Anyone who keeps tabs on innovation in the financial services sector knows that with its limitless service potential and expansion opportunities, the industry is experiencing huge growth following the boom in personal technology use.

Despite this industry-wide growth, traditional retail banks are struggling to capture and retain new customers. Instead, Millennials and adult Gen Zers are turning to neobanks for their financial needs. What is driving this change in loyalty and how can traditional banks innovate to remain competitive? Check out our webinar on fragmented loyalty in financial services, or read on to discover recent innovation-drivers in the finance industry.

What are Neobanks?

Neobanks are new banks characterized by low-or-no-fee business models and impressive digital usability features to compensate for a lack of physical presence. They tend to be startup direct-to-consumer banks, but many larger financial and technology institutions like Goldman Sacks and Apple are starting to make plays in the neobank space as well. 

Rather than the traditional target of scalable and efficient growth, startups begin by growing within small population segments. Armed with large marketing and R&D budgets, neobanks often start out optimized for one or two specific needs – such as buy now, pay later trends. Over time, neobanks grow their customer base, and eventually, their range of services.

The Trojan Horse of Finance

These days neobanks act as a trojan horse, focusing on a specific component of a customer’s financial profile before using this opening to promote other service offerings. The personal finance company SoFi is a great example of a neobank startup wedging new opportunities into their services plan. Established in 2011, SoFi initially focused their efforts on refinancing student loans for growth. Over time, SoFi gained enough customer support to offer other financial solutions, eventually introducing services in wealth management, mortgages and personal loans, crypto trading, and brokerages. Now in 2021, SoFi is a retail juggernaut with a wide variety of services to offer their customers and plans to expand even further.

Startups, however, aren’t the only source of competition for traditional primary banks. Tech corporations are also entering the race, with some recent introductions including Apple’s Apple Pay and Apple Credit, Google, and Amazon.

Loyalty Fragmentation

The new trojan horses of finance are forcing a massive customer overlap between traditional retail banks and their neobank competitors. Fuel Cycle recently ran a study to expose this overlap, discovering that up to 92% of retail bank customers also have a neobank account. Despite this overlap, neobanks and traditional banks maintain a nearly equal customer propensity to recommend services. This means that customers are reporting equal satisfaction from both traditional and neobank services, yet neobanks continue to dominate the present finance market.

In order to address loyalty fragmentation, traditional banks must understand the attractors of neobank services. Younger consumers of the neobank era represent a significant portion of future spending power, and their needs vary widely from traditional banks’ older-leaning customer base. Here are some ways that retail banks can remain competitive with their neobank counterparts:

  • Eliminate holding fees
  • Increase interest rates where possible
  • Optimize mobile apps and digital nativity
  • Focus on customer service

Financial services companies need to shift their focus to improving their customer experience overall. Current global conditions have skyrocketed the popularity of services with optimized digital nativity, and at-home access to financial services has become essential.

Competing in the Fintech Space

Listening and adapting to customer needs will be imperative for traditional banks to evolve and succeed now and into the future. Get to know your customers and improve your CX with Fuel Cycle’s agile online toolkits, optimized and approved for secure use in the financial services industry.

For continual market research, check out our agile research platform, Ignition. With insights automation and video interview technology, Ignition provides financial institutions the complete agile toolkit to conduct accurate research and collect actionable insights for strategic decision-making.