Neo Bank for the Millenials

Note: Below is part 1 of the post. Part 2 of this post is here - https://www.dhirubhai.net/pulse/neo-bank-millennials-part-2-deepak-malani/

Technology disruptions have impacted almost all industries and sectors. Banking remains one of the few sectors which is being disrupted bit by bit. One of the renowned VCs, a16z predicts that every company will be a fintech company in near future

This snapshot below further elucidates how banking infra will witness what Amazon did to compute and storage and spawned a whole generation of businesses.

It also calls out one important thing - "What’s so unique about this disruption is that, with most large industry changes, oftentimes there’s one winner and many losers. But in this case, everyone has the opportunity to participate and improve significantly. For startups, we’ve seen some of the examples of the new infrastructure companies that are being built, and there are many more opportunities. But there are even more opportunities in the thousands of experiments that are going be unleashed on top of this infrastructure." Essentially the banking infra as services will spawn a new breed of startups focusing on core consumer problems of this industry. One such need is how users interact with their bank. Enter Neo Banks...

What is a Neo Bank?

Prior to the coronavirus lockdown when the world was seemingly normal, Neo Bank was the buzzword especially in startup circles. Fintech sector has been in the limelight for last few years. It started with the payments, lending, asset management and now with neo banking. The word being catchy also was in the spotlight quite often in news and media. Another word typically used for neo bank is challenger bank. However the underlying model is the same. So what exactly is a neo bank?

Neo bank is a digital only and mobile first bank and may not have any physical branches. These banks don't have banking license of their own but rely on the traditional banks for the licensed services and also use the core banking infrastructure systems for transactions and services. Unlike the incumbent banks which aim to serve every person on the earth, the Neo banks are primarily aimed at specific target segments who would generally be comfortable to transact online and may or may not have utilized banking services in the past. Neo banks offer various banking services ranging from account services, investments, credit facilities and payments

Neo Banks & Target Segments - India

There are over a dozen funded neo banks in India alone. Below tables shows neo banks for different target segments -

From the above table it is fairly clear that most of the Neo banks are targeting broadly 3 user segments with one of it focusing on b2b -

Who Is A Millennial?

As evident from the above startups list above, many Neo Banks are targeting Millennials with higher than average disposable income. In this post I want to focus on the 3rd target user segment i.e. White Collared Millennial Workers. But before that we need to understand millennials.

Millennials are loosely defined as those who were born 1980s and 1990s. This group will mostly comprised of people who were employed or in own business for atleast 5 years. This generation is also referred to the one who are comfortable with new age digital technologies, adaptable to disruptions and also are fairly connected to the previous generation (again loosely defined as Baby Boomers)

Millennials & Banking - What do they want?

While we, the millennials, mostly have bank accounts with one or more of the established private or public sector banks, the experience of dealing with a bank is at best nothing to talk about. A few times we have enjoyed the banking experience and many a times we loathe the experience fraught with delays, hidden fees, non-customer friendly and sales-y support.

Many reports unsurprisingly point to the fact that Indians do not find banking a pleasant experience. One report says that a whopping 84% of Indians find their banks falling short of expectations. But what choice do users have? There is SBI in public sector bank or HDFC, Kotak and ICICI in private sector to which most of the millennial consumers have an account with. This is where the Neo Banks can fill in and provide a memorable experience! But the question is, what do we, the millennials want?

Bain in the report titled - "In search of customers who love their Bank" shared an interesting approach of earning customer loyalty (One of the metrics to measure is NPS - Net Promoter Score?, which measures the likelihood that a consumer would recommend the service or product to others). Going back to first principles, we know that loyalty drives growth and better economics. Banks that lead in loyalty, i.e. higher NPS, will have better economics and a defensible competitive moat.

How does one bring loyalty? There could be many factors that drive loyalty but fundamentally it is a function of how an entity delivers the value perceived by its customers. Bain in the same report breaks down this aspect of value across 4 broad categories - Functional, Emotional, Life-changing and Social Impact, in a pyramid of structure similar to Maslow's heirarchy of needs.

Among these, the important value elements for the Bank are - Quality, Saves Time, Reduces Anxiety, Simplifies and Heirloom. The report ran a survey among customers to rate his or her primary bank on these elements in comparison to some renowned technology leaders. Below image is snapshot of comparison of banks with tech companies on these parameters. It does not put a good picture for the banks.

While banks score resonably well on Reduces Anxiety and Heirloom, they are ranked low on Quality, Saves time, Simplifies. It is also important to notice that Banks are rated lower than Paypal on Reduces anxiety, Saves time and simplifies. It is also evident from the rise of Paypal along these elemental values.

The above analysis thus helps us understand on what broad element values should a Neo bank focus on to succeed in the long run. Some of these values are functional a.k.a hygiene and a few go beyond the functional category. Additionally Neo banks can add additional elemental values across the categories of the hierarchy and become better than the incumbents.

• How can the Neo bank help me Save Time? Seamless onboarding? Automated investments?
• Can the Neo bank Simplifies and Organizes my monetary transaction footprint? Spends & Savings Analyzer?
• Can the savings account in my Neo bank work to Reduce Costs & Make Money for me? Due date alerts, investment advice, penny savings Et al.?
• Is it too much to expect a good Quality service from my Neo bank? Safe, Secure and Transparent banking experience?
• Will the Neo bank Reward Me for the business that I give to them?
• Why are the bank portals and app so poorly designed? Can the Neo bank give me a fluid online transaction experience that has user-centric Design?
• Can the Neo bank gives me a sense of Belonging to a community?

Part 2 of this post is here - https://www.dhirubhai.net/pulse/neo-bank-millennials-part-2-deepak-malani/

Do share your feedback / questions in the comments!