Varo Money received a charter from the Comptroller’s Office in mid-2020 to become a full-scale bank, making it one of many consumer fintechs to throw its hat into the banking industry ring but in a very big way. More such competitors will follow. The idea that brought fintechs to life in the first place still exists: disrupting traditional banking. One way many neobanks and challenger banks attempt to do so is through their offer of “free banking.”
A headline containing the words “free banking” make for an eye-catching marketing tool. But as attractive as that message is, it’s also too good to be true. While the initial mission of many neobanks is to be more transparent than traditional institution and free of fees, it’s not a sustainable business model.
Venture-backed newcomers can afford to build share on such offers. However, eventually, shareholders will expect to indeed make a profit. Only when it is time to fulfill those expectations, does the business model change and then the end users will feel the impact.
But how do financial marketers combat the initial appeal of the new players, and the erosion that they may be causing in existing or future relationships? A change in marketing strategy, a shift in tactics and a fresh look at partnerships may help.
There’s No Such Thing as a Free Lunch — or Bank
While financial institutions understand that free banking is not really free even if it starts that way, consumers do not. Attractive buzz words like “free” and “no fees” can lead accountholders away from their bank or credit union when comparing the newcomers’ offers to what they have. While consumers may not totally leave their original institution, the risk to traditional banks and credit unions is that they will see the potential of those accounts dwindle. Traditional institutions must not only find a way to compete with neobanks and this claim of “free” in order to not only retain current consumers but also attract new consumers.
The COVID-19 pandemic and the continuing low-rate environment has caused many consumers to reevaluate their financial decisions and potentially with whom they bank. With consumers deciding between neobanks and challengers that are offering free banking and engaging digital tools, now is the time that banks and credit unions must find new ways to compete for market share. While the industry is flush with deposits in the current atmosphere, that will not remain so.
But how can relationship-oriented banks and credit unions compete with neobanks’ enticements and the heavy promotion those brands engage in? With such strong promises from the competition, cutting through the noise to recapture your accountholders’ attention may be difficult.
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Make the Battle about Something Beyond ‘Free’ Banking
Rather than focus on “free,” and going head to head, what if financial institutions focused on transparency in all costs and no “surprises”? Instead of gimmicks, what if they went back to their roots and focused on deepening relationships and adding value through digital?
Simon-Kucher & Partners recently shared with The Financial Brand the primary factors that cause consumers to switch financial institutions such as financial bonuses and engaging and fun products and services. By positioning themselves well with some of these key factors, banks and credit unions can maintain their customer and member bases.
The number one factor, according to the firm’s research, is financial bonuses. While most financial institutions cannot afford to be fee free, sign-up bonuses, cash back, gift cards and other rewards can create an attractive offer for consumers. Additionally, these rewards could compensate for any minimal fees at a bank or credit union. And again if the fees you are charging can be viewed as “prices” or costs that the consumer controls and is never surprised by, the loyalty created will be extremely valuable.
Another major determining factor was making money management fun. In fact, Simon-Kucher’s research reported that nearly one out of three respondents cited this as a determining factor. Many challenger banks and neobanks have tapped into this ability through gamification in digital offerings, making it critical for banks and credit unions to catch up. Traditional financial institutions have the data to pursue such an effort — they just need to use it to add the value.
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Developing Engaging New Products with a Partner
Unfortunately, many financial institutions do not have the resources or bandwidth to create the most engaging, digital tools to compete. With all of the talk of fintechs turned neobanks, it can be easy to view all fintechs as yet another competitor and not a potential partner.
Although many fintechs were created with the goal to disrupt traditional banking practices, there are others that focus on partnering with banks and credit unions. In fact, many were founded by former bankers looking to alleviate pain points in the financial services industry and offer banks and credit unions better products and services for their consumers.
By leveraging a trusted fintech partner, community financial institutions can compete with neobanks with the same innovative tools. Combining technological innovation and the customer service for which local institutions are known, they can maintain their current accountholders at the bank or credit union and attract and grow new relationships.