There is a pool of exploitable revenue on the order of nearly $60 billion, concentrated in the consumer space.
This is the market at stake, and with open banking and comprehensive credit reporting, new entrants will be able to make more informed lending decisions with data available to all market participants.
Both of these regimes offer opportunities for holistic situations and a better understanding of a client’s profile.
This is where incumbents could gain the upper hand if they handled the data correctly, given that they own all the data.
Neobanks have a harder time proving to the customer that they provide value that their current bank doesn’t, and because banks own the data, this will be harder to prove.
However, this should not mean that incumbents should not feel threatened, as neobanks may emerge and be able to use data in meaningful ways, giving them a competitive advantage.
Incumbents had already shown they were aware of the threats posed by technology and neobanks by proactively changing their offerings to bring them closer to digital-only players.
Competition would intensify with the arrival of new entrants into the market; this was nothing new for banks. However, this competition would lead to more competitive prices and the need to be efficient.
Given the small size of neobanks and their lack of physical presence, it is in this scenario that new banks were able to take over the historic banks.
Looking at the UK as the closest example to the Australian market, neobanks have yet to fundamentally disrupt the banking industry.
A British study found that people are more likely to divorce than change banks, and the lion’s share of neobank customers are those who use them as an alternative to their main account with a major.
These neobanks offer a “freemium” approach to creating customers, which is a small audience with limited deposits in the banks, but as neobanks seek profits and charge for services, they will inevitably see a customer decline.
Neobanks that continue to offer the cheapest products to customers will see their customers remain but potentially to the detriment of their products.
The challenge they face is creating a viable and profitable business model, which has yet to be found in the UK.
Building a customer base can put pressure on the margins of neobanks, as they rely on more expensive forms of financing.
Currently, there is a market in Australia that neobanks can exploit, but in the long term, free or cheaper products may not be sustainable.
The opportunity for neobanks lies in the 30 percent of market “nomads” defined by an Accenture study as customers with a digital preference and who are not loyal to a brand.
Nomads are not exclusively Millennials, with 43 percent in the 22-34 age group and 37 percent between 35 and 50.
Nomads, more than the rest of the market, wanted banks to offer instant functionality, the ability to switch digital channels and wanted a seamless experience.
Their value stands at $2 trillion, Accenture found, and this highlights the need for banks to adapt to this changing customer perspective, an area where neobanks were proving successful.
Trust in incumbents is in decline because of the royal commission, with more people than ever ready to change. The only thing that stopped many was ease, something open banking could solve.
Overall, incumbent banks and neobanks have strengths and weaknesses.
Incumbents are investing in technology that could enable them to become competitive, and they already have a larger customer base, and many older Australians are unlikely or unwilling to switch.
However, the younger market and nomads were attracted to neobanks, and open banking would ultimately help neobanks capture the market that wanted to change but found it too difficult.
But the lesson for neobanks today is to offer a fundamentally different service, something that has not yet been seen in the market.
As long as neobanks do not offer this service, they would not pose a significant threat to incumbents.
