Comparative Study on Challenges Faced by Traditional Banks Due to the Emergence of Neo-Banks in Developing Countries.
Chapter One: Background of the Study
Introduction
The global financial crisis that was experienced in 2008 caused severe financial loss in trillions of dollars in financial capital and millions of jobs. Most people blamed the loss to the banking sector and the individuals that benefited from the speculative investments (Bömer & Maxin, 2018). Moreover, the financial crisis provoked a wave of anger that is still currently worldwide. For instance, a study that was done in Italy indicated that its only 37% of the population that trust its bank (Ari, Darracq-Paries, Kok, & Zochowski, 2017). In Japan, only 27% of the surveyed individuals indicated that banks genuinely act in the interests of the clients (Ari et al., 2017). With the ever-reducing confidence of the customers with the banks, some upstarts noticed a remarkable opportunity for self-gain. Neo-banks that are digital-only financial institutions and sometimes referred to as the challenger banks have maximized the opportunity to thrive (Gerlach & Rugilo, 2018).
Notably, the emergence of the neo-banks was aimed at maximizing on the resentment that was felt by the customers towards the incumbents of the industry. The aim of the neo-banks was not only capitalizing on the resentment to unsettle the leading players but offer innovative solutions to outdo the long-established traditional banks (Grennan & Michaely, 2018). In the recent past, the progressive approach that was adopted by the European Union to regulate the financial sector opened the gates for competition in the industry. The access for market entrants and the increased transparency was enhanced by the payment services directive that became law in 2009, in which PSD2 as the successor mandated the third parties to access the application programming interfaces for the banks (Grennan & Michaely, 2018). The financial la sector landscape was opened meaning that FinTechs were able to access customers’ data from the accounts that were previously held as a preserve of the traditional banks (Arner, Barberis, & Buckley, 2015). It is the same platform that gave rise to the neo-banks to thrive. It is worth to emphasize that the neo-banks do not have physical branches for the organization of customer finances but operate efficiently through the digital channels (Shami, 2019). Moreover, their characteristic low overheads put them at an advantage over the traditional banks in terms of the agility and customer charges.
The rise of neo-banks was attributed to the low barriers of entry in that they can admit people that are not considered qualified to take traditional bank accounts simply because of the lack of credit history (Gurdgiev, 2016). For instance, in Germany, N26 neo-bank took advantage of the frustrations that people underwent with the traditional retail banking to offer paperless sign-ups that were fast and efficient (Bömer & Maxin, 2018). As a result, the neo-bank had acquired more than a million clients since its launch in 2013. The success is further attributed to the fact that the neo-banks have been successful in Europe attracting $495 million of the funds in the five months of 2018 (Bömer & Maxin, 2018). Some of the pioneers of the Fintech are the UK-based Atom and Monzo neo-banks that made use of efficient and simple mobile applications whose features included using the mobile applications for the majority of banking services such as management and opening of bank accounts, getting loans and credit cards (Omarini, 2018). In addition, the growth of neo-banks is predicted to go to 45% by 2025 (Gurdgiev, 2016).
Apart from that, there have been rising cases of Fintechs posing threat to traditional banking in the Middle East and North African Region (Shami, 2019). In this context, the United Arab Emirates has taken the lead in the region followed by Saudi Arabia in the drive of the new innovative models. Finally, other countries such as Bahrain and Lebanon are currently making efforts to be abreast with this process.
Significance of the Study
Since the financial crisis that occurred in 2008, many players blamed banks for the occurrence and the customers lost confidence in the systems. New banks emerged in developed countries such as the United Kingdom with considerable promises to the consumers and penetrated the market, gaining access to customers who identify with innovative technologies (Omarini, 2018). Thus, it can be concluded that the neo-banks have been embraced because of the reduced customer provider physical interactions, convenience efficiency and effectiveness in service delivery. Furthermore, their customer experience has been improved and has introduced features such as the multiple currency accounts putting them at a competitive edge over the traditional retail banking (Wang, Xu, & Wang, 2018). As a result, the traditional banks have experienced challenges such as reduced customer base and productivity owing to these neo-banks (Wang et al., 2018). The study aims at investigating the challenges that traditional banking has experienced as a result of the growth of the neon-banks. Moreover, the findings will be crucial in enabling the policy formulators and individual banks to devise strategies that will ensure that technology does not leave them behind in the sector. In addition, they can learn what to adopt from the neo-banks to remain competitive in the market.
Study Objectives
- To explore the challenges faced by traditional banks as a result of the emergence and growth of neo-banks in developing countries.
- To investigate the possible relationship between the growth and thriving of the neo-banks and the struggling of the traditional banks.
- To investigate the factors favouring the growth of neo-banks in developing countries.
Research Questions
- What are the challenges faced by traditional banks that are attributed to the growth of neo-banks in developing countries?
- What has favoured the growth of neo-banks in developing countries?
- What is the relationship between the growth of neo-banks and the struggling of Neo-banks?
Chapter Three: Research Methodology
Research Approach and Strategy
A qualitative approach was utilized to explore the issue. Thematic analysis methodology was adopted where thematic patterns were developed from the information gathered. The findings of the research were also compared with the current literature. The reason to choose the in-depth qualitative research strategy was to guarantee relevance and quality of the output rather than quantifying the data collection and analysis (Lipscomb, 2012). A qualitative research strategy gave an in-depth exploration of the systems, processes and interactions of the day-to-day activities in the banks and the understanding of the managers on which were the challenges that could be associated with the emergence of neo-banks (Smyth, 2016).
The use of open questions gave room for the researchers to give an in-depth analysis of their responses and understanding of the situation (Lipscomb, 2012). An inductive research strategy was adopted as the theory is developed from the findings of the study. An epistemological position of interpretivism was selected and found suitable for the research as the study is guided by the objective of understanding the challenges faced by the traditional banks because of the emergence and growth of neo-banks in the developing countries through examination and interpretation of the context. The philosophical approach was adopted as it is a critique of positivism whereby the emphasis is qualitative analysis (Matta, 2015). The researcher as the social actor appreciates the manifesting differences in people. This allowed an in-depth exploration of the factors such as leadership and cross-cultural differences among the respondents that could lead to their interpretation of the subject (Sampson & Johannessen, 2019). A constructive ontological position was used as the results are assumed to be contributed by interactions of the banks with the clients rather than other outside forces.
Research Design and Data Collection
The research employed a thematic analysis of qualitative data. The six steps of in-depth qualitative research as proposed by Belll and Bryman (2007) were adopted which have been utilized because of their accommodating and overarching nature and different methodologies can be incorporated. The most critical steps are the selection of the relevant study sites, data collection and interpretation.
Selection of the Relevant Study Site
The researcher took into consideration the need for the triangulation in the qualitative study thus collected relevant data from two sources that are the review of previous related research, and stakeholders. Bank managers formed the population of the study from two developing countries where neo-banks have recorded significant growth. These are Bahrain and Saudi Arabia. The study sites are selected based on the previous findings that there are some of the fast rising developing countries that have adopted the neo-banks technology.
Collection of Data
The research is for a school project and has limited time for completion and therefore could not use a longitudinal study design. Therefore, a cross-sectional design was utilized as it was the most suitable to provide timely information. The cross-sectional design ensured that the study findings would approve or disapprove various assumptions regarding the neo-banks. In addition, the findings can be utilized for the development of new theories.
The study was qualitative using thematic analysis methodology, which was selected to enable the researcher to gain an in-depth insight and knowledge for the data that was gathered. In addition, there was an appreciation of the topic being researched. The thematic analysis allowed the researcher to broaden the patterns and analysis. Apart from that, semi-structured interviews were used to collect primary data from the bank managers as the major respondents. A list of questions on fair topics guided by the research questions was formulated to give flexibility to the interviewees in the responses. The qualitative study was informed by the need for detail and depth in exploration of the study topic. The fluid research framework allowed the researcher to have a specific questioning sequence, data collection, analysis and reporting.
Data Analysis
Thematic analysis was utilized in the analysis of the qualitative data, which involved obtaining patterned meaning from the gathered data. The qualitative findings of the study were complemented with direct quotes from the respondents. In addition, the findings of the current study were compared with the existing literature and the results of the previous research. Most of the interviews with the bank managers were done by the use of mobile phones without and recorded for transcription. These were later transcribed into verbatim and the transcripts used for the qualitative analysis.
Sampling
The respondents for the interviews were managers in their different capacities in the banks. The study could not have accommodated all the managers and a sample was identified to represent them. The validity and reliability of the methodology were enhanced by having a representative sample selected using simple random sampling. A convenience sampling technique was used to ensure that the population of the managers were sampled until the target population was achieved. The convenience sampling was adopted as the research is mainly based on the opinions and thoughts of the bank managers regarding the emergence of neo-banks in the sector (Sedgwick, 2013). In addition, the study was conducted in Bahrain and Saudi Arabia through phone interviews and, therefore, the target was to obtain as many as one could because there were no physical interactions. The focus was shifted to the one that responded to the invites and the easily accessible. Finally, the possibility of bias was minimized by ensuring that the distribution in the study sites was even to ensure that the sample representative.
Research Assumptions
There was an assumption that major banks in the study sites would welcome the study and provide useful information. They would allocate time and resources for the interviews. It was also assumed that the sampled participants that are the bank managers were knowledgeable about the subject matter and would provide valid and reliable information. In addition, their experience was critical to the understanding of the trends in the financial sector.
Chapter 4: Results and Discussion
Response Rate
A sample of 15 bank managers responded to telephone interviews. The research questions and the interview guide, as well as the consent forms, were sent to the participants before the actual interviews were conducted. There was 100% compliance and answering the interview questions. The response rate of above 70% is adequate to answer the research questions.
Demographic Characteristics
To achieve the main goal of the study, it was found essential for the researcher to understand the demographic characteristics of the population of the participants. These included the professional qualifications, work experience, gender and age as they have an impact on the knowledge and interpretation of the subject as well as the responses given. The determination of the gender of the respondents was crucial to enhance gender parity. From the study, 60% were male and 40% were females. The lowest level of education among the bank managers was an undergraduate Bachelor’s Degree comprising of 30%. 60% had a Masters level and only 10% had PhDs. However, their specializations were different ranging from finance, accounting, human resource and marketing disciplines. The highest age bracket was between 40-50 years comprising of 65% of the respondents. However, there were some few cases of managers below 40 years at 10% and above 50 years at 25% as represented in Figure 1.
Figure 1. Demographic characteristics.
(Source: Author)
The age of the respondents was critical as it determined the work experience in the sector and the occurrences in the industry. Most of the managers interviewed a had good knowledge of the developments in the financial sector such as the crisis of 2008, the emergence of neo-banks and the other related technologies that have changed the platforms. The key finding among the respondents was that they all agree about the changes in the banking sector as a result of the emergence of the neo-banks. They all recognized that traditional banks have been threatened.
The Growth of Neo-banks
Innovation and creativity of Neo-banks
The main finding from the interviewed managers was that retail banking has experienced a myriad of challenges in the past few years. They attributed this to the entry of new entrants in the form of FinTechs. The presentation of the innovative features by the neo-banks was outlined to be the major attracting power among the consumers. These included the unrivalled customer experience, innovative features, and well-designed interfaces. The managers outlined that the neo-banks have outdone the traditional banking approach and have become true competitors in the field.
“In the recent past, retail banking has not been changing for consumers. The focus has been the main objective of being profitability rather than the improvement of the customer experience. This has given the neo-banks a competitive edge because of investing in customer experience.” Interview with a bank manager
“Many industries in other sectors have shifted and experienced radical changes in the customer experience but the banking systems have been doing things the same way for decades now. For instance, the transport industry has experienced significant changes with the technology redefining the customer experience, and evolutions of the sector. The transport sector has experienced changes such as the introduction of technology-driven Blablacar and Uber. These are the similar experiences of the innovations in the tourism sector leaving banking behind.” Interview with a marketing manager
These are similar sentiments by Buckley and Webster (2016) who attributed the growth of neo-banks to the introduction of digital banking systems that often work solely by the use of mobile applications to improve both the efficiency and effectiveness. The most significant characteristic is the improvement of customer experience. In spite of having different interaction, the main propositions of neo-banks are the client. The managers attributed their lack of competitiveness to the fast-rising of the neo-banks and lenient nature.
“We have experienced different challenges as we have not changed to the automated system. The neo-banks have outdone our traditional approaches because of improving their customer experiences”. Interview with a manager
A manager indicated that neo-banks have become the real competitors of traditional banks in the market because of their advanced features, new technologies, user-friendly interfaces, and reduced costs. When compared to traditional banking operations, the neo-banks are fast and efficient. One manager reiterated that in neo-banks, the account opening is very fast and convenient.
“Account opening in the neo-banks is between three and ten minutes. A direct video call sets up the entire process contrary to the traditional approaches where one can que for even hours depending on the number of customers ahead.” Interview with a customer service manager.
“Most of these neo-banks are ahead of us and we face difficulties in the catch-up. For instance, contrary to what we do, neo-banks give free debit cards and manage their cards using mobile applications. Blocking and changing of passwords occur instantly at any given moment. The use of the cards in the international payments attracts no fees and utilizes the live exchange rates.” Interview with a retail banking manager.
Challenges Faced by Traditional Banks Attributed to the Emergence of Neo-Banks
Efficiency and Innovativeness of Neo-banks Deprives Traditional Banks of Customers
Most of the interviewed bank managers indicated that the traditional retail banks are at a disadvantage because the neo-banks are efficient and even offer instant payments to their customers. The blockchain technology such as the emergence of cryptocurrencies has been attributed to favouring of the neo-banks. The findings are similar to those of Sakso and Kuzmina-Merlino (2017) who indicated that traditional banks have not embraced the blockchain technology and therefore give room to the neo-banks to prosper as they offer an opportunity to the customers to open an account in cryptocurrencies and use of the real-time exchange rates. The possibility of having an opportunity for the clients to open multiple currencies’ accounts and instant transfers were identified to have put the neo-banks ahead of the traditional approaches.
Some of the most common identified challenges that were found to have been triggered by the neo-banks to traditional banking include a reduction in customer acquisition. The managers indicated that it was difficult to convince the customers to move from the efficient and advanced features of the neo-banks to the traditional banks. In addition, the managers have confirmed that it was becoming difficult in the market to overcome the challenge of neo-banks and they have to streamline and offer new technology to the customers who have already embraced the innovations of neo-banks.
“It is difficult to compete with the Neo-banks who are spoilt of choice and features that they offer their customers” Interview with a customer relations manager
Neo-banks are well marketed
It was evident from the responses that while the banks must actively market their products, the neo-banks do not necessarily need the campaigns to attract new clients. The word-of-mouth advertisements and referrals from satisfied clients serve them to attract more customers. A manager gave an example of Revolut that does not use costly marketing campaigns to attract new clients despite having gained significantly in terms of market penetration. The increase in safety and reliability has been triggered by the opportunities that the neo-banks have been having of growing their roots and easy and fast integration of technology
“Neo-banks have been embraced by the people because of the efficiency in their operations. They offer everything that the traditional banks give but have a significant advantage in terms of instantaneity and speed. For instance, the addition of a new beneficiary in the traditional banking system, as the multiple verifications involved delays the process and procedures to three days. However, the application of mobile technology by the neo-banks can only take three clicks. The customers’ choice is surely the latter” Interview with a manager.
Simplicity of Neo-banks is Appealing to the Customers
Managers indicated that the faceoff of the traditional banks with the neo-banks has been difficult because of the investment in simplicity among the latter. This was corresponding to the findings by Khayrallah, Radia, Hickey, Singh, and Xu (2015) who indicated that the neo-banks have invested immensely in the redesign of their applications to be the basis of their interactions with the customers by making them as simple as they can. In addition, there was an affirmation of the competitive edge of the neo-banks in terms of customer experience. On the contrary, there was an agreement among the respondents that creation of such applications by the traditional banks is counterproductive as the clients are expected to make visits to the agencies in case, they want advanced services. Therefore, the main advantage over the traditional banking was identified to be the fact that the neo-banks have made access easy and the process is self-explanatory.
“The traditional banks are not at the luxury of such features. We have budgets and to modernize and digitize the operations to fully compete with the neo-banks will cost a fortune that will shake the revenues and profitability” Interview with a finance manager
From the findings, it was evident that traditional banks are doing catch up of the neo-banks. Their functions such as the multiple currency accounts and adoption of blockchain technology have made them improve customer accessibility and experience. In addition, the neo-banks have put their emphasis on improving the traditional banking features. The services that are made by neo-banks are not even accessible or available by the traditional banking players.
Traditional Banks Experience Infrastructural Difficulties to Compete
The introduction of neo-banks was found by Cuesta, Ruesta, Tuesta, and Urbiola (2015) to be giving immense pressure to the incumbent traditional banks to modernise and digitize themselves to meet the market demand of efficiency and compete to retain their customers that are moving out in masses. In addition, they are under pressure to leverage technologies that will change the existing business models. The neo-banks have been characterized by improved cost efficiency and customer experience. This has been met with difficulties for the traditional banks to achieve. These were similar sentiments by the respondents who indicated that the investment capacities and knowledge of the market by the neo-banks are used in the provision of products and services through the adoption of new technology or the improvement of the existing business models. To match the efficiency of neo-banks, the traditional banks face significant difficulties with their current infrastructure since they have one eye on the profitability.
“The traditional banks cannot survive the threatening wave of technological advancement that brings the disruptions. The neo-banks provide banking services in an innovative, convenient and cost-effective manner.” Interview with an accounting manager
These were the similar findings by Tornjanski, Marinković, Săvoiu, and Čudanov, (2015) as they identified that the neo-banks have thrived and revolutionized the banking sector through digitization and modernization of the customer model of relationship such the one implemented by Monzo and Atom in the United Kingdom. They are moving away from the traditional banking system that is branch-centered. The neo-banks can develop new technology at a low cost compared to what would be spent by traditional retail banking to achieve similar results. The predominant nature of the neo-banks through the extensive application of technology is giving immense pressure to the retail banking platforms and paralysed their operations. The provision of banking services at a lower cost has negatively influenced the profitability of the traditional banks that cannot sustain the same services.
Improved Customer Experience by Neo-banks Renders Traditional Banks Irrelevant
There was a confirmation from the respondents that direct interactions of the customers with the financial service providers have made the traditional banks irrelevant. They are no longer huge players in the sector in the scenarios of a disintermediated bank because of always needing a third-party. This is a similar observation by Varga (2017) as mobile technologies and platforms that are agile and used in the financial transactions have displaced the traditional retail banking models. In addition, the technologies make it easier and efficient to match the needs of the customers such as payments or borrowing with the customers having a direct say in the choice of the services, transactions and dealing with risks.
“In the spirit of competition and maintaining the customer base, the traditional banks have launched partial digital tools to assist in the banking services and attracting new clients. However, this comes with the cost that many traditional banks are unable to meet and make profits. Interview with a retail bank manager
The rise of the fintech such as the neo-banks was attributed to an increase in the competition in the financial sector where the environment is challenged for the traditional retail banking to sustain their earnings. The pressure of these banks to meet the customer expectations to improve the digital interfaces. These traditional banks, therefore, find it very difficult in terms of the prompt response to the emerging technologies that can control the relationships with the customers. The innovative services and products of the neo-banks were attributed to the proliferation increase in the risks and complexity of the operations of the traditional approaches.
The current study aligns with the findings of Wijewardena (2014) reiterating that the scale and size of traditional banks make it difficult for the modernization and digitisation of the existing operations and processes to achieve cost-effectiveness or provide innovative services with the speed of the customers, convenience and timeframe. Similarly, the issue of customer drains to the challenger banks has been found constant in the recent past as confirmed by Wijewardena (2014). There have been reduced revenues in the traditional banks, and profitability thus leading to the questioning of the incumbent banks.
The strategic risks of the traditional banks are triggered by the neo-banks as their entry and thriving in the market increases the risks of the individual banks losing profitability.
“A substantial portion of the market share is lost and also the profit margins by the efficiency of the innovative neo-banks who can deliver similar services to meet the demands and expectations of the customers a less cost. This has triggered the deterioration of the traditional banks and their business cycles withered as some try to react by engaging in riskier activities to bridge as some measures to bridge the gap.” Interview with a human resource manager.
Neo-banks have Embraced the Youth and Small and Middle-income Earners
The youthful generation was found to be appreciating the technological advancements owing to their social media presence. In most of these developed countries, they are the largest portion of the working population with bank transactions. The neo-banks innovative services such as virtual transactions are appealing to this population and have drained them from traditional banking. Santos (2018) identified that the emergence of neo-banks in both developed and developing countries have posed significant threats to conventional banks because of the main factor of customer convenience in their system. These were similar sentiments found in the current study as it was identified that the major differentiating factors between the neo-banks and the traditional retail banking systems has been the continuous improvement and focus on innovation, reduced capital requirements and the flexibility of the government regulations. With the traditional banks focusing on the mechanisms of digitizing their banking solutions, neo-banks have been operating at an advantage as they offer similar experiences at a low cost without the idea of physical visiting of the premises.
Neo-banks are data-driven as they use real-time information for decision-making. In addition, the banks operate with the potential of understanding the users’ digital behaviours and identify the clients’ interaction with application features. The consumer tracking was identified as a critical factor assisting the neo-banks in the creation of the relevant cohorts that are in return utilized for the improvement of the user experience. This has been a challenge to the traditional banks that rely on studying diverse groups over time to understand the customer behaviours empower the consumers and tailor the experiences to meet their expectations. The two cannot compete on the same ground and therefore traditional banks are left behind.
“Neo-banks are at advantage in the market as they operate without branches. Unlike the traditional banks that rely on huge infrastructural developments to carry out their operations, these models are lean and efficient. It is hard to compete with such and at the same time remain profitable’ Interview with a finance person.
Saksonova and Kuzmina-Merlino (2017) identified that people were attracted to the neo-banks because of the speed and accuracy of the bank transfers and protection as well as the security of the customer data. This puts the traditional banks at a disadvantage as they cannot match the features. The transfers in the conventional banks take days to complete. Besides, the attitude of the customers and the perceptions regarding the security of their data with the traditional banks has been changing with the emergence of neo-banks. Similar sentiments were echoed by the interviewed managers in the study. They attributed the mass subscription of the customers to the neo-banks to the traditional banks’ sticking to traditional approaches of lending that were inconvenient, methodical and time consuming. The method of lending did not incorporate the small entrepreneurs who have ceased the opportunity for the low-income millennials. These small business owners attribute their attraction to the neo-banks to the services offered, convenience. One of the interviewed retail banking managers confirmed the statement by indicating that neo-banks have brought transformation in small and medium scale entrepreneurs because of accommodating their needs and simplicity.
There was appreciation of the fact that the superfast services, digitization and innovative features has placed the neo-banks in a better position to acquire many customers. The legacy of traditional banks has been focused with infrastructure without emphasizing the need for improved customer experience that has been the pillar for the neo-banks.
“Neo-banks have emerged with shifted attention to the customers. They have focused on financial inclusion and rejuvenating the role of the banks, their reach and simplifying the sector. They are accommodating even the needs of the small and middle-income entrepreneurs.” Interview with a finance manager.
The leniency that has been experienced in the government regulations has triggered the evolution of the neo-banks, unlike the traditional conventional banks that have to face stringent processes. Therefore, the neo-banks have been able to stay ahead of their incumbents thus piling pressure to the conventional ones to digitise the practices. The interviewed managers confirmed that the issue of trust after the financial crisis has dwindled and negatively affected the traditional conventional banks.
“Most people believe that banks cannot be trusted. It is only the government that tries to make them believe that their money is safe “Interview with a bank manager.
The issue was confirmed to be worse especially among the millennials that have lost trust in the conventional banks because of the narrations that they got from the parents. With the introduction and the thriving of the fin techs such as the neo-banks, it has been difficult to convince this group of the population put their money into the banks. The World Economic Forum puts estimates that more than 50% of the population of the world comprises of people under 30 years.
“Scepticism among the young people has put us at a disadvantage and we are toiling to gain back their trust as they form a large market base for the banking services.” Interview with a retail banking manager.
This brings a crisis to the traditional banks that have been losing the market to the digitized and modernized neo-banks which are appealing to the youth.
Saudi Arabia and Bahrain have witnessed the wave of the neo-banks that have come to shake the banking sector that has remained stagnant for some time now. It is evident from the findings that clients have been snatched to the neo-banks because of the associated customer service and innovative products offered. Established traditional bank players have been displaced by the start-ups of the challenger banks with the digital approach enticing the consumers. The interviewed managers also attributed the growth of the neo-banks with the media hype that they are given in terms of the perceived disruptive impact that the neo-banks are having in the financial sector.
“It is a wave which cannot be controlled unless you become innovative and compete in the same platform. The neo-banks will soon displace the traditional banks as they have proven attractive to the customers” Interview with a retail banking manager.
The respondents also indicated that the neo-banks have also thrived by taking advantage of the disillusioned customers who developed a belief that their preferences and needs were not adequately addressed by the traditional banks. These were the similar findings by Saksonova and Kuzmina-Merlino (2017) indicating that the backing of enthusiastic customers and the investors have made the idea of neo-banks realistic and may soon establish themselves as the major providers of financial services in the developing countries. One manager reiterated that the fact that the neo-banks have found a breakthrough in the developed countries is a motivation for the developing financial markets. The evolution into the mass market is an idea that is spreading fast and cannot be contained by the traditional approaches.
Consumer-Centric Model of Neo-Banks and Accommodation of Jig Economy Reduced Revenues for Traditional Banks
There was a common identification that neo-banks have proved that they are customer-centric. They have redesigned the banking models and practices with the customer been at the centre. Unlike shifting their focus on selling their products, they concentrate on meeting the financial needs of the customers in the most convenient way.
“The most critical component of the growth of neo-banks in the fact that they have mastered the art of attracting customers. They have demonstrated an understanding that customers do not need the financial products but what the products will create or give them the ability to do”. Interview with a marketing manager
The gig economy was also attributed to the growth of the neo-banks and reducing the customer base for the traditional banks. This is a reality in the flexible working culture that has been hailed recently with many people working as independent contractors or freelancers and controlling their schedule rather than having a full-time job with a single stream of financing. The rigidity of the traditional banks has discouraged the operators of the gig economy, most of whom are the youth that has no financial history or credit records thus making it hard for them to access loans. The traditional banks seemed unprepared for the gig economy and lost out to the neo-banks. The latter have embraced the flexible patterns of work that have been increasing day by day and thus attracting a lot of support from the youthful population. This has led to millions of the youth becoming members and subscribing to their principles. The findings correspond to a study by Cuesta et al. (2015) identifying neo-banks to have leveraged their knowledge to serve this segment of the customers and move a step ahead of the traditional banks that have struggled through an emphasis on the customer financial history to access their services. The outcomes reflect the seamless integration of the components.
“Neo-banks have been favourable to the freelancers and the independent contractors, unlike the traditional banks. For instance, account opening in the neo-banks opening of current accounts for the freelancers is fast and can even access the services while the process of verification is underway. In the traditional banks, there is an outright denial of the opening of the current accounts among the freelancers.” Interview with a General manager
The neo-banks have also enjoyed the advantage of instant payments that meet the expectations of the gig economy unlike the traditional banks that one has to wait for long durations. These advantages have made the competition stiff for traditional retail banking as the line of customers is shrinking every day.
Financial Disruptions of Traditional Banks
Traditional banks have become the victims of financial disruptions after the emergence of the neo-banks. The conventional banks had been focusing on the reaping from their reputation and infrastructural growth. However, the challenger and the neo-banks have been moving speed and characterized by dynamic entities. Respondents expressed confidence that neo-banks have established themselves as worthy competitors because of building on technology to woo customers and gain their trust. The attraction of the neo-banks is the focus on fulfilling the needs of the consumers and exploring the base that had considered being left behind by the traditional conventional banks. The managers confirmed that the customer service was a major challenge reported by surveys of the bank that the neo-banks have revolutionised. For instance, one interviewed manager indicated that there were instances that the customers would easily feel dissatisfied with the banks because of their service experience and the waiting times. This is a feature that the neo-banks have specialised to become easily accessible in the digital platforms. The concept has bitten the traditional banks as the reduced physical interaction significantly reduces the chances of dissatisfaction among the clients as many are triggered by emotions and perceptions
“The focus of the neo-banks on the digital platforms has made them easily accessible to the clients who are always time conscious. Besides, there are no chances of interactions like the traditional banks. Sometimes customers complain of poor services depending on their perceptions and emotions and that is not always true. There no such cases in the neo-banks thus improving the perception of excellent customer experience.” Interview with a customer relations manager.
From the study, this is a significant finding as there was minimal literature comparing the perception of the customers’ service experience between the neo-banks and traditional banks and the contributing factors.
The respondents indicated that the major source of revenues for the traditional banks was the interests accrued from the loans with regular payments by the borrowers serving the purpose. However, the banks have to operate with huge deposits to sustain the loans. Taking into consideration that one has to have a good credit history to access most of the products, the emergence of neo-banks spelled doom. They have lost a significant portion of clients in search of better customer service experiences and products. The current study corresponds with the findings by Santos (2018) that the focus of the traditional banks on the interests to generate revenue and sustaining the deposits have made them lag and struggle to catch up with the innovative products offered by the neo-banks. The results have been a decrease in the customer base.
From the findings of the current study and the reviewed literature from previous research, it is evident that the banking sector has been revolutionised by the emergence and growth of the neo-banks. They have been doing extremely well in the developed countries and the developing ones too are not left behind as they have embraced the idea. The markets are changing and the rise of the gig economy is making it hard for people to stick to the traditional banks where access to some services is limited to financial history. The innovative products and the improved customer experience of the neo-banks have deprived the traditional banks of their customers. Unless the traditional banks embrace the creativity and technological advancement offered by the neo-banks, it will be difficult to compete with them to generate revenue and remain profitable.
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