The Neobank Emergence
Led by the likes of Simple, GoBank, and Moven, alternative financial service specialists (commonly referred to as “neobanks”) are betting big on mobile to attract specific customer segments. However, it is unclear whether neobank offerings represent a viable alternative to traditional banking—and whether full-service retail banks will respond.
What do neobanks offer? Neobanks target millennials, the technology-inclined middle class, the unhappily banked, and the underbanked with streamlined checking accounts supported by sleek and function-rich mobile applications. Users can open accounts, deposit checks, pay bills, and transfer money all within the application. In addition, the applications offer robust deposit and transaction analyses, along with the ability to segment account balances for savings purposes. Fees are minimal, especially if the account holder exhibits desired behaviors such as funding the account through direct deposit.
Have they been successful? While few adoption figures have been released, early results have been positive. GoBank, Green Dot’s mobile-centric platform launched in early 2013, has experienced favorable performance indicators, although number of customers or aggregate deposit data has not been disclosed (see Figure 1).
Figure 1: GoBank Performance Indicators (2Q 2014)
These metrics suggest that consumers, especially those that skew younger, are warming up to the idea that a neobank can be their primary financial institution.
How are banks responding? Traditional banks are beginning to test the waters. BBVA Compass Bancshares, the U.S. arm of BBVA, acquired Simple in February 2014 for $117MM. At the time of the acquisition, Simple had 100,000 accounts performing $1.7B in transaction volume.
In January 2015, Customers Bank became the first retail bank to enter the neobank market organically, with a homegrown product called BankMobile. BankMobile is an independently-operated digital banking division of the $6.5B bank, with its own fully-featured mobile/tablet application, website, and marketing material.
While the product has many non-standard features (e.g., enabling customers to pay bills by snapping a picture and to lock or unlock a debit card), four unique features differentiate it from competitors (see Figure 2):
- Availability of a line of credit
- Mobile license (I.D. card) scanning
- Relationship rewards
- Completely free checking
Early neobank results suggest that digital technology is changing customer expectations, especially for millennials and the technologically-inclined, and that the historically slow-moving financial services industry will be pressured to catch up. Users will increasingly expect the flexibility smartphones bring to their everyday lives to extend to financial services. Retail banks should be evaluating opportunities to leverage the digital channel both as an acquisition and servicing channel to ensure they are well-positioned to meet evolving customer expectations.
Source: BankMobile website; Customer Bank website; Green Dot investor releases; BBVA press release; NY Times; American Banker; The Financial Brand; and First Annapolis Consulting analysis and observations.
For more information, please contact Bob Rohr, Senior Consultant, firstname.lastname@example.org, specializing in Debit and Prepaid.
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