An economic downturn is a-coming. Or it’s already here, depending on who you ask.
According to Forbes’s Kenneth Rapoza, for example, with natural gas prices over $100 more per megawatt hour than a year ago, Western European economies are on their way back to the Middle Ages. Barclays “only” expects a eurozone recession to unfold in the fourth quarter of 2022, spearheaded by Germany, and to carry over well into the next year, along with a 1.7% contraction in real GDP. The growth prospects of the UK economy have also been dimmed by a lingering cost-of-living shock and, KPMG Chief Economist Yael Selfin says, now point towards a shallow recession fuelled by a squeeze on household incomes and a jump in costs for businesses.
Over the pond, things look a bit brighter – for now. Goldman Sachs analysts predict a one-in-three probability of a US recession over the next year, and a mild one at that, citing higher-than-usual job opening rates, strong disposable income outlooks and steady consumer spending. This is welcome news but probably does little to quell the anxiety of consumers who saw their grocery bills go up by 9.4% in the first half of 2022 – the biggest twelve-month rise in four decades. Former Federal Reserve official Bill Dudley shares their sentiment. He told CNN: “Almost certainly there will be a full-blown recession. If we’re not in one yet, I think we will be in the next 12 months.”
With a sharper-than-anticipated slowdown in China, the world’s three largest economic powerhouses are slowly but surely losing steam – and dragging the rest of the globe with them. To bring down inflation, central banks have been raising interest rates with a degree of synchronicity not seen since the 1970s, highlights a freshly published World Bank report. But it probably won’t be enough. World Bank Group President David Malpass warns: “My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging markets and developing economies.”
Nothing good, unless they go back to their roots and focus on what made them a success in the first place. That is, innovation. Hear me out.
The less disposable income people have, the more skittish they become about who to trust with it. And new-generation financial service providers aren’t exactly their go-to options. In a 2020 survey by Accenture, less than half of Brits believed that neobanks would even exist in a year’s time, with a fifth of the respondents saying “not at all” when asked if they trusted them to look after their financial wellbeing. With face-to-face banking out of the picture, digital-only players were among the rare winners of the coronavirus crisis, granted. But they have yet to translate the sudden surge of downloads and account openings into sustainable growth and, even more importantly, profit.
“A business based on interchange fees is only viable if costs are contained and volumes are high. All neobanks must bleed cash building trust with the hesitant underbanked and luring the already banked with freebies,” points out The Economist. Brilliantly put; and here’s why this is a problem: consumers aren’t the only ones who get nervous about their money moves during an economic slump. Should it turn into a full-blown, prolonged recession, the VC money that neobanks typically use to foot the bill of their rampant customer acquisition costs is bound to dry up. In other words, a longer-term strategy for monetisation will go from nice-to-have to means of survival.
In two key areas, to be specific: product offering and customer experience.
A few months back global strategy and marketing advisory firm Simon-Kucher & Partners published The Future of Neobanking: How can Neobanks Unlock Profitable Growth?, an eye-opener of a study about where the industry is now and how it could get on the path to profitability. Having analysed 25 of the world’s largest neobanks, the researchers found that only two had reached profitability, and the majority of them bring in less than $30 in annual revenues per customer. The US landscape looks particularly dire, with less than a handful of local neobanks breaking even, and several losing as much as $140 per customer per year.
One of the main culprits is limited product range. Very limited, in fact, with most neobank business models revolving around accounts and card-based payments. These are essential but entry-level services that can turn into major loss-making machines. It’s high time more new-wave financial institutions looked into adding potential cash cows to their portfolios, such as digital investments, lending and mortgages, crypto currencies as well as buy-now-pay-later and embedded finance schemes. In other words, products and services that make customers want to trust neobanks with their money longer than the two seconds it takes them to transfer it somewhere else.
Customers these days don’t need much convincing. In a 2021 survey of more than 5,000 US consumers by EY, 31% named a fintech firm as their primary financial relationship, a steep rise from just 6% in 2019. Fifty-three percent of respondents have also set up direct deposits with them. Capgemini’s World FinTech Report 2021 echoes this, drawing on the fact that 25% of global consumers on the lookout for faster delivery, personalised services and convenience say they’re open to trying banking products from new-age players.
This brings us to customer experience, the other arena challengers should renew their efforts in. Now, you might think “Wait… weren’t it neobanks who disrupted the industry with Netflix-like banking experiences?” Yes, they were. Too bad they’ve stopped there. Lack of innovation post-MVP, Simon-Kucher & Partners says, is among the most common mistakes digital-native banks make in their infancy. The result? Many of them go from disruptors to disruptees, failing to keep pace with fast-changing customer demands and technology trends.
Especially when it comes to personalisation.
Think about it: the only interaction challenger banks have with people is through a screen. Making it possible to open an account in just five taps is certainly a great way to win users. To transform them into loyal customers, digital-first players must find ways to add a human touch to customer engagement and care – even more so when users are cash-strapped.
Say, alert customers of scheduled transactions that might send them into the red or help them stick to the 50/30/20 budgeting rule. Or show them peer comparisons and cash flow patterns that predict bigger financial troubles on the horizon. Based on their spending habits and recurring payment transactions, smart money management solutions can help customers find safe-to-save money they might not have even known they had and build good saving behaviours. Or highlight where to shave costs and tell them about deals and discounts on their favourite brands.
But that’s just the tip of the iceberg. Best-in-class data analytics solutions can tell which users currently rent a property but earn enough to take out a mortgage and buy a home, and allows banks to proactively come up with a mortgage calculation and offer. Or track which customers have entered a new phase in their lives, such as having a baby or starting retirement. In other words, they let financial institutions pinpoint the very moment when customers would need specific financial information, products, services or advice and respond with just the right action.
Do read our latest case study to learn how we’ve helped a 130-year-old bank group become digital at scale but human at the core for inspiration. Plus, watch this space for my next piece on how to innovate at scale and speed without breaking the bank.
If you want to check out how Finshape supports neobanks with personalisation solutions, click here.