The ultimate goal of all financial institutions – whether they operate on-premises or purely digital – is to become the central hub of their customers’ main account.
Money is deposited into this account on a regular basis, usually through direct deposit of a paycheck. It is the gateway to cross-selling other products and services.
However, for pure digital banks to be successful, they must offer more than just basic banking services.
Neobanks establish themselves among niche audiences
Until now, neobanks have been able to gain a foothold by targeting niche audiences that have been underserved or neglected in terms of debit or basic lending features.
In Europe, challenger banks are targeting the youngest generation. Companies such as Vybe, Kard and Osper offer prepaid cards, digital offerings or parent-controlled apps.
To be successful, however, pure digital providers must offer more than just another direct deposit option.
The need to be more than just banking
Purely digital banks need to offer more than just basic banking services, because in an environment where the cost of capital for investors has risen sharply and they have retreated from lending, it has become increasingly difficult to rely on institutional lenders.
In the long term, there is potential to create additional revenue streams as consumers move beyond one or two initial use cases and embrace more comprehensive features, from checking accounts to checking their financial situation.
Success stories
LendingClub, which acquired Radius Bank two years ago, has shown that an expandable model also brings turbulence. The company noted that it grew its deposits by 104% year-over-year, contributing to an increase in net interest income.
For platforms where a bank is actually involved, stronger customer relationships will become the norm, with added value driving the establishment of a primary current account relationship.
SoFi’s earnings report showed that personal loans, direct deposit accounts, and cross-buy opportunities are building resilience, and the platform has built key relationships, as evidenced by the growth in total deposits at SoFi Bank. Monzo is on track for near-term profitability.
Expandable platforms and valuable insights
The ongoing development of scalable platforms, such as those offered by SoFi and LendingClub, will be a long-term project.
The potential of digital banking has only just scratched the surface. Key differentiators will be the added value, such as higher interest on accounts and the insights that inspire smarter financial decisions that can increase savings and investments and pay down debt.
Interest in purely digital 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 moving to purely digital channels for handling daily financial lives.
PYMNTS and Treasury Prime found that 56% of millennials, 54% of small business owners, and 54% of freelancers have at least some interest in switching to a digital bank.
Diploma
Purely digital banks have the potential to become the preferred choice for consumers, but to be successful they need to offer more than just basic banking services.
Added value such as higher account interest rates and insights that lead to smarter financial decisions will be key differentiators in the long run. While the potential of digital banking has only just been realized, interest in moving to purely digital channels is growing, especially among millennials, small business owners and freelancers.
