Building a Neobank: Why (& How) Legacy Banks Should Design A Digital Bank to Stay Ahead

Your bank or credit union alone might no longer be enough to retain your primary customer base.

In fact, creating a separate digital bank unit is a vital step for banking growth in the 21st century, McKinsey argues in a report. 40% of people are using fintechs for daily financial activities and more than nine out of ten of them are satisfied with the experience.

The Financial Brand was advocating traditional banks and credit unions get on the digital banking train far before the rest of the industry.

Jim Marous —?in particular — has reitereated time and time again for years how critical it was for legacy institutions to jump on board:

"Deploying a digital-first banking platform is not only now possible but mandatory for financial institutions of all sizes," Marous says.

In a digital era where speed is of the essence, it is more important than ever to think like a digital organization, where agile development and test-and-learn mentality can bring solutions to market first as opposed to being a fast follower.

If banks and credit unions?don’t move quickly, competitors will insert themselves into the buying process, gaining the valuable purchase insight that is the domain of the banking industry today .

It's not as easy as experts make it out to be: the lingo alone is a nightmare: build or buy, low code versus no code, platform banking and even the “buy, build, extend, and assemble” model.

To compound the confusion, there are weighty questions often left unanswered in the digital bank conversation. One big one: Did all these banks and credit unions that launched a digital bank hire specialized experts to build out the tech or did they buy a digital bank package from a fintech that can do it faster and better for less?

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Breaking Down The Digital Banking Terms

There is a laundry list of questions bankers are bound to have when it comes to creating a digital bank subsidiary: Do we build our own? Do we buy a tech package? What's more affordable?

The terms can be confusing too. There's low-code versus no-code and there's build or buy. Then there's the middle option: buying prepackaged digital banks.

What's the best option?

No-code vs low-code

The rapidly increasing pace of change and need for code in many industries, including banking, has driven major growth in two alternatives to traditional software development: 'low-code' and 'no-code' .

Martech expert Scott Brinker of chiefmartec.com argues in a blog that increasingly no-code and AI are changing marketers’ role and capabilities, going from "… ‘What if?’ ideas to ‘What about this?’ creations."

“No-code is more than creating without code,” Brinker writes. “It’s more than just building websites or apps that would have previously required knowledge of JavaScript, HTML/CSS, Python, etc. The broader spirit of the ‘no-code’ movement is creating without limits.”

Low-code programming uses a developmental system from one vendor or another that essentially creates “building blocks” of code that accomplish common tasks. These are manipulated using graphical user interfaces, basically visuals symbolizing the blocks of code that are being combined. They are moved around using drag-and-drop. Coding to make the blocks work with other blocks, and for other tasks, must still be done manually.

On the other hand, no-code programming is designed for the true non-coder, typically a user who knows what they want but who wouldn’t know the first thing about actual coding.

The idea is that they are given 'building blocks' that can be assembled without even knowing how to connect them. No-code also uses graphical interfaces and is often presented in the form of templates that can be manipulated to produce the process that the user wants.

Simplifying Low-Code Vs. No-Code

Essentially, a low-code solution entails using building blocks to design a digital bank, and it requires some coding experience. No-code utilizes the same 'building block' strategy, but it is more of a plug-and-go.

Build or Buy?

"To build" refers to when a bank or credit union hires tech experts to build online banking technology in-house, whereas "to buy" in this sense means purchasing the necessary capabilities from a fintech or other vendor.

McKinsey surveyed banks which invested in a digital bank subsidiary and found it takes on average 15 months to build a digital bank from development to launch and 18 months from launch for a bank to break even on the investment.

It often requires an investment of $20 million or more prior to breaking even and an average of 30 employees at launch, although over half (55%) of new business heads are often sourced from the existing bank’s core team.

A Harvard Business Review study found that any company would benefit more from buying over building given that "firms can reduce innovation time by up to 19% if technology licensing is used as an input to their R&D."

Digital Scorecard:

There are many arguments in favor of buying the tech components needed for a startup digital bank versus building it, but it’s not entirely one-sided.

Nabeel Wyne — an advisor on digital banks, digital transformation and enterprise architecture at Capgemini — suggests smaller, community banks take the 'buy’ approach, if they can.

“‘Build’ is a tough road that mostly does not suit the corporates who do not have core technical expertise in-house and rely on partners to deliver applications,” Wyne wrote in a LinkedIn post.

Click here to learn more about Building Versus Buying .

The Middle Ground

Other companies, like Nymbus, offer prepackaged digital banks that are scalable within that company. Liz High uses the most recent digital bank they launched — Hitched — as an example.

“We came up with the idea, we built the brand, we did the messaging and positioning, and built the technology,” High explains. “And then we sold it to the bank.” The bank in this case was Iroquois Federal Savings and Loan.

Aside from the purchase price, Nymbus makes money the more customers engage with the digital bank platform, High says, which encourages faster technology growth on Nymbus’ part. Ultimately, High explains, the goal is for a bank or credit union to buy several digital banks, each catering to different subsets of populations.

Examples Of Banks Building Digital Banks

There are a lot of banks in the financial industry that are the backers behind a digital bank —?meaning they provide the services that a nonbank, unchartered institution would need.

Plenty of those out there.

But, there are also a large number of banks which have launched their own digital bank:

Cambridge Savings Bank's Ivy Bank

Cambridge Savings Bank's CEO Wayne Patenaude says in an interview with The Financial Brand that the bank wanted to keep the product set simple as it launched a new nationwide channel. Saving is a priority for millions of consumers, he points out, and so is having a simple way to manage their money.

Both contribute to financial well-being, a topic of increasing interest among consumers, Patenaude believes. The Ivy Bank app allows customers to view their spending by category, set budgets and view all of their bank accounts — including those held in other institutions — on a simple dashboard.

JP Morgan Chase's Finn (in the U.K.)

Finn — the digital bank spinoff from Chase —?might have crashed and burned in the U.S. But it's making waves across the pond.

In less than a year, U.K. Chase attracted roughly half a million banking customers. It also boasts over $10 billion in deposits and has processed 20 million payments.

“We have been watching in which markets customers are really ready to do their banking primarily through digital channels,” Sanoke Viswanathan, Chief Executive Officer of the U.K. Chase brand told Reuters. “The U.K. frankly leads the way in this respect.” 9

“The market structure in the U.K. is such that you have to generate economies of scale; there are profits to be made but if you are subscale or have a high-cost infrastructure, you’re not going to make it work,” Viswanathan said. 9

Goldman Sachs' Marcus

Goldman Sachs' Marcus brand was introduced in 2016, with both no-fee personal loans and high-yield FDIC-insured online savings.

Both of these products leveraged established customer bases, such as a deposit platform acquired from GE Capital.

Combined with the relationships built through the introduction of the Apple Card in 2019, the Marcus brand currently serves more than 13 million customers (up from less than ten million in the fourth quarter 2021) with an array of personal finance and investment tools available through a smartphone app.

"We have several products, but we are shooting for the experience of our customers to be an integrated end-to-end experience on our website and on our app seamlessly across products," Swati Bhatia told Jim Marous.

Other banks too have launched their own digital banks, which financial institutions can look to for ideas and inspiration: National Bank of Omaha's FNBO Direct, River Valley Bank's IncredibleBank, Texas National Bank's Bankers Lender, First Horizon Bank's Virtual Bank and Central Pacific Financial Corp's Swell.

Check out The Financial Brand to learn more about building digital banks.