Everyone remembers Aesop’s fable of the Tortoise and the Hare. The account of this race between unequal partners has several different interpretations, …
In my last blog ‘Are Neobanks Changing Old School Finance?’, I talked about how the digital revolution and evolution of financial regulation has lowered the barriers to market, opening the sector up to new challengers.
In short, the way people bank is changing and for many, it’s going digital.
Over the last five years challenger banks have made inroads into the debit provider and card payment facilities, with some having tripled their customer base in a year.
As impressive (and worrying for traditional banks) as that is, what this shows is that Neobanks need to move into credit facility options and mortgages. For generations, this has been the mainstay for banks and one of their most profitable portfolio offerings for the consumer market.
Mortgages can potentially give you a customer for life, and as such the long-term cash/profit projection is massive. This is one of the main reasons, I believe, will be the next battleground…skirmishes have already started.
Looking down under
If we look at Australia (which is a relatively new market for Neobanks) 86400 has over a year in the marketplace and is now focusing its staff on $2billion in mortgages. With an aim to grow their mortgage portfolio from around $40million today up to around $2billion with only 110 staff members, their goals are backed by the technology that sits behind them. It will cater to owner-occupiers and investors with principal and interest-only loans.
This is a prime example of how Neobanks are moving into the space at speed with the ability to offer lower rates, ease of management and an ability to change mortgages quicker, at less cost.
No more home advantage
With Europe being a much more mature market, others are moving towards this approach – going through the requirements for license regulation. Once this happens, larger traditional banks are going to have a problem on their hands, they’ll need to scale at speed to counter the offers from the new kids on the block.
Other areas to consider will be Open Banking and how this is going to affect mainstream banks, a large proportion of banks make their money from business banking, mortgage payments etc. Many of these are done currently through BACS as an example. The bank makes money on the transfer as well as keeping the money for up to 3 days in a holding account. With the take up of open banking, this will remove the need for payment processes like BACS as customers/business will just give direct access to their bank account for immediate payment.
Not all banks have signed up to open banking yet and that includes some Neobanks, but it is fast becoming a standard and will eventually become the new norm.
Putting this into context of mortgage providers and payments, even credit reference checking, the onset of all this new tech is going to change the structure of how financial institutions work and more importantly for them, how they make money.
Consumers want to see change and are actively looking for simpler options allowing them the freedom and feeling of managing their own financial requirements on a day-to-day basis.
The true battle then, will be who is ready and able to offer that change first?
It’s safe to say that Neobanks are winning the “Hearts and Minds” campaign with their users having the deep-seated roots of wanting to challenge and move away from traditional banks.
Digital Banks, Neobanks and “digital disruptors” have already started cutting into the revenues of the traditional and financial markets and institutions.
Read Nick Foggin’s complete deep-dive into Neobanking here