I’m sitting on my sofa enjoying the last few hours before 2016 will start in full, and I’m in a reflective mood. I’ve earned a living in fintech for many years and I’d like to think that I have been innovative on several occasions, but I have never really tackled the biggest fintech innovation challenge of all: If I could completely redesign a retail bank, what would I do? What would the neobank look like?
The best place to start would be with customers. I would try to understand why customers come to a bank. I’m sure that most people don’t wake up in the morning yearning for financial services. Most bank customers don’t want a credit card – they want to buy a new gadget that they can’t afford. They don’t want a savings account – they want to earn interest on their surplus cash.
As a first step, I would go back to first principles. A redesigned bank ought to be truly customer-centric. It wouldn’t be concerned with selling products, but instead with meeting customers’ basic financial needs (keeping in mind that these are always a means to an end). No one needs a financial product. Customers need what the financial product enables them to do.
I would group customers’ basic financial needs into three groups:
- They need to pay someone.
- They want to do something they don’t have enough money for.
- They have a surplus of cash and they want to protect it.
The neobank would therefore offer only three products designed to make the life of its customers better. These products (or product families) could possibly be structured as follows.
The universal payments account
This should be straightforward and easy for customers to use. At its core, it would hold a wallet where all the cashflows coming to and from the customer can be captured, analyzed, visualized and managed.
This account must make it easy for the customer to pay for things any way they choose to do so. Ideally, a customer would be able to use any payment device, channel, process and method they wish, including checks and cash. Imagine a neobank account that, when opened, it automatically:
- Provides the means to pay merchants that offer Visa, MasterCard, Amex, Discover, JCB and China Union Pay, or any other scheme relevant in your market. (Swyp is providing an early prototype of this.)
- Opens your accounts on PayPal, Skrill, iTunes and any other wallet.
- Updates your phone so that Paym, Apple Pay, Google Wallet (and whatever Amazon comes up with) work.
- Taps into a sleek, efficient, new, instant bank-to-bank payments solution (think iDeal but better) that eventually may even make the card schemes obsolete.
This solution would be seamless and easy to use, with no hidden fees (this doesn’t mean no fees); imagine Apple Pay or Samsung Pay on steroids. It will be simple to manage so that the customer has complete control over how each payment is funded. If they don’t want to choose themselves, they can count on the neobank to make the right choice on their behalf, knowing that it will always choose the lowest cost option for them.
The account will also prompt the customer on how to manage their money better, predicting overdrawn accounts or highlighting funds that are not earning income, making it very easy for the customer to make the most from their funds. Simple has done some interesting work in this area.
The account will also allow customers to instantly transfer currencies internationally directly from customer to the end recipient. At the point of making a foreign exchange transaction, the customer will know exactly how much it will cost her and she will feel confident that the bank will charge her a rate that’s fair and competitive. (Like TransferWise, but easier.) Needless to say, this system will provide the latest fraud prevention techniques, including high-speed data analysis and latest-generation biometrics, and without adding any complexity to the transaction.
Lastly, the universal payments account will have to offer a user experience that’s better than any other proposition out there. ‘Good enough’ doesn’t get customers to switch, but ‘better’ does. User experience (UX) is the key to customer adoption, and if trends are to be believed, it will be delivered on a mobile device.
The master credit line
Customers can have complex credit needs. These differ by parameters such as size, duration and urgency. The neobank would allow the customers to manage all their needs with one master credit line that’s serviced through a single monthly repayment. Customers would be able to increase their credit lines by providing collateral and guarantees as relevant. Customers looking for sales finance, a car loan or a mortgage could simply add the TV, the car and the property as collateral to add to the personal loan facility they were offered at account opening. Businesses such as Sofi are already thinking along these lines.
From most customers’ perspective, this would be a great proposition: they would get one monthly bill for all their borrowing that’s very likely to be considerably smaller that the aggregate cost of separate credit products, making late and overdraft fees mostly a thing of the past.
Obviously, risk management and affordability parameters will apply, and if the customer circumstances change, the costs or size of the facility may also change. Yet, in every case, the customer will be informed with adequate notice, with clear guidelines on how to address the problem.
The profitability of the master credit line will be an interesting challenge for the neobank. With this proposition, customers would have an incentive to consolidate their credit needs in one place, so overall the neobank would own a greater share of the customer wallet. Product by product, the profitability of certain individual products may be lower, but this would be counterbalanced by a deeper relationship and retention benefits.
The capital protection portfolio
Customers with surplus capital want to protect it and make sure they earn a reasonable return. The objective for this isn’t to protect the cash itself, but to safeguard the lifestyle it enables. Again, most customers’ financial requirements in protecting their capital could be simplified into three objectives:
- Earn the highest returns for their money considering their risk appetite.
- Put in place the right mechanisms that protect these assets.
- Create the means for them to cope with unexpected events.
These roughly equate to savings & investments, pensions and insurance.
The traditional approach is to provide advice and to direct customers to a set of products within the bank’s portfolio that fit their needs. Yet, most customers can’t afford to pay for an adviser, so people are not making the most of their money. Furthermore, in a world where customers can get a whole-of-market view of any investment, pension or insurance product with just a few clicks, it would be a risky move for any bank to limit customers to just its own products.
The neobank would act as a trusted adviser using digital technology. It would illustrate the likely outcomes of choices available to their customers through simple visualizations using the customer’s actual data modeled on the different financial propositions available to them. These scenarios would enable customers to toggle between different options to create the end result that best suits their needs. This isn’t a robo-advisor, but rather a simple way to provide customers with the means to make a better decision. Customers will be provided with complete access to all savings and investments, pensions and insurance products available to them in their market. This access will also include the ability to buy any product. The neobank would manage authentication, verification and payment processing as required. The range of products will include peer-to-peer, crowdfunded investments, and if available the nascent P2P insurance offering.
The neobank’s approach to savings, investments, protection and insurance is to act as the only place where the customer can get transparency, customized guidance and ease of execution. A few startups across the globe are attempting to do something similar in the investments space, such as Betterment in the US, Nutmeg in the UK and 8Now! in China, to name just a few.
The concept of the neobank is intended to be simplistic and sketchy, as I don’t have all the answers on how it could actually be delivered. Challenges are numerous: IT and operational delivery will be complex, the product-centric organization of most modern banks would have to be replaced, the path to profitability isn’t obvious, and last but not least support from the regulator is not a foregone conclusion!
All considered, banks are slowly appreciating (I hope) that to really meet their customers’ needs, they need to stop thinking of themselves as retailers and more as enablers. To achieve this, they will need to profoundly alter their business model based on guiding principles of transparency, openness, fairness, affordability and ease of use. A better-designed app will not cut it in the long-term.
Done right, this will deliver growth, customer satisfaction and sustainable profitability.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here.