Taking Digital Banking Beyond Customer Journeys
Many of the missteps that banks make can be avoided by building their digital transformation programs around a full front-to-back approach focused on customer value streams.
In the current era of transformation, no industry has proven to be a haven from disruption. This is becoming increasingly apparent in the finance industry. Here, an entirely new breed of financial institutions is coming to mainstream attention, brought to the fore by a community of technologists and financial innovators who have proven particularly adept at solving complex problems through products and services that are vying for dominance in the digital realm.
Most of the attention has been captured by a community of independent-minded computer scientists and cryptographers who, dismissively, refer to conventional banks and finance houses as traditional finance, or ‘trad-fi’. They see themselves not as fringe elements attempting to disrupt a multi-trillion-dollar global financial market but, more importantly, as its solution.
But aside from cryptography, blockchains, artificial intelligence-enabled algorithms and programmatic ‘currency’ distribution mechanisms, another world of financial disruption is quietly taking place at the hand of ‘neobanks’. These companies rely on the promise of digital convenience to tap into the burgeoning appetite for any time and anywhere access to customer finances. And while the popular attention they have gained is surpassed by the controversial world of cryptocurrencies, decentralized finance, and other phenomena, these new-age service providers are experiencing staggering rates of growth and adoption.
Often called challenger banks, neobanks operate under the umbrella of mainstream finance but are supercharging specific services long associated with veteran institutions such as retail banks, payment providers, and international wire services. These financial service providers operate online entirely, with no physical presence apart from office space in the offline world. And the growth of these institutions is spurred by the need for on-demand and easier-to-access financial solutions demanded by a young and increasingly digitally savvy, often digitally native, demographic.
Even spurred might be an understatement. The transformation that was already underway before the turn of the decade experienced a dramatic acceleration following the onset of the COVID-19 pandemic. The result was a seismic shift in the way the human population organized its finances. Strict lockdowns and a young population left to work online from home for a prolonged period led to an exacerbation of their most defining preferences, notably a dramatic expansion in the demand for financial services that could be accessed anytime and anywhere. Some estimates now suggest that neobanks will account for more than $2 trillion in market size by 2030 at a CAGR of 53.4%.
More than half of the Gulf Cooperation Council’s (GCC) population is under 30. The region has some of the highest connectivity rates in the world with more than 90% of its population connected to the internet far surpassing the global average of 51.4%, and nearly two-thirds of the population is expected to hold 5G connections by 2026.
The combination of the aforementioned makes the region ripe for fintech, and neobanks, to accelerate growth. The sector is expected to grow to a valuation of $3.45b by 2026 as the result of a boom in terms of growth rates for digital payments (53%) and digital remittances (41%). Surveys of consumer intent to use lending and insurance technology reveal interest levels roughly five times above current usage.
Regulators in the region, long seen as slow to adapt and suppressing innovation as opposed to encouraging it, hold the keys to the rapid advancement of fintech in the region. However, GCC regulators are indicating they are up to the challenge and are fast-forwarding the development of policies and frameworks to foster an environment conducive to fintech advances by easing requirements for new market entrants to enter, launch and promote innovation.
In line with the ambitious Vision 2030 and the Financial Sector Development Program, the Saudi Central Bank (previously known as the Saudi Arabian Monetary Authority) began publishing licensing requirements for digital-only banks in 2020. As of 2022, it has licensed 3 digital banks and 19 Saudi fintech companies to provide consumer microfinance, digital insurance, and payment-related services – in addition to allowing 32 fintech companies to work under a regulatory sandbox environment designed to test innovative services and products in the Kingdom of Saudi Arabia (KSA), the largest economy in the GCC.
Similar regulatory advances and sandbox environments feature across the GCC, such as FinTech Hive at Dubai International Financial Centre, which is the largest financial technology accelerator in the Middle East, Africa, and South Asia (MEASA) region, as well as others in Abu Dhabi in the United Arab Emirates (UAE) and Manama in Bahrain. So far, few unicorns have emerged, but the region’s fintech and neobanking space is beginning to heat up. Several digital-only branchless model ventures have come to the fore from established players such as STC Pay and Emirates NBD’s Liv, in addition to well-funded startup innovators targeting specific sectors of finance, such as but not limited to, Tabby and Tamara (Buy-Now-Pay-Later), Sarwa (Robo-investing), YallaCompare (insurance aggregation), and PayTabs (payments).
Given that traditional branch banking in the GCC provides one of the highest rates of return on equity globally the proliferation of digital-only branchless banking, favored by a young, highly connected, and digitally savvy population can only enhance the significant returns generated.
Until a few years ago, digital banking’s growth was widely touted but concentrated, with only players like PayPal, Venmo, CashApp, and a few others in developing economies gaining the most consumer attention. More innovative fintech firms have now received financial service provider licenses globally than during any period in the past. BCG’s Fintech Control Tower Report, which monitors and maps the latest trends in the industry, tracks more than 26,000 fintech firms globally and reports a more than 200% increase in the number of neobanks since 2015 (of which 45% are in the Americas, 35% are in EMEA and 20% are in the Asia Pacific region).
While traditional banks will retain a strong position in the near term, especially in terms of corporate banking and retail mortgages, neobanks will gain share in specific product areas such as payments, lending, Buy-Now-Pay-Later (BNPL), cards and digital wallets, and remittances, by targeting specific customer groups such as the tech-savvy youth, expatriate populations, and women.
Market research conducted by BCG shows that the GCC population has been very accepting of new entrants, in part because the digital offering of incumbent banks lags. BCG’s latest Digital Maturity Benchmark reveals that the quality of digital banking services in KSA scored just 13 out of 100, compared to 45 in the United States and 49 in Germany. It is no stretch to understand how a highly connected population is also familiar with quality digital experiences provided by services in other sectors (including government sector services). Given that customers are willing and able to adopt quality digital offerings – 88% of consumers in KSA, for instance, are willing to open an account with a digital-only bank (see more on BCG’s 2021 Consumer Sentiment Study in Banking)—the opportunities for consumer-centric neobanks to capture significant market share from any incumbent competitors are obvious.
For neobanks, traits that have often defined success include digital and mobile-centric services, great user experiences, cloud-based platforms with a modular architecture, a lean and agile technology-first culture, and building brands that users have an emotional connection with. Global examples of how neobanks have built such differentiated digital-only propositions can shed important insights into how financial sector market entrants can capture market share in the region. These propositions offered by the innovative firms have succeeded because they were able to ‘hook’ users to products to drive acquisitions and focused on retention by building customer relationships once they were onboarded.
For instance, Chilean challenger bank MACH, launched by Banco de Crédito e Inversiones (BCI) in 2017 targets financial inclusion for unbanked Chileans who otherwise are unable to access international services or buy products online from abroad. It was the first bank to provide digital bank accounts in the country. By 2021, through innovative products such as virtual prepaid cards, MACH had become the second-largest bank in Chile by customers (3 million), most of whom were first-time account holders.
TMRW, launched by United Overseas Bank in Thailand in 2019 and Indonesia in 2020, focuses on customer engagement and service quality, addressing the unmet needs of digitally savvy millennials by simplifying banking. TMRW was the first bank to provide digital bank accounts in the countries, offering an app interface that is modeled similarly to Facebook and Instagram feeds. Personalized ‘cards’ that carry messages generate data based on customer transactions and interactions and empower them to make informed financial decisions. The app also provides real-time tracking and an overview of expenses and finances, as well as the ability to set budgets. In 2021, it was recognized as Best Digital Bank SEA and Best Digital Bank for Millennials by The Digital Banker.
Mainstream financial institutions in the region that are looking to introduce neobanking arms can also leverage their existing sizeable user bases to gain similar advantages. The most prominent and successful models with which they can introduce digital tap into branchless banking involve:
Access to a robust and active existing network can amplify the impact of fintech innovation and shorten time-to-market for platforms looking to build critical mass. A tried-and-true method to scaling and gaining customers, both in the region and globally, is pursuing partnerships to leverage a broader ecosystem and fast-forward growth. Disruptive innovators partnering with mainstream financial institutions, telecom operators, or e-commerce providers, can secure significant advantages early on – the former provides users with the ability to organize and access their finances however they choose to, while the others provide users with wide ecosystems with which to transmit or transact.
Regional examples of neobanks that have found success through an existing network include STC Pay in Saudi Arabia which has capitalized on its parent company’s dominant position in telecoms (more than 55% of all mobile subscribers in KSA are STC customers) and partnered with Western Union to digitize international remittances, simplifying access for the country’s large transient population. As of 2020, STC Pay had reached over $1.3 billion in valuation and is currently serving more than 7.8 million customers.
Elsewhere in Malaysia, BCG Digital Ventures worked with Malaysian telecom operator Axiata to launch its fintech arm Boost in 2017. The cashless payments innovator has built a versatile ecosystem with extensive digital features including bill payments, online shopping, grocery and food delivery, parking tickets, insurance, and more. In less than two years after its launch, the company was serving more than 3 million users.
Neobanks have had and will continue to have, a tremendous impact on consumer finance, the economy, and society at large. Customer preference for digital banking over branch banking has come at a time when the internet itself is arguably entering the next stage of its revolutionary life cycle. Internet-enabled digital finance has emerged at a time when proponents of the change behind the ‘new internet’ (Web3) are arguing for user-centric innovation -- where the end-user is the ultimate arbiter of a platform’s evolution and viability.
Most global mainstream financial institutions view partnerships with fintech and neobanks as important to their long-term growth plans. In 2021 alone, equity funding raised by fintech globally amounted to approximately $131 billion, according to BCG’s Fintech Control Tower report. These numbers lend further credence to results from BCG’s 2022 KSA Banking Qualitative Research study, which is indicative of similar sentiments in the rest of the region and points to several gaps in the local market that neobanks can fill: only 56% of customers are satisfied with savings products, and the majority (more than 56%) are unhappy with credit products (particularly expats). Frustrated by fees and subpar customer service, customers would switch banks if they were presented with more convenient digital options (32%), financially rewarding (30%), offered more benefits (33%), and a feature-rich experience (29%).
To achieve profitability, and ultimately success, in the regional market, the most important considerations involve finding a differentiated value proposition, understanding how to leverage ecosystem partnerships to acquire users from target segments, and being able to deliver a level of customer experience and convenience that is absent from the market. It is also important to consider deploying modular architecture from best-in-class technology vendors to speed up time-to-market, instead of reinventing the wheel and building technology stacks from scratch.
The GCC fintech sector is still early in terms of fintech maturity but is developing rapidly. As regulators review, barriers to entry, new companies, and established players are looking to capitalize on the demands of a young and highly connected population that wants convenient, on-demand access to their finances, and is keenly aware of what to expect in terms of sophisticated user experiences. There is a lot of action that is gaining traction in the race to conquer market share from incumbent banks. However, with the examples outlined above, mainstream financial institutions and other companies can draw powerful lessons on how to come up with a winning formula to secure first-mover advantages on the path to gaining critical mass and ensuring local success.