How established and challenger banks can meet customers’ soaring expectations
Competition in the banking industry is cut-throat, more so than it has ever been. The rivalry doesn’t involve just established banks who’ve been in the business for tens or even hundreds of years.
A flurry of challengers have popped up in recent years as a result of the change in the value chain, new legislation, and especially due to changing customer habits and expectations creating a pull for new business models enabled by modern tech stacks.
A quick visualization of the challenger-banking ecosystem helps put things into perspective. Established banking organizations and challengers are now on the same boat, competing for customers’ attention and willingness to engage with vastly different resources and capabilities.
This Cambrian explosion of neo-banks was long time coming. Ever since the 2007/2008 financial crisis it has become clear that Big Banks have become Too Big. Westpac’s recent scandal in failing to investigate customers who made transactions possibly linked to child exploitation and terrorists proves there remains an urgent need to shake up the status-quo. As the markets and regulators lose control over the big banks, the need to break them up in smaller pieces becomes imperative. creating an even stronger magnetic force for neo-banks, challengers and those with greater agility and customer focus.
However, we see many of the neo-banks, being built by career bankers, losing much of the promised innovative edge by adopting overly trodden bank structures and cultures. To be successful the challengers must have a Capital F and Capital T in FinTech, ensuring they string Technology muscle and approach into design and delivery, focusing on the two things they must do well: build and sell.
As a consequence, the overabundance of marketing campaigns, the commoditization of offerings and a lack of granularity in customer segmentation leads to a lot of the challengers struggling to overcome the scarcity of the customers’ attention and inertia. Engagement and attention rank highly among the biggest issues for banks today.
Rising customer acquisition costs
Exacerbating the market conditions above, VCs have poured massive amounts of money into challenger banks like Revolut, Xinja, Monzo, Chime, Volt, Starling, and N26, looking to tap into new opportunities in the ecosystem. The tech giants are finally making their long-awaited move into financial services. This includes the new breed from Asia (WeBank, Ant Financial and Mox) as well as the traditionalists from the United States: Apple launched a credit card; Google launched current accounts; Uber launched a new division called Uber Money; Facebook launched its Pay service. While the banking industry competes internally, the tech giants have the capacity to eat everything from the outside.
Their first goal? To attract and onboard as many customers as possible, as fast as possible. Consequently, the biggest budgets go that route, increasing customer acquisition costs for everyone.
“For startups burning through cash to acquire legions of customers, this could help provide a path to profitability, whether that’s through a subscription service, broker-style fees for making recommendations, or some other way of making money based on the reams of data that their systems could collect. The trick is getting there before the venture capital money runs out, or someone else does it first.” – Source
This is precisely what the strategy these challenger banks are basing their growth on.
After raising EUR 100M, presumably at a valuation north of EUR 200M Praxia is rumoured to have accepted EUR 10M as an exit from Viva wallet
In early October 2019, Revolut announced its losses had doubled in 2018, while “the principal direct costs of the business continue to be card scheme costs, acquiring costs and user acquisition costs”.
A month before, in mid-September 2019, Monzo shut down their user referral program because the costs had ended up outweighing the benefits:
“The neobank discontinued a policy that rewarded customers who sign up after being referred by a friend with a £5 ($6.25) cash bonus […] The challenger bank said the bonuses were expensive and that it wanted to “moderate” its user growth, adding that it dispensed £500,000 ($624,670) in bonuses over the past two months.”
These are just three examples that show the important financial burden that customer acquisition costs puts on both fintech startups and long-standing banks.
A report dedicated to mobile finance apps exploring user acquisition trends and benchmarks provides more accurate details:
“Over the past five years, user activity on finance apps has rocketed by 354%, cementing apps as the “channel of choice” for consumers to manage their finances and plan their future. […]
Amid this flurry of activity—and fierce competition as banks and fintech companies race to grow their audiences and drive loyalty—costs across the funnel increased slightly compared to the previous year. At $6.93 the average cost to acquire a new user in 2018 is 5.32% higher than the year before, when the price tag was $6.58.
The average cost to convert that user to complete a registration is also somewhat higher, coming in at $25.73 compared to $21.42 the previous year.”
Liftoff.io Mobile Finance Apps Report 2019
A golden rule in marketing is that customer acquisition costs increase in direct proportion to the broadness and congestion of the target market. We see this playing out in a key battleground where we see many contenders targeting the same broad user group: millennials. As open banking plays out, many of the winners will be those that get increasingly niche in their offerings or identify untapped markets.
As we were to look at the situation from a blue ocean strategy perspective, there remains an opportunity for growth that’s still uncongested.
Get Tribal
While challenger banks focus mainly on millennials, there’s huge potential for future-oriented banks to start crafting increasingly niche or un-served markets. The large pool of customer intelligence data points are ready to be harnessed if financial organizations decide to become more granular and look to alternate segments such as Gen Z.
Meet your future customers
To kickstart this process, we’ve collected the most relevant characteristics that look at Gen Z and it’s our hope these generational commonalities will act as a lens rather than labels.
Another set of interesting aspects pops up in McKinsey & Company’s report: 4 specifics behaviors that draw from a single pursuit – to find out the truth.
How Gen Z sees consumption
Access rather than possession – products transform into services that consumers use to connect among themselves
As self-expression – eager for personalized products and willing to pay a higher price to express their individuality
A matter of ethical concern – “well educated about brands and the realities behind them”, quick to develop a point of view around new brands, and fast to penalize lack of follow through on company promises
On one hand, Gen Z consumers are savvy enough to know the type of risk associated with using a challenger bank’s products and services. On the other hand, when it comes to established banks, they’re less likely to be lenient and more likely to have ethical concerns.
“That path is more challenging for large corporations, since a majority of our respondents believe that major brands are less ethical than small ones.”
These key generational traits can help visionary banks rethink how they deliver value, reconcile scale with personalization, and ensure they practice what they preach in their marketing and corporate culture.
Key Gen Z features for the banking ecosystem
Although the first members of this generation will turn 25 in 2020, a large part of the Gen Z group hasn’t even turned 18 yet. Based on known behaviours, banks can already carve out strategies to acquire them, engage them and refine their approach as young Gen Z-ers start using banking products.
Gen Z’s expectations of instant gratification and uninterrupted availability takes many forms when it comes to consumer behavior in relation to financial institutions (lack of patience with the onboarding process, prefer to be in control of their financial assets which also entails having plenty ofself-service options, expect mobile-first, cashless services etc).
The incumbent’s opportunity
While everyone else continues to compete for millennials’ attention and financial resources, a few banks are already leapfrogging this demographic and looking at Gen Z.
Revolut was set to launch Youth by the end of 2019:
“Revolut is breaking ranks with its fellow challenger banks by targeting 7-18-year-olds for the first time, set to launch “Revolut Youth” later this year.
Parents will control children’s cards via their Revolut current accounts, and a child-friendly app interface will reportedly follow in early 2020.
Most importantly, Revolut Youth users will be absorbed onto its main platform once they hit 18.”
What’s more, gohenry – a prepaid debit card and app with unique parent controls designed exclusively for 6-18 year-olds to help them learn good money habits in an increasingly cashless society – has been on the market in the UK since 2012.
Start cultivating a relationship with Gen Z
Incumbent banks have a massive opportunity here because most Gen Z-ers have yet to develop strong relationships with financial companies. Their openness to a wider range of financial products and services created the perfect context for established banks to create the first touchpoints with Gen Z.
In this new era of lifestyle banking, we’re confident thatgame design principles can be one of the most effective tools to create apps, products, and services that cater to Gen Z’s expectations.
Established banks can close the gap and reap this opportunity for growth by leveraging the Moroku engagement model, designed to help young generations to build healthy financial habits.
Large banks with strong data intelligence programs can leverage their relationship with existing customers in order to reach their children, the Gen Z, while avoiding the same customer acquisition wars that played out with the millennials.
For example, we built ChoreScout on top of our GameSystem platform to show the possibilities of using Moroku to create highly engaging banking experiences around generation-specific needs, such as the ones Gen Z has.
Established banks can make progress fast by white-labelling apps like ChoreScout or building customer applications using the Moroku GameSystem to teach Gen Z-ers fundamental financial skills in a fun way while leveraging decades of experience to rapidly integrate with their core banking infrastructure.
Understanding what motivates and stimulates Gen Z-ers to engage is critical for banks looking to cater to young customers. That’s why working with a partner with deep expertise of shaping financial habits can be a significant competitive advantage that places big banks ahead of the curve.
