Published article available here.
With more banking options than ever, small businesses will be faced with a difficult decision: stick with the trusted, old-guard or make the jump to something new. It’s this dilemma that will see Neobanks continuing their meteoric rise in the financial services industry.
Today, readily available APIs make it easier than ever to integrate core banking features into any app experience. Service providers from Unit to Solid enable young startups to build complex banking platforms in minutes and launch in weeks. This reduced barrier to entry coupled with a cash-flush market has led to an overwhelming flood of digital banks.
With so many available options, we’re seeing digital banks rapidly diverge into segment-specific solutions. From digital banks built for the elderly to Nerve, the online bank for musicians, Neobanks are relying on ultra-specific audiences to gain market share. We’ve heard the term Minimum Viable Product (“MVP”), but rising Neobanks are now champions of the Minimum Viable Audience (“MVA”).
Traditionally, consumers and small businesses pick a bank and stick with the institution for an extended period – often never switching to a competitor. However, simply offering banking services is no longer enough to retain customers. Digital-native individuals want more from the financial institutions they entrust with their money. Whether through community, commerce, or brand identity, Neobanks are unlocking new, more effective ways to connect with their customers than traditional institutions.
What does this mean for the next ten years of banking? Before jumping into the future of banking, it’s important to touch on a key pillar of this future: identity verification. The biggest pain point of opening a new bank account is proving your identity. We’re all familiar with the hours-long appointment, only to be told that your application is pending, and your account won’t be fully functional for another week. Yes, Neobanks have found innovative ways to reduce this friction by leveraging third-party identification software like Trulioo’s GlobalGateway. However, the account creation process is still where most would-be users drop off.
Exciting startups like Portabl (portabl.io) seek to address this pain point by enabling cross-device, cross-site identity verification. Incumbents like Plaid are also chasing the opportunity. This means multi-step identity verification processes may be a thing of the past. At the very least, proving your identity will not be as significant a friction point as today.
Ok, now let’s talk about the next ten years of banking. In a world with segment-specific Neobanks and significantly less friction in opening accounts at these banks, consumers and small businesses will use several banks throughout their financial lives. Yes, several.
As a kid, you use a youth-focused banking platform like Till. In your late teens, you fall in love with music and start uploading your work to Spotify. You move to Nerve, the digital bank for musicians. Five years later, you start a career as a freelance designer and begin using Novo, business banking. Your business quickly grows, and you need a platform to support your growth. Boom, you seamlessly move to Rho, a digital bank built for high-performing businesses. Years later, you switch to a platform built for setting mid-life professionals up for retirement. And so on.
This future is one where traditional financial institutions can’t compete as consumer-facing brands and platforms. They’re too big and old to be as nimble and customizable as their digital counterparts. If they can’t compete as consumer-facing platforms, then are big banks a thing of the past? Nope. Traditional financial institutions will be infrastructure-first businesses. This is a trend that has enabled tech-forward banks like Evolve Bank & Trust, Cross River Bank, and others to quickly and cost-effectively increase their total assets (deposits). Chime, for example, is a multi-billion dollar Neobank with over thirteen million users that The Bancorp Bank and Stride Bank power. This paid partnership enables Chime to offer banking to its users, increasing deposits at The Bancorp Bank and Stride Bank.
It’s highly unlikely that large financial institutions will be content with serving as shadowy infrastructure-first businesses while the Fintechs they power get all of the attention. Many larger banks will try to cultivate portfolios of various segment-specific neobanks to keep customers within their ecosystem.
There’s a lot to love about Neobanks. From no account minimums to more intuitive user interfaces, the buzzy Fintechs have found a way to make managing finances more accessible and...fun. The divergence of the space will continue for years to come, but it will culminate with the convergence of Neobanks via acquisitions and portfolios managed by traditional institutions.