FinTech Flashback: Neobanks As Primary Institutions

FINTECH FLASHBACK is a series on FinTechtris that takes a look back at topics first discussed over a year ago and provides updates, dialogue, and further developments of what’s going today in the industry.

Two years ago, in the early days of the FinTechtris community, we spoke about the battle for primary relationships between digital banks and traditional banks and credit unions (read the brief, original article here). As a quick recap, primary banking relationships typically involve a checking account receiving recurring payroll deposits, paying multiple bills monthly, and providing a debit card that a consumer would consider their main card for withdrawals and purchases.

Large banks and legacy institutions have historically held the majority of these primary relationships since banking became popular and accessible over 70 years ago. Fast forward to the Financial Crisis of 2008-2009, these banks lost the trust of their primary customers who now looked elsewhere for their banking needs. Many clients transitioned over to small regional banks and credit unions for higher interest on savings and no monthly fees, but became disappointed with the lack of ATM access and services available outside of their local community.

The FinTech movement that started in 2009 offered customers additional options through digital banks (virtual, completely online FinTech companies that partnered with existing banks or obtained their own licensing to offer standard banking services). These virtual banks (commonly known today as neobanks or challenger banks in the UK) were able to offer no-fee accounts, the latest banking technology and capabilities through a mobile app, and recommendations for users to meet budgeting and savings goals.

At the start of 2018, neobanks were becoming widely popular options and quickly scaling to become fintech unicorns (valued over $1B) with top companies emerging in each global region. Larger banks and institutions still didn’t have their own offering or direct response for the FinTech threat, but they maintained market share due to the longstanding sense of trust with clients. The original article’s question of “Can Digital Banks be Primary Banks?” was directly linked to the creation and sustainability of trust within banking by these new entrants. So, what happened between 2018 and 2020?

In 2020, the answer to this question is now a resounding YES. Neobanks have become the primary banking relationship for those who have been underserved by larger banks, specifically consumers with poor credit, low savings, marginal income, immigrants, freelancers / contractors, and international students. These unbanked and underbanked groups have gained the most from fintech companies offering frictionless banking services at the same (if not higher) level of quality as institutions. This ability to bank these segments has created trust towards being a primary relationship and has earned the right to offer secondary services such as budget insights, payroll advances, and savings programs.

The graphic above confirms how valuable the primary banking relationship is for customers seeking advice to improve their financial health, and how far the fintech industry has come in the last two years. For millennial and younger banking groups struggling with student debt and long-term planning, customized advice offered by neobanks is everything. Large banks have yet to leverage transactional data into insights personalized to clients — many have just started to offer visibility about monthly spending and card usage.

The impact of the coronavirus has only accelerated this movement. For those struggling now with finances or banking access, waiting for enhanced services is no longer an option. Anticipate customers who have tested the waters with a secondary neobank account to transition to more of their primary banking activity in the next decade. Expect customers that aren’t eligible to open a bank account due to negative financial history, to sign up for banking via a mobile app. For existing banks looking to stay relevant in the face of fintech competition, there will be an emphasis on education by staff, and tools / programs to boost savings and credit-building habits.

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