The threat of neobanks is on the rise, but incumbents already have enough ammunition to deal with it
Digital banks attract customers to their ranks, from brand awareness to account opening, with native digital marketing strategies and value propositions. Streamlined account opening flows help them close the deal.
- The ranks of digital-only bank account holders will reach 53.7 million in 2025, against 29.8 million this year, according to Insider Intelligence forecasts.
- To put that number into perspective, Bank of America and Citibank combined only had 45.3 million active mobile users in the second quarter of 2021. (Citibank reported the number of users for North America, while Bank of America said globally.)
A new report from Insider Intelligence looks at what incumbent banks stand to lose from the rise of a specific type of digital-only bank, neobanks, and how they can fight back.
What the incumbent operators have to lose in the face of neobanks:
New accounts opened digitally. Digital-only US bank account openings have been bitten by the coronavirus pandemic. But the future is theirs:
- This year, they will grab 7.4 out of 10 digitally opened accounts, and that dominance will not fade. From 2022 to 2025, they’ll get at least 6.6 out of 10 every year, leaving U.S. incumbents to fight for the rest.
Fee income. Giving in to pressure from neobanks to remove fees (such as overdraft or account maintenance fees) eliminates a major source of income for banks:
- U.S. consumers paid $ 12.4 billion in overdraft fees in 2020, according to Forbes.
- Total bank fees paid by account holders reached $ 32.2 billion last year, according to personal finance site MagnifyMoney.
Access to certain consumer segments. As neobanks use bespoke services to make inroads into the often underbanked consumer demographics, the long-term customer acquisition efforts of traditional banks could die a thousand fold.
Primary banking relationships. Only 11% of American adults had their main checking account in a digital bank as of December 2020, according to Cornerstone Advisors quoted by Forbes.
- However, neobanks pursue primary banking relationships by portraying access to leading benefits, such as early direct deposit or higher savings interest rates if customers meet direct deposit or transaction thresholds. .
The incumbents are not powerless. Here’s how to counter the threat of neobanks
These three best practices range from small (low maturity) to aggressive (high maturity):
- Low maturity. Basic incentives for setting up direct deposit, such as cash bonuses or waived account fees, can help foster primary banking relationships by encouraging customers to make banking a larger part of their financial life. .
- Average maturity. Providing early access to direct deposit (a perk that is usually a neobank-specific advantage) helps erode a key neobank competitive advantage and persuades customers to implement direct deposit.
- High maturity. Moving beyond neobanks to next-generation mobile banking features – the ability to manage or cancel subscriptions to services like Netflix or Spotify, for example – would come back to the heart of one of neobanks greatest benefits: their digital prowess. .
For a deeper dive into the rise of neobanks and the major disruptors that could shake up the competitive dynamic between incumbents and challengers, as well as the wide array of counterattacks available to traditional banks, read “The digital-only banking revolution in the United States: how old banks can fight back as neobanks take off. “