Challenger and Neobanks – state-of-the-art digital and mobile-first financial institutions operating without traditional physical branches and digital wealth managers (or Robo advisors) have been making a name for themselves, becoming significant players in the fintech industry in recent years.
Their objective? To serve underserved market segments while innovating and redefining traditional banking and wealth management services forever.
As the age of Neo and Challenger banks and digital wealth management dawns, many startups are securing multi-millions in first-round funding as they seek to consolidate their places in the market. Neobanks like N26, Monzo, Nubank, SoFi and Revolut are fast becoming household names. On the wealth management front, organizations like Rosecut offer digital wealth management solutions to higher-end markets, with their website illustrating investments at around £250,000 initial deposits.
As more and more of these new generation players appear across the globe, they are slowly chipping away at incumbent banks' market share, and not only in the mass banking and unbanked categories. Their power lies in their ability to appeal to the next generation across the spectrum from the mass market to UHNWIs, many of whom are lifelong digital natives, and offer what they desire.
This begs the question: What does this mean for traditional private banks and wealth managers? Here are some key insights for consideration.
Digital or doomed?
Challenger, Neobanks and digital wealth companies are growing successfully and securing larger global market shares year-on-year. According to Allied Market Research, Neo- and Challenger banks are projected to reach a $471 billion market size by 2027, growing at a CAGR of 48.1% from 2020 to 2027. While currently holding a modest $100 billion of the $60 trillion market, digital wealth managers are expected to capture $16 trillion by 2025.
Competition is rising as fees shrink, but this does not have to spell doom for traditional private banks and wealth management firms. That is, as long as these organizations are prepared to adapt and expand their service offerings to compete in this arena.
This is a step that investment giant Goldman Sachs has already taken with the launch of their digital-only challenger brand, Marcus, in 2016. The brand retains the illustrious Goldman Sachs name while providing an avenue to diversify revenue and tap previously untapped markets. Earlier this year, the company launched its mobile app, which, it is understood, will eventually become the group's main mobile face for most of its digital banking services. It has also been revealed that the group is developing an investment platform that will be offered via Marcus. This has been specifically designed to target the United States' mass affluent segment, with liquid assets ranging from $100,000 to $1 million. Will HNW and UHNW millennials be their next step?
Is there offering enough to compete with other Challenger and Neo bank competitors? According to one Cornerstone Advisors survey, the answer is yes, with half of the respondents who already have a Neo or Challenger bank account, intending to open a Marcus account.
While many traditional institutions understand the need to leverage technology to engage and serve prospects and clients more efficiently and effectively, several issues exist. In some cases, legacy systems cause constraints; in others, usability issues lead to low adoption rates, and often, these organizations battle with how to do so successfully. Still, ways around these need to be identified and plans put in place and executed if future survival is the objective.
Differentiating from a value point of view for the next generation
Neo and Challenger banks and digital wealth managers differentiate themselves from traditional players through ease of access, cost-efficiency, faster, more convenient service and favorable rates and returns.
For traditional private banks and wealth managers to compete, it is not about replicating this 1:1. Instead, it is about translating the value of private banking services into a Challenger / Neobank / digital wealth management type offering. To do this requires active research into client pain points through next generation client engagement and listening. Asking small focus groups questions like "What do you need us to be for you?" can assist in developing a real customer-centric culture that translates into lasting relationships and profitability.
Research repeatedly shows that the next generation of HNW and UHNW individuals, while more hands-on, still value education and guidance. When it comes to selecting a wealth manager or advisor, reputation remains a vital factor.
In terms of investments, alternatives like sustainable and impact investment opportunities should be presented. This is vital as this generation is committed to making a profit while also making a difference.
Considering these factors can help traditional private banks and wealth managers to take what they do best, position themselves appropriately and present this in such a succinct manner so that their unique value is immediately evident to prospective next-generation clients.
Consolidate and communicate
When it comes to the affluent markets, traditional private bank and wealth management clients have a far more complex financial picture than their mass-market counterparts. Experts in these fields know this. So, could there be a way to leverage technological innovation to deliver the appropriate advice in an entirely different format than is currently being used?
Although they are digital natives, face-to-face meetings are still important to over 60% of Millennials. These should be supported by social media communications and technological innovation that enables this generation to access what they need to when they need to. Finding new, engaging ways to address the pains that future wealth owners face can help traditional organizations to pivot into the new era.
Change is inevitable. For traditional private banks and wealth managers to thrive, it is time to harness the power of reputations build over decades and usher them into the digital age, not imitating but innovating to develop lasting value propositions and offerings for the next generation.