For any financial institution, whether it is brick-and-mortar or digital-only, the ultimate goal is to become the home of a consumer’s primary account.
This is the account that is funded on a recurring basis, typically through direct deposit of a paycheck, and it is the gateway to cross-selling other products and services.
However, for digital-only banks to thrive, they need to offer more than just basic banking services.
Neobanks Finding Footing Among Niche Audiences
So far, neobanks have been finding footing by targeting niche audiences that have been underserved or neglected for debit or basic credit functions.
In Europe, challenger banks have been targeting the youngest generation, with companies such as Vybe, Kard, and Osper offering prepaid, digital offerings or apps controlled by parents.
However, to thrive, digital-only operators need to offer more than just another direct deposit option.
The Need to be More Than Just Basic Banking
Digital-only banks need to offer more than just basic banking services as relying on institutional backers has become tougher in an environment where investors’ cost of capital has surged, and they have pulled back on loans.
In the long term, there is the potential to realize ancillary revenue streams as consumers move beyond one or two initial use cases to a more fully realized embrace of everything from checking accounts to checking up on their financial wellness.
Examples of Success
LendingClub, which acquired Radius Bank two years ago, has shown that an extensible model has had its share of turbulence. The company has noted that it grew deposits 104% year-over-year, which helps boost net interest income.
For platforms that have an actual bank in the mix, stickier customer relationships are becoming the norm, with value-add that drives the establishment of the primary checking account relationship.
SoFi’s earnings report has shown that personal loans, direct deposit accounts, and cross-buy opportunities are fueling resilience, and the platform has established primary relationships as evidenced by the growth of total deposits at SoFi Bank. Monzo is on a near-term path to profitability.
Extensible Platforms and Value-Added Insights
The continuing evolution of extensible platforms, such as those offered by SoFi and LendingClub, will be a long-term one.
Digital banking has just scratched the surface of its potential. It is the value add, such as higher interest rates on accounts and the insight that spurs more intelligent financial decisions that can grow savings, investments, and pay down debt that will be key differentiators.
Interest in Digital-Only Banks
Despite the potential for growth, only 25% of consumers have used a neobank, digital bank, or FinTech with bank-like services in the past 12 months, excluding PayPal and Venmo. However, there is interest in switching to purely digital channels to conduct daily financial life.
PYMNTS and Treasury Prime found that 56% of millennials, 54% of small business owners, and 54% of freelancers are at least somewhat interested in switching to a digital bank.
Digital-only banks have the potential to become the primary accounts for consumers, but they need to offer more than just basic banking services to thrive.
Value-add, such as higher interest rates on accounts and the insight that spurs more intelligent financial decisions, will be key differentiators in the long-term. While digital banking has just scratched the surface of its potential, interest in switching to purely digital channels is growing, particularly among millennials, small business owners, and freelancers.