The Rise of the NeoBank
I am sitting on my sofa enjoying the last few hours before 2016 will start in full and I am in a reflective mood. I have been earning a living in FinTech for many years and I’d like to think that I have been innovative in several occasions but I have never really tackled the biggest Fintech Innovation challenge of all: If I could completely redesign a retail bank what would I do? What would the NeoBank look like?
The best place to start would be with customers. I would try to understand why customers come to a bank. I am sure that most people do not wake up in the morning yearning for financial services. Most bank customers don’t want a credit card they want to buy a new gadget they can’t afford today. They don’t want a savings account they want to earn interest on their surplus cash.
As a first step I would go back to first principles. A redesigned bank ought to be truly customer-centric. It would not be concerned with selling products but with meeting customers’ basic financial needs — keeping in mind that these are always means to an end. No one needs a financial product; customers need what the financial product enables them to do.
I would group customers’ basic financial needs into three groups:
They need to pay someone
They want to do something they don’t have enough money for
They have a surplus of cash and they want to protect it
The NeoBank would therefore offer only three products designed to make the life of its customers better. These products (or product families) could possibly be structured as follows.
The Universal Payments Account
This should be straightforward and easy for customers to use. At its core it would hold a wallet where all the cashflows coming to and from the customer can be captured, analysed, visualised and managed.
This account must make it easy for the customer to pay for things in any way they choose to do. Ideally a customer would be able to use any payment device, channel, process and method they wish — including cheques and cash. Imagine a NeoBank account that when opened it automatically:
· Provides you with the means to pay merchants that offer Visa, MasterCard, Amex, Discover, JCB and China Union Pay or any other scheme relevant in your market. Swyp is providing an early prototype of this.
· Updates your phone so that Paym, ApplePay, Google Wallet and whatever Amazon comes up with work.
· Taps into a sleek efficient new instant bank to bank payments solution (think iDeal but better) that eventually may even make the card schemes obsolete.
This solution would be seamless and easy to use, with no hidden fees (this does not mean no fees though) — imagine ApplePay or SamsungPay on steroids. It will be simple to manage so that the customer can have complete control to choose how each payment is funded. If they don’t want to choose themselves, they can count on NeoBank to make the right choice on their behalf, knowing that it will always choose the lowest cost option for them.
The account will also prompt the customer on how to manage their money better, predicting overdrawn accounts or highlighting funds that are not earning income, making it very easy for the customer to make the most from their funds. Simple has done some interesting work in this area.
The account will also allow customers to instantly transfer currencies internationally directly from customer to the end recipient. At the point of making a foreign exchange transaction the customer will know exactly how much it will cost her and she will feel confident that the bank will charge her a rate that is fair and competitive. Like what Transferwise does only easier.
Needless to say this system will provide the latest fraud prevention techniques including high-speed data analysis and latest generation biometrics, without adding any complexity to the transaction.
Lastly the Universal Payments Account will have to offer a user experience that is better than any other proposition out there. Good enough doesn’t get customers to switch — better does. UX is the key to customer adoption. And if trends are to be believed it will be delivered on a mobile device.
The Master Credit Line
Customers can have complex credit needs. These differ by parameters like size, duration and urgency. The NeoBank would allow the customers to manage all their need with one master credit line serviced through a single monthly repayment. Customers would be able to increase their credit lines by providing collateral and guarantees as relevant. Customer looking for sales finance, a car loan or a mortgage could simply add the TV, the car and the property as collateral to add to the personal loan facility they were offered at account opening. Businesses like Sofi are already thinking along these lines.
From most customers’ perspective this would be a great proposition — they would get one monthly bill for all their borrowing that is very likely to be considerably smaller that the aggregate cost of separate credit products, making late and overdraft fees mostly a thing of the past.
Obviously risk management and affordability parameters will apply and if the customer circumstances change costs or size of the facility may change. But in every case the customer will be informed with adequate notice with clear guidelines on how to address the problem.
The profitability of the Master Credit Line will be an interesting challenge for the NeoBank. With this proposition customers would have an incentive to consolidate their credit needs in one place, so overall the NeoBank would own a greater share of the customer wallet. Product by product the profitability of certain individual products may be lower but this would be counterbalanced by a deeper relationship and retention benefits.
The Capital Protection Portfolio
Customers with surplus capital want to protect it and make sure that they earn a reasonable return. The objective for this is not to protect the cash itself, but to safeguard the lifestyle that it enables.
Again, most customers’ financial requirements in protecting their capital could be simplified into three objectives:
· Earn the highest returns for their money considering their risk appetite,
· Put in place the right mechanisms that protect these assets
· Create means where they can cope with unexpected events
These roughly equate to savings & investments, pensions and insurance.
The traditional approach is to provide advice and to direct customers to a set of products within the bank’s portfolio that fit their needs. But most customers cannot afford to pay for an advisor so today most are not making the most of their money. Furthermore, in world where customers can get a whole-of-market view of any investment, pension or insurance product with just a few clicks, it would be a risky move for any bank to limit customers to just its own products.
The NeoBank would act a trusted advisor using digital technology. It would illustrate the likely outcomes of choices available to their customers through simple visualisations using the customer’s actual data modelled on the different financial propositions available to them. These scenarios would enable customers to toggle between different options to create the end result that best suit their needs.
This is not a Robo-advisor but a simple way to provide customers with the means to make a better decision. Customers will be provided with a complete access to all savings and investment, pension and insurance product available to them in their market. This access will also include the ability to buy any product. NeoBank would manage authentication, verification and payment processing as required. The range of products will include peer-to-peer crowdfunded investments and if available the nascent P2P insurance offering.
The NeoBank’s approach to savings, investments, protection and insurance is to act as the only place where the customer can get transparency, customised guidance and ease of execution. A few start-ups across the globe are attempting to do something similar in the investments space — these are Betterment in the US, Nutmeg in the UK and 8Now! in China just to name a few.
The concept of the NeoBank is intended to be simplistic and sketchy — as I don’t have all the answers on how it could actually be delivered. Challenges are numerous: IT and operational delivery will be complex, the product-centric organisation of most modern banks would have to be replaced, path to profitability is not obvious and last but not least support from of the regulator is not a foregone conclusion.
But all that considered, banks are slowly appreciating (I would hope) that to really meet their customers’ needs they need to stop thinking of themselves as retailers and more as enablers. To do so they will need to profoundly alter their business model based guiding principles of transparency, openness, fairness, affordability and ease of use. A better-designed app will not cut it in the long term.
Done right this will deliver growth, customer satisfaction and… sustainable profitability.