The passing era for neobanks is best described as 'customers in motion', a new age of economic uncertainty will prompt money to be the new moving phenomenon.
One of the defining elements of the last era in banking has undoubtedly been the advent of new providers, features and offerings. You could describe this as an era of ‘customers in motion’, with customers exploring new providers and, in many cases, opening accounts with multiple banks.
At the heart of this shift have been the digital-first neobanks. The likes of Revolut, Monzo and Starling have rightly been lauded for redefining the customer experience and the results in terms of new customer acquisition have been impressive.
With alluring offers at sign-up and the convenience of app-based banking, neobanks have distinguished themselves further with their excellent customer experience and budgeting tools. This has prompted many customers to add a secondary neobank relationship alongside their incumbent provider.
But one of their early differentiators, once viewed as one of their greatest assets - the ease with which they enabled consumers to switch, sign up and transfer money between institutions - may have also hurt them. While customers are more readily moving between banks, balances have not always followed – with a reluctance among some to move their salaries.
This is due to a mix of continued customer loyalty to the major high street banks, low interest rates, a lack of competition for deposits and a nervousness about the long-term viability of neobank business models.
There is no doubt that the neobanks have redefined the banking experience with the introduction of innovative features such as the ability to temporarily disable a debit card. But true switching, where primary balances move between players, has remained low.
This era of ‘customers in motion’ has been defined by customers sampling new providers without ever fully committing to the movement of significant capital.
The new era: money in motion
As we move into incredibly challenging times, with the cost of living pressures building rapidly, the mood is changing.
The Bank of England has raised its base rate to the highest level in decades and further increases are expected imminently. Inflationary pressures have shown little sign of abating, the housing market is precariously positioned, and the cost of living continues to rise for households across the UK.
In this rapidly changing environment, the incentive is growing for customers to think more carefully about where they keep their money. Finding a return for their household cash and savings is now critical and fortunately, the yield on those balances is starting to return.
Although the big high street banks have built up strong cash balances and capital bases, and rate rises are not yet being passed through in full to customers, the re-emergence of returns on cash savings will help UK households. This shift will see the major high street banks - with broad and deep balance sheets - able to drive net interest margins through lending, giving them funding and pricing power to attract and retain deposits. We will start to see primary balances seek out better returns resulting in a subtle move from an era of ‘customers in motion’ to an era of ‘money in motion.’
By contrast, the neobanks which have smaller lending books relative to their deposit bases, will find it harder to drive the net interest margin and price to compete for the same cash. This will place increased pressure on their business models.
What does it all mean?
The shift from ‘customers in motion’ to ‘money in motion’ represents a new chapter on the road to model convergence in everyday banking. Ultimately, both the neobanks and incumbents are striving for the same digital-first banking model defined by great user experience and technology, underpinned by a balance sheet of sufficient depth and breadth. Both groups have come from different starting points and their journeys to reach this ‘end game’ have been, and will continue to be, markedly different.
Whilst rate rises provide some tailwinds for the incumbents, this new chapter does not change the need to accelerate their modernisation and continue to invest in digital-first products, experiences and features.
By contrast, the neobanks must continue to focus on driving ‘primary’ usage, building out their lending businesses to balance and grow their balance sheets, and delivering revenue growth including through net interest margin.
But first and foremost, in the immediate term, the priority for all banks must be to work hard to support households through this challenging period. It’s easy to forget that, as well as their customers, the big banks themselves have tens of thousands of colleagues from all income brackets who will also need support.
From increased financial advice to guidance and prompts for those in need, there is a raft of interventions that banks have the opportunity to make as they help their customers navigate this new era of everyday banking.
The views and opinions expressed are not necessarily those of AltFi.
21 March 2023
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