Failing does not always mean it is the end of the world; sometimes it is a realization that you could have done things differently. The same applies to some neobanks and their precarious future in the sector.
While some neobanks like Chime are flourishing, there are Fintech firms like Zuno Bank that are not doing so well.
What is it that leads some neobanks to failure but creates a springboard for others to reach new heights? You’ll find out all about it in this article.
First, let’s discuss the factors that drive neobanks towards failure.
Betting Solely on Checking and Savings Accounts
Checking and savings accounts offer a low entry barrier for neobanks. One of the leading challenger banks today, Chime, made headlines back in 2018 as it opened two million fee-free online checking accounts. At the time of this writing, Chime is valued at $14.5 billion, thanks to expansion strategies and additional services that add to its bottom line.
Unlike Chime, many neobanks failed because they doubled down on checking and savings accounts, hoping their profits would soar. This strategy is the reason they couldn’t bring in enough returns to break even.
Checking and savings accounts can only get your foot in the door. By opening fee-free checking accounts with zero provisions for profits, neobanks seem to have dug their own grave. Although some neobanks eventually revised their pricing model, they had to bear the backlash from customers who didn’t want to pay for features they initially got for free.
Lack of Trust
People trust financial institutions with their money because they believe it’s in safe hands. and rightly so. These financial institutions have been around for decades or more.
On the other hand, neobanks are relatively new. Only 8% of the US consumers use challenger banks like Chime or Varo as their primary bank. As a result, neobanks struggle to have high deposits and build long-term relationships with their customers.
Competition from Incumbent Banks
If that was not concerning enough, incumbent banks are making it even more difficult for neobanks to survive in the highly competitive financial industry. Following trends and changing customer behaviors, incumbent banks are investing heavily in digitizing their products and services, which mitigates neobanks’ competitive advantages.
If you are planning to launch a bank, it is important to partner with the right BaaS (Banking as a Service) provider, have a profitable pricing model, and create expansion strategies. Additionally, positioning is key to winning your customers’ trust.
That said, here’s what neobanks should be doing to stay in the game long enough for the public to appreciate the value that they offer.
Reviewing Customer Life-Time Value
Are your customers generating enough revenue for your neobank to stay afloat? Customer Life-Time Value is an important metric that should be reviewed periodically to make sure your bank is making sufficient profit or lay down immediate measures to improve it.
Acquisition Cost per Customer
Are you spending way too much on advertising or incentives for customer onboarding? The concept of neobanks should sell itself but, due to fierce competition, neobanks must rely on advertising and marketing to cut through the clutter. Regardless of marketing strategy, it is important to review your average acquisition cost per customer and ensure it’s as low as possible to maximize revenue.
Reposition your offerings
As discussed earlier, the purpose of providing checking and savings accounts is to bring customers onboard and build trust so you can launch new products, integrations, and services to an expanding customer base.
Foraying into Credit and Investment Products
The market is already saturated with options, but some people can’t get a credit service or start an investment portfolio with an incumbent bank. Neobanks can introduce products like payday loans and credit cards to this market.
Exploring Customer Segments
Neobanks may not have the capital or intent to provide long-term credit, but they can venture into customer segments that are not well-served by incumbent banks. Small and medium enterprises looking for affordable and hassle-free banking experiences are a prime market. Another segment to consider is people who cannot afford to maintain an account with traditional banks due to high service markups.
In their pursuit to stay profitable, challenger banks have started to look and function like traditional banks. That’s because scaling their operations while keeping the cost low is becoming increasingly difficult. For now, the best strategy for neobanks is to continuously innovate, remain customer-centric, and look for opportunities to create sustainable competitive advantage and differentiation in an already busy market.