New breed of banks are a threat to retail banks

Turbulent capital markets, sluggish global economy and more than heavier regulations since the 2008 financial crisis can be termed why several big banks have economized their adoption to technology and innovations.

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To start with these banks cut IT budgets over years, ultimately compelling their personnel to use outdated Windows systems which are poorly protected - if they are at all. This means receiving emails, with or without attachments and careful scrutiny of the property of the attachment, and the sender of course. 200,000 computers in 150 countries across the world, are hit by ransomware cyber-attack aka WCry, and can also go by a ton of other names including WannaCry, Wana Decryptor, and more. It targets the vulnerability to get into defenseless and exposed machines.

Miserable times ahead

This it seems is just the beginning of miserable times ahead in absence of high confidentiality and increased data security, which can be managed only with digitization of data and information. Rigorous cost cutting activities not only poses challenges like the one mentioned above; but also make retail banks fail miserably in keeping pace with customers, looking for all things digital and mobile. It further made a huge dent by opening doors to a new breed of banks – the "neobanks"; apt at delivering optimal digital customer experience.

New breed of banks

This new breed of banks walked in with agile, modular and wholly digital document management and data processing systems, backed with data analysts doing real time data analysis to assess changing consumer demands and expectations. They shook up the stagnant consumer banking sector in waves.

In year 2000, Virgin Money and Metro Bank emerged, challenging four established players in the banking and finance industry. They delivered their customers with more innovative products, better customer service, and a branch experience that made conventional approach, ancestral in terms of accessibility.

Year 2010 witnessed the emergence of second batch of neobanks. These digitally focused banking and finance institutes rammed in with the aim to disrupt players who had established their monarchy since more than hundred years then. New breed banks succeeded in doing so as not only the products, but also the services of these established banks had remained to all intents and purposes, unchanged since inception.

London was the epicenter for this second wave of neobanks. A large number of startups were encouraged, of course by progressive regulators, to boost competition in consumer banking. Number of companies applying for banking licenses has increased tremendously since then, which have become much easier than ever to obtain.

Since year 2013, 15 licenses to various players are already been granted and 20 more companies are in the talks or are going through the process. The last jolt to the entire scene was when enterprises without banking and financial service background, started throwing their weight around to grab potential opportunities arising from open banking arena.

Retail banks are really big banks

The reason to look at retail banks to be is due to the edge in customer trust, that they have and not the neobanks. They should be wise enough to launch digital subsidiaries of their own to fend off the upstarts. But the challenge these giants face in doing so is digitizing their records. Yes, unfortunately they still are operating out with non-licensed windows versions, and physical data in filing cabinets.

The need of the hour for these banks is digitized record creation and data entry of account opening forms, cheques and pay slips. Various other financial documents comprising of tax & accounting details also need digitization to go ahead & handle finances.

Secondly, these banks should identify the features that make neobanks their distinct competitor. This should then follow with the range of models they adopt and the regions in which these neobanks are flourishing. This would need them to have market research and analytics experts to help them with data modeling, data visualization and sentiment analysis for their customers. These efforts will help them with insights to challenges that neobanks face and the opportunities these challenges offer to established retail banks to get ahead in the transition to digital banking.

Should retail banks take acquire-and-absorb approach?

This has been a major point of debates, agreements and disagreements amongst leading banks and financial institutions, globally. There are two beliefs which are paving its path, where a particular segment is in favor and the other is against; acquiring and absorbing neobanks. The one who are against acquisitions strongly feel that instead of taking over, retail banks should use their resources to launch their own that is self-sufficient. The advantage these banks have is the loyal customers, who they can migrate gradually from old to new services.

However, the ground reality is far from different. While this is being read, neobanks with help of investors and enthusiastic customers and advocates are not only surviving, but thriving and influencing the direction their conventional counterparts should walk towards. If experts are to be believed, these new players may succeed in establishing themselves as leading financial service providers to today’s digital native generation. But, sustaining the same kind of growth or mass market adoption needs more investment in scale, which they might or might not be able to afford. Simultaneously, if established retail banks, do not take up digitizing their data for enhancing customer services and products, they would be indirectly supporting the neobanks flourish like never before.