It’s no secret that 2018 was a tumultuous year for the Big banks in Australia. Hayne’s Royal Commission hearings took a toll and as a result, aggregate Big 4 cash profits for the year slumped under the weight of public dissatisfaction.
2019 does not promise to be any different. Ongoing challenges remain the same in an environment of heightened tension, lingering distrust and tightening regulation. Amidst this unsettling backdrop, neobanks are being hailed as revolutionaries, not yet tainted by the exposed wrongdoing of traditional banks and poised to shake up a market ripe for disruption.
For those unfamiliar with the term, neobanks are 100% digital, defined by their complete lack of brick and mortar presence. They are not simply a traditional bank with an outstanding ‘digital first’ user experience (a classification of which they are trying to distance themselves) they are start-ups with no ties to traditional banks. In fact, they are so new that out of the three neobanks that entered the Australian market in 2018, only one – Volt Bank has a full banking license from APRA as of yet, while others such as 86 400 and Xinja are still operating under a restrictive license. When these much anticipated licenses are granted however, will we get any closer to knowing whether neobanks really are the solution to the problems facing Australia’s financial sector?
While the majority remain unlicensed, data from DBM Consultants suggests that only 1 in 10 Australians had heard of neobanks, with only 13% likely to consider using them in future. These are not threatening figures on the surface, however it would be safe to assume awareness of these new digital options will grow as they continue to announce their entry into the market. It is another question entirely however whether neobanks will offer what Australians want from their financial provider.
Ironically, Australian consumers are not asking for much from their banks in order to meet their expectations. Data from DBM’s Consumer Atlas, Australia’s largest financial services survey with over 60,000 interviews per annum suggests the top three things that Australians consistently want from their banks are:
That they can be trusted to do the right thing
They have competitive prices with no unnecessary fees
They offer convenient ways to connect, good service and process efficiency
So, does the neobank business model provide a competitive advantage in delivering these three crucial elements of the consumer banking experience? Let’s look at them one by one.
1. Trusted to do the right thing
The Big banks have almost certainly lost the trust of the consumer, however neobanks have not had enough exposure or take-up in the marketplace yet to be regarded as trustworthy or otherwise. While these banks undoubtedly have been presented with an opportunity, they will have to gain public trust themselves before creating any real disruption in the market.
2. Have competitive prices with no unnecessary fees
The neobanks have a competitive advantage here. Having no physical branches results in a cost saving that can be passed on to the customer in the form of higher interest rates and lower fees. The Big banks will need to counter this competitive advantage through convenient service and process efficiencies, otherwise they may stand to lose out in this area.
3. Convenient ways to connect, good service and process efficiencies
There are pros and cons on both sides of the argument. While digital only, and in some cases mobile only, interfaces are the most preferred way for certain younger demographics to contact their bank, this does not hold true across the entire market. DBM data shows that there are certain customer segments, commonly the most profitable segments that prefer a human interaction. Convenience is a relative term and the branch foot print that the Big banks have is also one of their strengths.
The fact that there are no legacy systems and processes to slow things down could potentially result in neobanks providing faster service due to process efficiencies, however once they gain full banking licenses, they will be restricted by the same regulation and compliance requirements that tie the hands of the Big banks. Also, the Big banks have the resources to invest in the very same technology which neobanks promise to deliver.
When it comes to convenience and process efficiencies, it is a level playing field between neobanks and the Big banks.
Neobanks will only pose a serious threat to the Big banks if they continue to be complacent and ignore the voice of the customer. Australians already are and will continue to seek out other options if the traditional main players cannot demonstrate improvement and a willingness to meet the expectations of the public in the post-Hayne era.
Gazal Kapoor – Client Director, DBM Consultants