EXCLUSIVE: “In with the new…out with the old?” – Alex King in ‘The Paytech Magazine’
Flush with venture capital and flushed with the vigour of youth, most neobanks’ first priority has been to scale. For the past decade, that’s meant burning through eye-watering sums of cash to reach young people – the cohort that’s most receptive to digital tools and most promiscuous with service providers. Having come of age during the 2008 financial crisis, Millennials would prove particularly eager to ‘stick it to the man’ by hopping onto a rebellious new banking bandwagon. Roughly one billion people are now served by 400 neobanks around the world. But, as a recent report from the global consulting firm Simon-Kucher & Partners has estimated, less than five per cent of these challengers have reached breakeven, with some experiencing annual losses in excess of $100million.
It turns out that targeting young people gets you reach but it doesn’t get you rich. That’s in part because Gen Z and Millennials are less likely to seek high-margin financial products. But they’re also on the wrong end of the growing generational wealth gap in mature economies, holding less cash to deposit, to invest or even to spend. In the UK, Saga, a leading provider of products and services (including financial services) for the over-50s, points to figures that show 63p in every £1 will be spent by people over the age of 65 in 2040. This begs an obvious question. If silver surfers, swipers and savers hold a record proportion of household wealth, why aren’t challenger banks clambering over each other to get a chunk of the wedge?
We can forget the received wisdom that older people just don’t use technology. According to Ofcom, 85 per cent of the UK population owns a smartphone, including the vast majority of over-55s. Some seniors do fall into the digital divide, but most have proven effective digital migrants, many led safely over the threshold by digital native relatives. It seems, instead, that neobanks are simply out of touch with the very generation that could help them pivot from penetration to profitability. For Christoph Stegmeier, senior partner at Simon-Kucher’s global banking practice, that blind eye starts with founders. “Almost all neobank founders are digital natives, and the older generation is just not top-of-mind for them,” he explains.
“These founders don’t go into business with a strategic approach. They start out by saying, ‘I’ve had a problem opening a bank account, so I’ll do it differently’. “Obviously, none of those young founders has experienced the sort of issues that the older generation has. I talk a lot with investors who do want to see those issues targeted, but say that if you tell a founder to focus on them, it’s just not where their heart is. And if they don’t put their heart into everything they do, it doesn’t work.”They might not be Zuckerberg-fresh when they start their businesses, but the majority of neobank founders fall firmly within the Millennial age bracket. Nikolay Storonsky founded Revolut in 2015, when he was 31; the same year, Tom Blomfield founded Monzo at 29. Founders such as these would transform the debit card into a fashion accessory and the banking app into a hip financial advisor in your pocket – appealing to young people like them, but it was anathema to many mature consumers.
Dexter Cousins, founder of global fintech recruitment company Tier One People, based in Australia, believes that older generations are far warier of new, unproven platforms than Millennials and Gen Z. “Young people are happy to use robo-advisor platforms, for example, to help them manage their cash, but older people are more likely to think ‘this looks a little bit like a scam,’” he says. That’s not an unreasonable suspicion. For the past two years, researchers have warned of a ‘scamdemic’ as criminals seek to take advantage of older people in isolation. High-profile scandals at tech firms such as WeWork, Wirecard and Theranos, to name just a few, won’t have helped; they’ve led some older consumers to trust young technology CEOs about as much as young consumers trust older investment bankers.
Still, mature consumers are more clued up on the benefits of neobanks than you might think. In May, Revolut announced that it had seen a 215 per cent increase in UK users aged between 55 and 74 over the past two years, and a fourfold increase in their spending. According to George Grumbar, Revolut’s head of customer affairs, its growing number of ‘silver swipers’ is linked to scaling through younger people.
“Our most successful marketing tool is word of mouth, which has helped us to reach over 18 million customers,” he explains. “From our initial adoption by Gen Z users, we have been seeing those users refer us to their parents, relatives, and family friends. These consumers are typically looking for high-value savings opportunities, and fee-free transaction rates as they travel more across borders.”
Grumbar highlights Revolut’s Stays feature – which gives users cashback on accommodation bookings – as being particularly popular among these savvy seniors. But it’s unclear whether Revolut is enjoying the larger deposits and higher profits one might expect as a result of a more mature base. More likely, parents and grandparents are being instructed by young relatives to load a Revolut wallet to save on FX or make low-value transactions through a digital card, rather than invest their savings.
Whatever they’re using it for, it goes some way to prove that neobank apps aren’t challenging for older generations to use. Plus, it could lead Revolut to develop new products with their needs in mind. It points to a possible path to prosperity for any neobank looking to address its cash burn. It’s telling that the challengers currently chasing the deeper pockets of older savers, often by offering generous deposit rates, have dialled right back on the youthful exuberance that characterises most neobank positioning. Based in the UK, Recognise Bank and OakNorth eschew the Silicon Valley neologisms and the DayGlo colours for a sense of prudence and reliability. The founders of both banks are middle-aged; they know from experience that senior savers value organisations they can trust rather than those that have sheared seconds off the sign-up process.
Neobanks might do well to introduce retirees and older executives to their boards. But they should also go much further, because the Simon-Kucher report estimates that 70 per cent of revenues across the neobank space are generated by accounts and card-based payment services.
Those really are low-hanging fruit for today’s challengers. Up in the canopy lie the high-margin services: wealth management, pensions, healthcare, insurance, equity release. Interestingly, those were among the financial services identified by the Saga management team in 2020 as having the potential to power the business’s growth as it creates ‘The Superbrand for older people’, taking it way beyond its core travel business. Open finance makes all of these products possible for neobanks to integrate over one platform and could be a way to solve the liquidity and profitability issues that the vast majority continue to suffer from. Will they really miss the opportunity because their team is blinkered by youth?
Back in Australia, Cousins isn’t so sure that the age of a fintech founder is inevitably reflected in the direction the business takes. He points out that all four homegrown, standalone retail challengers – only one of which survives as an independent – were set up by mature ex-bankers, not frustrated youths: “We’ve not seen the Revolut-style founder bank emerge here.” The freshest-faced founders Down Under can instead be found in wealth management, he says – a curious juxtaposition, given that the wealth resides mainly among their parents/grandparents. Perhaps inevitably, those apps have been geared towards Millennials, not Boomers, although in Cousins’ experience, older users will overcome any latent hesitancy to digital finance if the offer is good enough. Xinja, a neobank that launched at the start of 2019 with a savings account that offered a rate-beating 2.25 per cent on deposits of up to A$250,000, fell over because it couldn’t put loans in the market fast enough to pay interest on all the deposits. It attracted AU$400million in the space of a month.
“It wasn’t Millennials, it was older people transferring their money,” says Cousins. Xinja wound up honorably, repaying every account holder. Whether it will deter those older savers from using challengers again, or whether it will persuade them to explore digital finance further, it’s hard to tell. There’s no doubt, though, that you have to address the trust deficit if you want to attract mature and affluent consumers.
It’s one of the reasons that Stegmeier believes incumbents are best-placed to mine the mature user market – by leveraging the credibility they already have and deploying a speedboat strategy. Seeing the mature market for what it is – a massive potential business opportunity, rather than treating it as a passion project – means they are more likely to succeed at it, he says. They still have to find pain points that consumers are willing to pay a bank to address, though. “You need a very precise understanding of that age group and what they would like,” Stegmeier adds.
Matt Williamson, VP of global financial services at the omnichannel design consultancy Mobiquity, believes that while new-generation banking is more about content and digital services and less about assets, senior banking is about providing a high-touch service with low risk. That might well be delivered through technology, but he suggests attaching the word ‘fintech’ to it is tempting ‘label bias’.
“If someone came along and created the right experience for that demographic, I think there would be a lot of take up,” he says. “Financial milestones are different for the over-50s, though; it’s going to be supporting kids through university, kids leaving home, downsizing, buying big-ticket items for retirement.”
You can hardly describe mature users as a ‘niche’, given they represent well over half the population in many countries, but Stegmeier agrees that this is an area of banking where depth, not breadth, counts. “It’s a big mistake neobanks make to say ‘we will grow like crazy until year seven and aim to break even then’. That’s if they last to seven and many do not,” he observes.
Stegmeier believes one could be successful if it turned its passion for ‘meeting the customer where they are’ and the ability to design superb, customer-led products and UX towards a more mature market. And, by chasing the money, not the numbers, he suggests it could break even within three to four years.
“But the road is a bit steeper than launching other types of neobank,” he cautions. “VCs don’t have that patience – that’s why speedboats launched from within larger financial services groups should explore that field.”It’s fortunate that the early neobank founders are beginning to develop their own silver streaks. When they can’t read the app comfortably because their eyesight’s fading and they have trouble raising themselves off the beanbags, we might expect new passion projects from them that cater towards older generations.Pivoting from rebellious disruptor to sensible grown-up may come with a sense of anticlimax, but neobanks can’t live in Neverland forever.
Opening its arms wide to affluent, mature consumers may be one of the best moves for a challenger seeking to turn a profit (or survive) this decade.