BID® Daily Newsletter
Jan 10, 2023

BID® Daily Newsletter

Jan 10, 2023

How CFIs Can Effectively Compete Against Neobanks

Summary: Nimble neobanks have an edge in the world of digital banking. But CFIs have advantages in the real world of finance, stemming from their traditional, brick-and-mortar businesses. Those traditions can help level the playing field.

In the sci-fi cult classic movie “The Matrix,” high-tech swashbuckler Neo saves the world. Neo has developed a following so devoted that some fans even name their kids after him. Neo was the 980th most popular baby name in 2021.
Neo is also a popular term in finance. Digital banks, often referred to as neobanks, are growing fast and winning over consumers and small business owners. Nobody’s naming their kids “Neobank” yet, but their rapid rise as an alternative to traditional banks has CFIs understandably concerned about direct competition from these high-tech financial innovators.
The Neobank Advantage
Neobanks provide financial services through digital channels in a way that appeals to consumers and small business owners. They have proven particularly adept at mobile solutions. Since they aren’t true banks and are not subject to the same strict federal regulations, they have certain advantages, such as their ability to be freer to innovate and adapt to change. They are classic disrupters of an old-line industry, and because they have moved aggressively into small business loans and services, their growth presents a unique challenge to CFIs, which specialize in servicing small businesses.
Of course, CFIs aren’t idly standing by while neobanks grow. CFIs are upping their digital games as well.
CFI Advantages Over Neobanks
CFIs have an opportunity to one-up the digital competition by promoting CFI services and products that a digital bank doesn’t have. To name a few:
  1. Branches. You can’t walk into a digital bank and meet face-to-face with a banker. Customers still like the idea of a physical presence and still prefer using branches to open checking accounts or take out mortgages. For instance, Deloitte’s global digital banking survey uncovered that 58% and 65% of US customers prefer branches when it came to checking accounts and mortgages, respectively. A CFI that keeps its branches up to date and staffed with capable front-line employees should have an edge, particularly if it also has a solid digital presence.
  2. Community connections. Neobanks are located everywhere and nowhere. With no physical presence, they lack the ability to establish real community connections. Community connectedness is a hallmark of CFIs and could be leveraged to effective use. Fostering and nurturing community support can play a significant role in giving a CFI an advantage over a neobank.
  3. Small business support. Clearly, neobanks can be quite adept at digital loan applications for small businesses through mobile apps. CFIs can also provide digital and mobile solutions — and they can go one step further. CFIs can provide personal assistance and advice to small businesses through dedicated relationship managers. A CFI can be a more effective partner to a small business by helping a small business sort out its individual financial needs and concerns. CFIs should play up the fact that they offer long-term local support to small business customers. That is something that provides real added value to small business owners.
  4. Rewards. When competing against a neobank, check their customer rewards programs. Many don’t offer rewards. A strong reward program can be another extra that CFIs can offer to entice customers.
Staying True to CFI Principles
What all this suggests is that CFIs have inherent advantages that digital banks have trouble matching. CFIs would do well to press the advantages they already have as a result of their local community presence. Like Neo in “The Matrix,” CFIs might be able to prevail over a seemingly powerful adversary — and they can do it just by being themselves.
Subscribe to the BID Daily Newsletter to have it delivered by email daily.

Related Articles:

Guidelines for M&A Are Evolving
The regulatory environment for banking M&A is evolving. Regulatory agencies are assessing the current competitive environment with an eye toward improving measures of competitiveness. While much remains uncertain, the recent merger of U.S. Bank and Union Bank offers some insights that may benefit banking institutions.
Are Overdraft Charges A Thing Of The Past?
Overdraft fees provided almost $33B in income for financial institutions in 2021. This was especially important in a low-interest rate environment. Yet, consumers are pushing back on these fees and neobanks have responded by providing accounts without these fees. Should community financial institutions eliminate these fees to stay competitive?