Next gen digital banking: from disruptors and competitors to partners

For almost a decade, neobanks and more established banks have been watching one another with the wariness of Western gunslingers. On the one hand, neobanks (aka digital-only banking platforms) offer customers personalised, digitised experiences, complete with superior user interfaces and data-driven insights. On the other hand, established banks bring big reputations – and big balance sheets - but also face big challenges as they seek to transform their businesses to meet new customer expectations.

What if however neobanks weren’t simply seen as disruptors or competitors? Instead of fearing this town ain’t big enough for the both of them; what if neobanks and the traditional banks considered each other as partners?

Neobanks: the story so far

Right now, neobanks are at something of a watershed in Australia. Setting up a digital bank has proved tough and remaining in business has proved harder still (as seen during the recent wind-up of Australia’s first online-only bank, Volt).

Globally, neobanks have sought specific market segments (and almost always where those segments were neglected by incumbents). Closer to home, Australian digital banks have shown a tendency to take on the big banks directly, and many have sought banking licenses. Both approaches have come with their own challenges, and with the exception of a few, the nimble neo’s have had mixed success particularly here in Australia.

Where the world’s best neobanks are starting to taste success, however, is in making their core technology – or neo-core banking platforms – available for broader consumption. (Think: cloud-native platforms such as Finxact, Mambu and 10x.) In fact, representatives from Britain’s first and much proclaimed digital bank, Starling Bank, were in Australia recently to explore the opportunity to offer their core banking platform (Engine) as-a-service to some of the Australian banks. One fact that they shared with interested parties was that they were able to stand up their SME banking platform from scratch in weeks as opposed to months or years.

In this way, the neo’s are commercialising their digital nous, offering the major banks new ways to improve their customer experience. Could this be where the next gen of digital banking is headed in Australia? And could it be the perfect partnership?

Next gen digital banking: win-win-win

Certainly, neo-core banking platforms appear to be a win-win for neobanks and the traditional bricks and mortar banks alike. Not to mention a win for customers.

Collaboration like this allows established banks to leverage new technology and accelerate their digital transformation, achieving efficiencies and leaving clunky legacy systems behind. In addition to capabilities, they also get access to new (often younger, tech-savvy) customers.

Australia’s Big Four are fast reaching the point where the only way to improve productivity and cut costs any further is through complete end-to-end transformation. And neo-core banking platforms could be part of an ecosystem to deliver the solution.

In return? Neobanks would enjoy affiliations with the big banks, and the security and capital this brings.

A partnership of equals

The success of any neobank/traditional bank partnership rests on it being a partnership of equals. Where established banks try to simply absorb new neobanking tools into existing core architecture platforms, the results are regularly disappointing, and the stumbling block here is one of mindset.

Instead, the traditional banks need to see neobanks as a genuine partner – not just a supplier – and then develop a way of working that reflects this partnership status. That means introducing neobank technology as a wholesale change within the organisation. Whether reconfiguring the way the organisation does mortgages, or rethinking policies and processes; by properly partnering with a neobank the effect can be transformative, driving real efficiencies and productivity if used as a catalyst to simplify products, policy, process and technology.

Practically speaking, how do banks go about this?

Top 5 tips for partnership success

If you’re not in a position to partner, there’s a lot you can still learn from the next generation of banks. And if you are considering partnerships, there’s plenty of opportunities in Australian banking right now. Based on PwC’s experience here and overseas, here’s five tips to get your partnering off on the right foot.

1. Choose carefully: Before making partnership decisions, do your homework. Why do you want to partner with this neobank? What’s the win-win for both organisations?
2. Be 100% behind the transformation: Are you really prepared to work differently as an organisation? Would you, for instance, reconfigure the way you do credit approval? Like any large organisation, the way things are done at some established banks is the way they’ve been done for 20 years. True transformation requires commitment to change.
3. Put customers at the heart of innovation: Customer centricity is nothing new but it’s how neobanks go about it that’s innovative. Neobanks prefer a path of continual development, taking a “test and learn” approach. They’ll put out x20 new app features in a single day, then change or retract them according to customers’ responses, while the major banks tend to save up their changes for a wholesale overhaul. Not only is the neobank approach faster, it reduces the risk of misreading the market.
4. Bust myths around lack of governance: There’s a misconception that being agile means a lack of governance or control. But as any neobank will tell you, they have copious checks and balances in place, as well as multiple and ongoing testing.
5. Become a pro at partnerships: Through innovation like their “marketplace for SME customer” neobanks have industrialised the partnership process to a point where it’s slick and effective. The best neobanks build marketplaces or ecosystems, partnering with multiple organisations. Plus, they build strong muscle memory around those partnerships, so they can set them up fast, and move on efficiently if a partnership proves less than perfect.

Australia’s traditional banks have all taken slightly different approaches to digital banking; build internally or build outside the core, buy a neobank and integrate or buy a neobank and leave as a standalone. Now there is an alternative option to access the technology, customer experience, ways to working, capabilities and ultimately the new customers that come with these. Which of these approaches will be the winner?