Sukeert Shanker, CEO, Aeldra
As digitization and technology have a sweeping effect across the globe, a new digital age of banking is coming to the fore in India and across the world. It is driven by a confluence of customer demand for better and faster money movement and banking, the advances in technology, and the support of regulators who are increasingly customer oriented.
A large population in India, for example, is also “smart-phone native”, i.e. their first phone was a smart-phone. They preferApp-based banking to branch-based banking or even browser based banking, for its convenience, customer experience and ease.
Finally, traditional banks are constrained in innovating due to legacy operating models and technology. Neo-banks like ours are stepping in to address the gap due to this, including serving the under-banked and addressing whitespaces like cross-border banking.
Addressing the Need-gaps: Why Neo Banks?
Today, customer expectations and behaviors have changed dramatically. Banks haven’t. Simply put, the global banking sector has fallen short in keeping up with customer needs. Notably, preference for handling everyday transactions digitally is as high as about 60 to 85 percent across Western European markets, according to McKinsey, and similar in India. McKinsey also goes on to say – “Should these emerging preferences become banking’s post COVID-19 “next normal,” retail banking distribution will experience up to three years of digital preference acceleration in 2020.”
Studies in the U.S. by American Bankers Association and others show that customer satisfaction with traditional banks have been falling. A large part of this is because traditional banks continue to focus on basic banking and lending services. Customers are not getting the personal financial management tools they need and so don’t see their bank is a true partner helping them become financially secure and meet their financial goals. This, perhaps, is the most fundamental,but often ignored, aspect that neo banks are solving.
My personal experience in a leadership role at Goldman Sachs and at East West Bank illustrates the above points in a very tangible way.
Case A: Goldman Sach’s Marcus– low cost personal loans with immediate approval through digital underwriting
I have had a chance to see the challenge customers face in a very deep way in order to createa solution at Goldman Sachs. In the U.S., customers often revolve credit on their credit card to meet unexpected needs or even their cash flow. However, even people with very strong credit profiles pay extremely high-interest rates of up to 25% p.a. on the credit card debt. This is because traditionally banks have not tried to give customers the best rates based on their risk profiles, but charge very high rates without discriminating between good credit and bad credit customers. On top of this, customers do not have visibility into exactly how much their debt is costing them. For instance, if you keep paying the minimum due, you are technically only serving your interest liabilities. The principal amount still stands. So, millions of people get into a cycle of credit card debt just because they are not careful or informed.
We changed the game with the launch of Marcus, a de-novo neo-bank started by Goldman Sachs in October 2016, where I headed the launch. Before Marcus, Goldman Sachs was not in the consumer business. Marcus introduced a personal unsecured installment loan with completely digital underwriting and an interest rate starting at 5%. This changed the lives of millions of people who were trapped in the credit card debt cycle because they could get a lower-interest Marcus loan that was approved in 10 minutes to pay off their credit card debt. The money was disbursed into their account the next day. Also, Marcus provided complete transparency on the number of installments and the amount that one would have to pay. Customers could use a calculator to decide how much loan they should take. Marcus was essentially a neo bank and has been a raging success. It could innovate because there were no legacy systems and it was building clean-sheet using the latest technology.
Case B: Borderless Banking
Similarly, as the COO of Digital Banking for East West Bank, I launched the first U.S. digital bank focused on the Chinese diaspora for East West Bank. It allowed digital account opening from China using the Chinese National ID in March 2019.
It addressed the enormous demand for this offering from affluent and mass affluent customers who had many links to the U.S. They have friends and family there, send kids to college, have business relationships, travel frequently, or wish to move to the U.S. Our customers were amazed at how easy this digital cross-border bank App made their life. A lot of the demand we addressed was latent because people simply couldn’t open a U.S. bank account despite needing one. There was a large global pool of customers but no global consumer bank. There were some market players that offered global banking services on the corporate and commercial side and a little on the private banking side. However, they were country-bound on the consumer side.
In a nutshell, the approach of neo banking is to reimagine processes, operations, and frameworks based on consumer needs. But what are they?
Neo Banks: Changing the status quo with customers at the heart of banking
Neo Banks offer banking services digitally. They may or may not have a banking license depending on the regulatory framework of the country they operate in and their business model. If they don’t have a banking license, they partner with existing banks to white-labeltheir products. Neo-banks typically have very low cost structures because they are entirely digital and have the latest technology that gives them the ability to give customers a differentiated experience. Core banking products have become a commodity and neo-banks are re-imagining customers’ financial lives.
These days, customers are looking for features such as a 10-minute digital account opening and an all-in-one App to manage their funds. In terms of borderless banking, they need ease of spending during travel, everyday use, and so forth. Customers may be aware of the fees, forex markups and international charges that traditional banks layer on but often don’t realize that such charges can comprise up to 10% of the overall transaction!This can work out to be hundreds of dollars for a short trip overseas, for example. Similarly, moving to the U.S. as a student or professional means putting up with the friction of something as basic as opening a U.S. bank account and getting a credit card. Neo banks like ours that offer truly global banking with low and transparent fees are giving customers an attractive option to traditional banks debit cards, cash or prepaid cards, visits to a branch, or other sources of friction when they need cross-border financial services.
Everyone is concerned about security, more so when it comes to payments and money management. Neo banking Apps have multiple security features using real-time data and authentication. Facial matching, fuzzy logic and machine learning based fraud protection and info security cannot be matched by traditional banks.
In conclusion, neo banks are the future of banking, and the future is here. Just like Amazon revolutionized retail, and Apple revolutionized mobile phones and music, neo-banks like Aeldra are revolutionizing banking and in 3-5 years we will look back and wonder why anyone ever banked with a traditional bank. Regulations always lag technology and customer behaviors, but post-COVID regulators have become even more supportive of neo-banks and we see a very robust regulatory environment becoming real, ensuring risk management and controls without stifling innovation that benefits customers.