Traditional vs neobank – where does banking go from here?

The constant influx of online, digital-only banks (neobanks) over the past decade has brought with it ongoing disruption to the banking industry which has revolutionised the service that providers now offer their customers. The impact of these challenger banks has put the traditional banks on the backfoot, chasing the innovation that is attracting and retaining growing numbers of customers to the neobank phenomena.

However, with the precedent for rapid innovation being set by neobanks, what does the future hold, and are both types of bank at risk of going too far – distancing themselves from their original core propositions that attracted customers to begin with?

The risk of innovation in banking

A lot of the attraction towards the neobanks comes from the modern and digitally native features they offer which has improved functionality, customer service and accessibility to previously unseen levels. These improvements could be seen as ‘low-risk’ as they have not fundamentally impacted the financial services these banks offer to customers, but more so the way in which customers and the banks communicate. However, pressures to constantly innovate could see both traditional and neobanks foray into new territory, such as the use of digital assets and crypto. We are already seeing this in some cases, with Visa announcing its partnerships with over 65 crypto wallet providers.

The risks and rewards involved in this level of innovation are plentiful. The more banks invest into alternative forms of finance and assets, the more distance they put between themselves and their original offering, as a reliable custodian of the customers finances. On the other hand, such innovation may offer the opportunity to enhance the customer experience and ultimately solidify customer retention in the longer term.

Where do consumers want improvement?

At GFT, we conduct quarterly assessments and research into how effective and impactful the current banking experience is for bank customers. Our latest Banking Disruption Index examined the sentiments of Brits when they are spending money abroad; their knowledge of foreign spending charges imposed by their bank and their experience with modern banking customer services when overseas.

The data showed that just over a quarter (26%) of consumers understand their banking providers’ fees for spending abroad. The research also found that 32% of consumers do not think that their banks’ current fees are fair and reasonable, and a further 38% admit to not even knowing what the fees are.

These stats paint an image of a consumer that is either oblivious to or unhappy about their current foreign spending charges. With this in mind, what could both the traditional and neobanks do to help improve consumer experience when it comes to spending abroad?

The zero charges on card purchases when spending abroad was a major selling point for the neobanks when they first launched, and it is clear from the research that this continues to be so today – particularly for the ‘millennial’ and ‘gen z’ age groups. Over a quarter of 25-34-year-olds (28%) and a quarter of 16-24-year-olds (25%) rely on their neobank card to make payments whilst abroad. In fact, it is the more popular choice for both age groups compared to cards from traditional banks.

From our latest data, we know that 28% of digital banking users want real-time currency exchange rates accessible through their banking app. A quarter (25%) of digital banking users wanted both the ability to pay in GBP or local currency from different ‘pots’ in their account, as well as better transparency over transaction and exchange charges. This call for increased clarity on charges is indicative of an industry (and financial institutions) that could be doing more to help support their customers, especially during a time of heightened financial strain. This could not be clearer than from data which shows that 25% of consumers want their bank to provide better transparency over transaction and exchange charges.

With the summer quickly approaching and Brits preparing to travel abroad in their thousands, banks would be wise to look at the number of ways in which they can improve the clarity of their fees as well as improve their customer service ahead of this time.

The conversation and healthy competition between the traditional and the neobanks is still very much in its infancy. Whilst there will always be room for both in the banking sector, it is clear that neobanks have cultivated a strong sense of cost-saving already in their short tenure in the industry, especially when it comes to spending abroad. This sentiment was captured in GFTs latest survey with 39% of consumers opting to use a neobank when abroad as they believe it offers the lowest fees.

It will be interesting in the coming months to see how the continued competition between the traditional and neobanks spurs a new era of enhanced banking services, aided by innovative new technology. As for now, the jury is very much still out on who has the upper hand as we enter what is sure to be an extremely busy holiday season.