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New Year, New Challenges for Fintechs

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Many fintechs successfully navigated the maelstrom of 2020, propelled by the fast adoption of digital channels and creative acquisition strategies that won them new customers and big headlines. From neobanks to online lenders to e-brokerages, these new players experienced a banner year in terms of growth and valuations, with a lucky few achieving valuations on par with some of the largest traditional banks.

At the same time, a number of them also entered the deposit market and captured an increasing share of customers — a trend that Novantas expects to continue as fintechs seek more charters and additional banking-as-a-service partnerships.

As successful as they were in 2020, however, fintechs face a lot of work ahead in order to meet the lofty expectations set by investors. Current valuations are built on expectations that growth will continue and customer relationships will turn profitable. Although fintechs have been successful in developing distinctive products and efficiently marketing them to acquire new customers, they will now need a new approach to succeed. That’s because they must turn those new customers into deep, profitable, sticky relationships — an effort that requires a new skillset for many of them.

Novantas sees two primary actions that fintechs should pursue in order to continue their growth trajectory: enhance the customer onboarding process with personalization and deepen existing relationships by using analytics that can understand and predict customer behavior for cross-sell activity.

THE RISE OF FINTECHS

Neobanks continue to take market share away from traditional banks at an astounding pace. According to the 2020 Novantas Shopper Survey, which surveys more than 50,000 customers who are actively in the market for a new checking account, neobanks have gone from capturing 4% share in 2017 to 24% share in 2020. (See Figure 1).

Success has been driven in part by shifting customer preferences — customers are more willing to open a bank account online and the COVID-19 pandemic has only accelerated that trend. But new entrants have also disrupted traditional banks by providing attractive, customer-friendly value propositions through no-fee products and distinctive features such as receiving access to direct deposit payments up to two days early.

Although the customer growth has been impressive, customer quality is well behind that of traditional banks. Novantas SalesScape data indicates that customers acquired digitally on average are twice as likely to close their account within 12 months of opening and hold just one eighth of the deposits compared with customers acquired in a branch. (See Figure 2.)

In part, that is because fintechs have a basic structural disadvantage relative to traditional banks — a notion that is somewhat counterintuitive. While a banker can take the time to understand the needs of a prospective customer and tailor a broad suite of products to meet the customer’s needs and create the right fit, the application process for fintech customers is designed to be as quick and efficient as possible. For fintechs, that speedy and easy digital experience can sometimes overshadow the need for personalization. But the value of that in-person interaction can’t be underestimated.

To some degree, lower customer quality from digital-only players is inevitable — those who are more comfortable opening deposit accounts online tend to be younger and have fewer assets than traditional bank customers. Over time, fintech customer quality should improve as their customers grow older and increase their wealth. But this only matters if the fintechs can keep them as a primary customer in the long run. It is also a long-term proposition — one that fintechs may not have the luxury of waiting for as investors clamor for near-term results. Furthermore, Novantas research indicates that even controlling for the customer’s age, accounts acquired digitally have materially lower average balances, suggesting there is an opportunity to accelerate improvements in customer quality now. (See Figure 3.)

Figure 1: Neobank Share of New Checking Account Acquisition

Figure 2: Digital Acquisition Quality

% of Households Retained 12 Months Post-Acquisition

Average Household Deposit Balance

Digital-originated accounts are twice more likely to attrite within first 12 months of opening account

Digital-originated accounts hold just 13% of the average balances that branch-acquired customers do

Source: Novantas Customer Knowledge | 2020 Shopper Survey

Source: Novantas SalesScape

Figure 1: Neobank Share of New Checking Account Acquisition

Source: Novantas Customer Knowledge | 2020 Shopper Survey

Figure 2: Digital Acquisition Quality

% of Households Retained 12 Months Post-Acquisition

Digital-originated accounts are twice more likely to attrite within first 12 months of opening account

Average Household Deposit Balance

Digital-originated accounts hold just 13% of the average balances that branch-acquired customers do

Source: Novantas SalesScape

Figure 3: Customer Origination by Age Group

Age Group Percent of Customers Originated Average Balance of
Retained Customers
(@ 12 Months Of Acquisition)
Branch Digital Branch Digital % Diff
<18 15% 1% $1,680 $1,200 30%
18-25 19% 17% $2,800 $2,000 30%
25-35 21% 38% $4,200 $3,000 30%
35-45 14% 23% $6,000 $4,000 35%
45-55 13% 12% $9,600 $6,000 40%
55-65 10% 6% $15,300 $9,000 40%
65-75 5% 2% $21,600 $12,000 45%
75+ 3% 1% $26,600 $14,000 50%

Source: Novantas Client Research

Figure 3: Customer Origination by Age Group

Source: Novantas Client Research

ENHANCED CUSTOMER ONBOARDING

Fintechs have designed efficient customer application processes, enabling customers to open new financial products in the matter of minutes. This has undoubtedly contributed to their success and differentiates them from most traditional bank counterparts. But getting the customer through the application as quickly as possible also limits the ability to gain more information about the customer’s needs. Additionally, some customers may drop out of the application process when all they needed was slightly more personal guidance to help them through it.

As a result, there are two shortcomings in the application process: the fintech winds up with fewer customers who actively use the account and fewer “sticky” customers who are long-term or have multiple products.

Fintechs can address these challenges with a more personalized approach that leverages a combination of people and technology. They can do this by exploring greater use of outbound calling during the onboarding process, including similar approaches that are used by banks. This could be a 2/2/2 program in which the fintech representative reaches out two days, two weeks and two months after the customer opens its first account to answer any questions the customer may have as well as better understand their needs. Outreach can be supported by automated emails and other forms of digital communication as well. This should enhance the rate at which customers fund their deposit accounts, as well as increase the number of multi-product users.

DEEPEN CUSTOMER RELATIONSHIPS

The lack of personal interaction in the digital experience makes it difficult to identify opportunities, evaluate a customer’s evolving needs and determine how to deepen the relationship. Furthermore, many fintechs have a relatively limited product suite at the moment, with questions about how which products to develop next.

Fintechs have done a tremendous job in leveraging big data and analytics to finetune marketing models and underwriting models, as well as other use cases. These skills should now be applied in a new way with a goal of greater cross-sell and product penetration.

Novantas has observed that deposit accounts — particularly transaction accounts — can provide a wealth of data that can score customer behavior and help predict fit and usage of other products. Additionally, Novantas has used its AI-marketing optimization platform to help financial institutions leverage machine learning to develop an “always on” personalization platform. This develops optimized offers with personalized messaging components, tone, as well as channel preferences that are continually learning and improving.

Fintechs have a relatively limited product suite at the moment, with questions about how which products to develop next.

Deeper customer relationships will result in greater wallet share and stickier customers, combining to increase customer lifetime value significantly. Building these capabilities isn’t easy, but it will go a long way toward helping fintechs achieve their goals and become dominant players in a major market.

There is ample opportunity for fintechs to continue the positive momentum they’ve achieved over the last few years, and particularly in 2020. But to parrot the title of a book from executive leadership coach Marshall Goldsmith, “What got you here won’t get you there.” Customer acquisition alone will only go so far.

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