Thought Leadership

Digital-only banking: bold moves needed

Getting into the wealth management space may be a winning strategy for digital-only banks.

ith their digital-first model, neobanks are setting up new standards of customer experience, ease of use and low cost banking. Additionally, they have a big impact on the market by driving innovation and improving financial inclusion. Next to customer experience as such, they have attractive options to engage new customers, such as budget management or financial education for kids – but the profitability of these services is low.

Neobanks share this struggle with challenger banks (institutions that maintain a network of brick and mortar physical agencies next to their “fintech” spirit) and digital banks (often a digital-first arm of large financial groups that have a long history of traditional banking), however with a different set of constraints on their business model. In particular, most of neobanks are focusing on payments and daily-banking needs of retail and – to a smaller extent – small business clients.

The dilemma of scaling a digital bank does not only boil down to increasing the number of customers. It also entails adding new features and products to get a chance to become the primary partner for multi-banked users and to diversify revenue streams. As most neobanks start off with a minimum viable product (MVP), extending their value proposition over time is a natural flow of things. Indeed, many banks do offer products that go beyond daily banking and lending is one the popular domains for scaling neobanks, as first proven in China by WeBank. However, creating a full spectrum of banking products including loans, cards, savings, investments, or bankassurance remains the domain of traditional banks.

The question remains whether it’s possible to offer more complex products, especially the investment ones, without exorbitant fees and unnecessary complexity.

Ksenia Goncharova, Sales Manager Banking & Insurance - Benelux and France Region

Sealing up money leaks

Despite a rapidly growing number of customers, most neobanks and digital-only banks are losing money year after year. They tend to focus on creating the customer experience but struggle to generate revenues. In the long run however, as with any startup, the success of a digital bank is measured not only by its unique value proposition or the way it disrupts the market. To guarantee revenue streams, startup banks commonly apply either the ‘freemium’ or the ‘subscription’ models. The former comes with a set of basic features available free of charge and more comprehensive ones available for a fee, which makes the bank reliant on cross-sell to boost revenues. The latter is where all customers are the paying customers but typically with a very low price for a starter package and attractive rewards in the form of cashback or higher interest rate.

Diversification of the offer is seen as another possible solution to pave the way for profitability. Players that decide to include investing in their offering can do it in a number of ways, with three approaches being most popular: via simple model portfolios of different risk levels, via direct trading accounts or via a marketplace.

For instance, the American Acorns grants its clients access to pre-defined investment portfolios to put aside small amounts of cash to work with. This might be the way to go not only for pure digital players but also for high-street banks that put a big focus on regular savings and investing one step at a time. KBC in Belgium is one of the outstanding examples with their “invest spare change” program that rounds up all expenditures on a client’s account and turns them into an investment plan.

Other players, such as Tinkoff out of Russia, go in the direction of online brokerage portals, offering their customers a low-cost and transparent platform for investing in a range of securities. They also offer an “investment academy” to help their clients navigate the complex world of funds and stocks.

Another approach – very characteristic of fintechs – is a marketplace where clients can benefit from the services provided by pre-selected third parties. The UK-based Starling bank, for instance, cooperates with Nutmeg, Wealthify and WealthSimple digital wealth managers.

The future of aviation is strictly tied to several factors

No small task

Entering the wealth management realm poses significant identity risks for neobanks. Simply put, the more complex the banks grows, the harder it is to stick to its original purpose of offering a premium client experience at low cost. Partnering up with other fintech players is one of the most promising paths to success here but the inherent turbulence of shareholding is a risk to consider.

Credit: claffra / iStock (Getty Images Plus)

How to build an offer

Contrary to mainstream banks, neobanks are well positioned to appeal to first-time investors, in particular tech-savvy ones, among whom many are millennials. Therefore, focusing exclusively on small-ticket service only with automatic investment of spare change, setting aside money from each paycheck and other types of regular investment plans fits well the purpose of neobanks.

But nurturing young investors and leaving them no other choice than to jump ship once their wallets become thicker would be a missed opportunity. To bridge this gap, the key options may be to partner up with other financial institutions that specialize in investments, be it in form of embedded service or a marketplace, or invest in frictionless wealth management technology accessible to customers with premium subscription plans. The latter inevitably puts digitals banks in ‘front-to-front’ competition with high-street banks, adds much pressure on costs and has a long-lasting impact on the strategy of market development.

Regardless of the chosen path, neobanks should use their main assets and innovate in investment journeys: playing with the concept of long-term horizon enhanced with short-term rewards, or giving the clients an incentive to come back to the platform regularly.

Learn more about Comarch Wealth Management

Main image credit: gilaxia / Getty Images (E+)