The Stringent Definition of a Niche Bank and Why It Matters
A Q&A with Liz High, EVP — Nymbus Labs
What are the core components of a niche?
It’s critical for a niche bank to have two major components.
- A clearly identified customer. While historically banks have customer segments, a niche bank identifies customers by common, unmet financial needs and emotional connections.
- Tailored products and services. Niche banks must go beyond putting a fresh paint of coat on existing products and services. Instead, they must innovate new features or combinations of features to solve their customer’s specific financial needs. There needs to be a strong hook that will deliver clear value to the customer.
It might sound simple, but in reality, financial institutions find it harder than you’d think to execute in a way that fits the true definition of niche banking.
Does a niche bank have to be digital?
No, there are lots of examples of successful hybrid models like Studio Bank in Nashville (niche banking for the creative community), where brick and mortar combines seamlessly with a great digital experience.
However, there are advantages to a digital-first approach. Finding your digital niche allows you to open up your addressable market and (charter permitting) break from traditional growth boundaries dictated by branch availability. A great example is Laurel Road, recently launched by Key Bank, offering a banking service specifically created for doctors and dentists in all 50 states — significantly increasing the bank’s traditional reach.
So, let’s define: What is NOT a niche?
Commonly a financial service provider will have one or the other, but not both of the core criteria we’ve defined.
It’s not enough to provide online or mobile versions of existing products and services for a segment of your bank charter.
A generic digital only-bank, on its own, is not a niche. While the services might seem very specific, they aren’t always tied to a particular customer need. At Nymbus, we call this the “hook.”
Acorns is well-known as one of the early digital-first banking apps and is an excellent example of creating a product hook based on customer needs. At launch, it leaned into the customer insight that millennials think they don’t make enough money to invest and don’t know where to start. By delivering an easy way to adopt micro-investing, they made investment accessible to its customers. The brand and marketing enabled Acorns to grow quickly with targeted messaging that articulated the clear value of the app.
Let’s drill down into the defined audience. How would an established bank or credit union approach a niche audience compared to an existing customer persona?
Community banks and credit unions in particular often have a deep understanding of the needs of their specific market segments. But a proper niche goes beyond career, location, or life stage. Niche audiences act on deep, granular insight about customer behavior, emotions, and needs. Let’s consider two examples.
Deere Employees Credit Union While the member charter is specific; the captured audience still has varied financial needs. The credit union meets all of them with services ranging from checking and savings to credit cards to home equity loans to RV loans.
BankMD Nymbus customer TransPecos Banks identified a need within the medical community: Underwriting physician loans is complex and nuanced. BankMD combines specialized software with human assistance to provide financing for practicing physicians, medical students, and resident physicians. This easy access to capital enables doctors to finance practice startups, equipment, acquisitions, and more.
Learn more about BankMD’s model in the Financial Brand here.
Other buzzwords like neo bank, challenger bank, and charter bank are circulating — How do those compare to a niche bank?
Simply, they don’t. ….
So what does the future hold for niche banks?
Niche is the most significant innovation opportunity for financial institutions today. Niche is the new local for community banks. It is how they can redefine themselves outside of geography.
Niche is the new loyalty driver for credit unions as it allows them to connect even more deeply with specific needs-based communities within their existing field of membership. For example, a credit union could reach a group of existing retail members by establishing a small business bank to provide access to affordable capital for Black entrepreneurs.
It is the same for large banks. Niche is a perfect opportunity for large banks to fill a role as a BaaS provider — increasing revenue and reach to support the needs of both fintechs and household brands that want to offer embedded financial products to their existing customer communities.
Now is the time for all financial institutions to find and build their niche.
