating — sustained, profitable growth is almost guaranteed.
The pandemic has driven more customers to embrace contactless payments and online banking. ATM’s are disappearing. Branches are closing and cash is becoming less of a processing burden. Operating costs are falling as well as providing more encouragement for investment in new technology. The future doesn’t look quite so gloomy after all for the big 4 banks.
For sure, some new ‘First Directs’ and ‘Eggs’ will appear. Still, the Neobanks need to learn from the disrupters of an earlier age, use their agility and focus relentlessly on their customers. A clearly differentiated proposition and an awesome brand experience creates fans who will join, stay, recommend and advocate. They may not become dominant, but with lean business models and the ability to react quicker than the incumbents, Neobanks can survive and even thrive post-COVID.
