Vertical Banks: The Future Of Customer Banking

December 16, 2019

Personalisation and targeting seem to be the latest Fintech trends nowadays. Experts have been wondering why no company has spun out a hyper credit card brand conglomerate. In fact, a lot of them have gone as far as to say:

"If done right, Vertical Banking = Relationship Banking" - Frank Rotman, QED Investors

Neobanks today are aiming to provide services for one specific section of the population. Evidently, this allows them to shape their services in a way that aids that demographic the best. For instance, Holvi, a Finnish startup aims to aid the self-employed as a “bank for entrepreneurs, made by entrepreneurs.”

holvi

They provide paperless accounting to their user so they users can see their expenditure and check which have been paid and which are still pending collection. Moreover, they allow their users to create an online store to encourage them to venture into eCommerce. This proves to be extremely time-saving and efficient for their targeted customer base.

Industry experts have been long debating if specialized banking for hyper-targeted userbase if the future of the banking industry. But, of course, at RedCarpet, we do not blindly follow the herd. We needed to dig deeper and understand how Neobanks could offer products and services that legacy banks could not. Is the idea of ‘Bank for X profession’ really a trend that might change the face of the consumer banking industry? Or was this a fad like many before?

Legacy Banks: Facing The Challenger Banks in 2019

Recently, the Fintech industry has been noticing some significant changes. Monzo, a Neobanking startup in Britain raised US$93 million in November 2017. They went on to build on a $27.5-million financing round during the first quarter. Another Fintech startup, Moneylion, has reached an estimated revenue of $5 million.

Customers are turning more and more towards Fintech companies for their credit, saving and investment needs. With their hyper-specialized services and products, Neobanks are challenging Legacy banks on a lot of fronts:

1. Technology

Traditional banks are bogged down by legacy systems and unmanageable organisational structures like branch operations. Neobanks, on the other hand, are faster with generally better UX. In fact, Tide, a US-based Neobank offers its users to set up a business account in minutes. It offers short term credit to its customers and users can get loans of up to £150,000 with no negative impact on credit scores or early repayment fees.

image6

2. Specialized Banking Services

Legacy Banks are bound by a lot of regulatory requirements because they aim to offer a wholesome banking experience, catering to all kinds of customers. On the other hand, Neobanks focus on niche products and not the entire retail banking value chain. This results in a more personalized kind of service where all of the banking solutions are tailored specifically for their users.

For instance, A Neobank called Greenlight specifically targets children and offers debit cards that can be given to them. It can be instantly reloaded by parents and they can impose restrictions on the child’s spend. They can also limit the child’s spending to a few trusted stores. Today, Greenlight has a $2.1M in estimated revenue annually.

image7

3. Affordability

The Rate of Interests offered by niche banks is lesser as compared to Legacy banks. Neobanks do not own brick and mortar establishments. Hence, most of their operations are online, which saves them the extra cost that legacy banks face.

4. Transparency

Legacy banks have been notorious for keeping a lot of information under wraps. In the age of internet and customer awareness, transparency is more than just a PR move. Neobanks have used this customer pain point by integrating transparency in their operations.

Monzo, one of the better known Neobank startups, has taken banking transparency to another level. They keep their users assured by updating them on how exactly their deposits are being used. They publish accessible and easy to comprehend Annual Reports. For instance, their 2019 Annual Report stated that they passed 2 million total users and added more than 200,000 new accounts every month. Moreover, their users can visit their public status page which shows live details of their system's status. This also shows details of any issues that might impact the customer’s use of the Monzo card or app.

image2

5. Easy Onboarding

Legacy banks are often overcome by lengthy cumbersome processes which makes onboarding quite difficult. On the other hand, Neobanks have made this process swift by utilization of fast customer-friendly technology and verification systems. In fact, Atom Bank, thanks to their partnership with IRESS built their unique mobile mortgage solution. Interestingly, this consumer and broker facing solution claimed to offer a mortgage in just 22 minutes. Later, they broke their own record by offering the same in 21 seconds.

image1

We, at RedCarpet, also revamped our onboarding flow to minimise dropouts and maximise conversion. We undertook some major research and made some structural changes to increase the ease of filling our form.

6. Better Customer Service

The biggest threat that traditional banks face from Neobanks is the exceptional customer service provided by the latter. Evidently, Legacy banks have the ‘brand trust’ factor that attracts customers towards them. However, Neobanks with their high interests rate, fast operations, and personalised services are quickly acquiring new customers and getting better at retaining them.

SoFi Money is an online cash management account offered by SoFi, a nonbank financial service provider. They are best known for their student loan refinance loans. SoFi Money offers an impressive 1.60% annual percentage yield on all balances, something unheard of in Legacy bank circles. They offer physical checks for rent or other payments and do not imply any overdraft fees. Such amazing customer service has helped them to acquire an annual revenue of US$547 million.

image5

A great example of customer-centric banking experiences is demonstrated by Barclays. They became the first high street bank to allow customers to block payments to certain stores or activities. Users can cut off their spending on gambling, pubs, bars or even phone lines.

7. Aiding Small Businesses Enterprises

According to statistics, there are a staggering 42.50 million Small Businesses Enterprises (SME’s) in India. This makes for a total of 95% of the total industrial units in the country. In fact, SMEs employ approx. 40% of the Indian workforce. Surprisingly, despite such intimidating numbers, most legacy banks have failed to aid them appropriately in the past. One of the major reasons for the same is increased bank regulations. After the 2008 recession, banks made rules to decrease their risk factor by not lending to SME’s. Moreover, lack of collateral and credit history intensified their doubts on whether SME would be able to deliver on their credit requirements.

Neobanks, with their adaptable and cost-effective methods, are helping SMEs to manage their online accounts with budgeting and saving tools. Many are focused on aiding SMEs with the credit underwriting process. In fact, many Neobanks like Bank Open are aiming to help startups and SMEs through bulk payouts, APIs and simplified banking experience.

image3

Conclusion

Evidently, legacy banks have the advantage of having unlimited funds and the factor of customer trust. However, vertical banks, with their improved customer service, personalized banking and seamless transaction are coming up as strong contenders. A lot of experts are betting on their unprecedented growth and transparent operations as well. In fact, recent developments affirm that it might be a good idea to start deeming them as the ‘future of net banking’.

About The Author: This post has been written by Sandeep Srinivasa and Etee Dubey.