by Kevin Hardy
It’s a brave new world for banks, no matter if they’ve been around for 200 years or just two.
The digitization of everything is reshaping the banking landscape for banks old and new. Incumbents have the advantage of a strong footprint in the financial system and their customers lives. Neo-banks sport a slimmed-down business model that enables them to compete on ease of use, fees and other changes brought on by the digital era.
The challenge for many digital-banks is that they battle with high customer acquisition costs. This owes to a number of factors, not least the difficulty of persuading customers to change their banking habits. In this regard, the Asian market presents more excitement since much of the population is unbanked and digital-banking represents a genuine positive-sum opportunity to increase access for all. Nonetheless, whether operating in developed or developing markets, what is clear is that to be successful, digital-banks need to translate acquired customers into sustainable and growing revenue streams.
One way might be to reach into broader demographics, but it is difficult to see how that won’t increase customer acquisition costs. The alternative is for digital-banks to build loyalty with their existing customers. This means being ready when customers needs turn from saving to investing, and avoiding customer attrition at this point as these valuable investing revenues represent a higher margin opportunity.
We’ve previously talked about how banks can add an orchestration layer to capture opportunities such Asia’s rising mass affluent tide. The same advice applies to neo-banks. But in some ways it’s more defensive. They can’t afford to become a feeder to incumbent organizations, giving low cost access to banking until that customer wants a “serious” bank to help them with their key life events. Through a digital lens, this means building a technology architecture that matures with customers personalized needs. Digital servicing doesn’t only mean self-service, and wealth management for the foreseeable future will be a hybrid of channels to cater for what needs to be a higher-touch proposition.
What follows is a discussion of the broadening opportunity pool for neo-banks and what it takes to retain customers through their wealth management journey.
In Asia neo-banks can acquire new customers at scale
Smartphone penetration has caused significant shifts across continents, cultures, and industries, in Asia its impact is especially transformative.
For example, in APAC 72% of the population (2.8bn) has a mobile subscription and 62% of people are mobile internet users (1.9bn). By 2025, 87% of mobile subscribers will have internet connections.
This growth in mobile subscriptions provides a low cost distribution channel for digital services, which offer the possibility to provide banking services to hundreds of millions of unbanked and underbanked consumers.
“More than 7 out of 10 adults in Southeast Asia are “underbanked” — they have no access to credit cards or have no long-term savings product, for example — or are “unbanked”, without access to a basic bank account.” – Source: Fulfilling Southeast Asia’s Digital Financial Services Promise
In this regard, Asia is unique. Most countries and continents don’t have hundreds of millions of unbanked consumers. Instead, neo-banks are generally engaged in a battle to win customers from incumbents, which involves high customer acquisition costs. Moreover, as we shall see later, the opportunity in Asia is winning first time customers and providing wealth services to the fast-growing emerging-affluent class.
Cultivating relationships throughout the wealth management cycle
The alternative to gaining new customers is for neo-banks to grow with their customers, which allows them to grow share of wallet without much additional cost of sale; a much higher margin opportunity. To do so, however, means retaining customers and expanding the service footprint when customers progress from saving to investing.
The first customers digital-banks appeal to are usually Gen Z (born 1997-2012) or millennials (born 1981-1996), tech-savvy and at the start of their wealth management cycle.
These customers usually start with setting up an account to use for saving and spending because they want to satisfy all their banking online. This benefit, coupled with better rates, easy transfers, and more visibility over their expenses makes for a powerful incentive. Further, in reaching younger consumer segments, neo-banks can use this advantage to digitally establish standards for these new to banking customers.
This initial pool of neo-bank customers have now built wealth and are ready for investing, neo-banks must be ready. A self-serve option is not something all neo-banks have, and those that do are setting industry standards and getting the lion’s share of attention, customers, and growth.
As they accumulate wealth, consumers who have only known digital-banking will seek expert advice. With a digital business model, neo-banks may lack the resources and infrastructure to provide this kind of service, which can translate to lost opportunities to build customer loyalty, expand their portfolio, and generate long-term revenue.
Wealth is often a paradox, the more assets one accumulates, the more detached they become from managing it. At some point, it just becomes too complicated. Market information, asymmetric risks, diversification options – it gets overwhelming, so the customer disengages and transfers decision-making to a trusted professional. They just want to see how much money they have and, when market conditions get difficult, to get advice to minimize risks and capture opportunities. Neo-banks don’t broadly offer wealth management to capture this part of the market but they ought to be working on building this capability.
Every stage of the wealth development cycle comes with a very different mindset. To successfully accompany their customers from one stage to another, neo-banks must plan ahead and understand their customers’ thinking and needs at every major step.
As a neo-bank, when you start your journey, you select the types of clients you’re going to target and the types of products and services that you’ll offer. But – 10 years later – these will undoubtedly change as demographics, expectations, competition and regulations change. If you’ve set up your business on a rigid platform that satisfies what you need now, it’s going to be very challenging and expensive to adapt as your clients mature through the wealth management cycle. Neo-banks must build in agility today, so they too can grow with their customers.
So how do you make this happen?
The omni channel approach – built-in flexibility and resilience
While neo-banks understand well that consumers’ expectations are formed through experiences they have beyond the financial sphere, they may underestimate the value of phone, voice, or face-to-face interactions. These types of communication are especially important for wealthy older customers who are building digital habits, and for previously unbanked consumers requiring extra help and guidance.
While customers may switch to a digital-bank for the initial flexibility, interest rates, and other benefits, they still expect the full package in terms of support and advice. As a result, neo-banks need to create seamless and unified client/advisor experiences across user journeys and channels – including ones that involve one-on-one communication. They need to have scalable omni channel capabilities to serve their clients across geographies and generations.
Without an omni channel approach, digital-banks risk:
- Giving customers too little information leading to lower engagement, less revenue, and higher chur
- Not building enough trust to remain competitive and losing loyalty/market share as a consequence
- Limiting their use cases thus becoming the cheap alternative for particular activities (money transfer, fx, expense tracking) without advancing to more serious commitments
- Losing customers as their financial position improves, progressing from saving to investing
While incumbents have legacy issues to overcome and work around, digital-banks must move faster to leverage their strengths and build a servicing organization around them in a much more agile manner.
Sometimes customers want to be independent, other times they’ll need guidance because they’re unsure of the risks involved, they might even want the bank to handle everything. These choices can – and will – change in the course of the relationship.
Is your organization prepared to cater to all of these scenarios?
At additiv, we’ve invested heavily into helping our customers become omni channel by design by providing an integrated platform that delivers superior customer experience at scale.
Digital-banks can leverage our DFS platform to:
- Manage multiple customer segments e.g. execution only, discretionary and advisory, for new-to-wealth to UHNW, and deliver contextualized and relevant content and experiences to each
- Grow their share of wallet with integrated prospect management and rules engine to deliver compliant proposals and offers
- Build in transparent wealth management components, automated products for saving, investing and retirement with low costs to entry
- Improve speed and service range by using APIs to quickly access services from third-party software providers or add specialist features that improve customer experience and loyalty
- Maintain strong compliance at scale based on the common sourcing platform that additiv provides, reducing legal hassles, reconciliation and saving internal resources.
Even better, neo-banks can pick and choose how they want to use these options and how they want to combine them to serve their customers.
Using video tech to dispense advice and provide guidance? That’s possible. But don’t want to use that for mass markets. You decide which use case it’s best suited for.
Looking to offer phone, voice, or face-to-face interactions for important wealth management decisions? That’s immediately feasible. Instant chat and email support is also an option, but now the customer chooses, demonstrating that the digital-bank walks the digital talk.
This blend of products, services, and support options can put neo-banks in a much better position to become a permanent fixture in their customers’ wealth planning.
Worried about how much this would cost (which is why you didn’t prioritize it in the first place)?
Let’s talk about that.
The cost efficiency that enables scale for digital banks
It’s true: it used to be quite expensive to provide omni-channel services because of the costs related to high-touch relationship management and technology.
Technology is in our DNA, and we’ve leveraged this knowhow to create the DFS, a cloud-based orchestration engine that supports digital age banking architecture throughout the organization’s evolution and changing customer needs.
Our feature rich, intuitive, cloud-based SaaS model provides the lowest possible IT cost. This enables all wealth managers to enter markets they couldn’t previously approach due to costly customer acquisition and servicing. With flexibility and scalability in mind, our DFS supports wealth managers’ ambitions and appetite for growth.
As mentioned before, the chance to bank hundreds of millions of Asian people is a unique opportunity for neobanks, but especially if they can hold on to these customers through the wealth cycle. Effectively, they need to skillfully position themselves as a trusted partner for the underserved consumers to grow through the wealth-cycle as their preferred wealth management partner. The opportunity is significant, in South East Asia for example, the affluent market is small but growing rapidly.
According to BCG, the affluent proportion of the population in the four most populous countries in South-East Asia (Indonesia, Thailand, Philippines and Vietnam) will increase by on average 12 percentage points by 2030, meaning almost 70m people will enter the category in the next ten years, and tens of billions of dollars of new wealth will have been created. As the graphic below shows, this growing mass affluent class doesn’t invest its savings today. Neo-banks must capture these customers, then mature with them into the world of professionally managed investments.
additiv believes in a world where access to wealth management should be available to everyone at any time. Digital-banks need to grasp the opportunity to develop their offering, and technology is not an obstacle, so why wait?
At additiv, we’ve built a market-leading DFS® (Digital Finance Suite) that lets financial institutions quickly launch new propositions and get access to data that enables them to maximize customer engagement.
Let’s chat about how we can help you move faster and keep all your systems in one piece.