Europe has seen a significant increase in digital banking over the past few years. Innovative neobank models have successfully redefined traditional banking norms, securing large market shares in the process. However, the recent economic turmoil has thrown both new and established players into uncertainty, leading to workforce cuts, decreased valuations, and recession fears. Nevertheless, with change comes opportunity, and Europe is currently on the cusp of multiple structural trends that could reshape banking forever. It's crucial to recognize these opportunities and understand how to navigate them successfully.
Global events have significantly impacted customers' financial and mental well-being. Rising prices, political turmoil, and climate change concerns have amplified customers' caution, making trust in financial institutions paramount. In this context, customer experience transcends the traditional definitions of satisfaction. It demands clarity, transparency, and flexible products capable of alleviating customer concerns.
Digital banks can seize this opportunity to cater to the growing migrant population's unique needs. For example, a simple wallet scheme associated with a bank account could facilitate the integration process for African migrants, enabling them to receive subsidies and support, access financial services, and transfer money to their home countries. A case study highlighting this is Remitly Israel (formerly Rewire), which has successfully implemented tailored remittance services for migrant workers.
Successful ventures start with in-depth customer research, leading to a clear understanding of their needs and challenges. Once these needs are identified, banks need to communicate their initiatives effectively and assure their delivery to build stronger connections with their customers.
Banking-as-a-Service (BaaS) providers offer digital banks an opportunity to expand their product and service portfolios in a more cost-effective and timely manner. By using a BaaS provider, digital banks can unlock new revenue streams, acquire new customers, and increase customer lifetime value. However, this opportunity comes with risks, including regulatory requirements, lack of scalability, and potential future uncertainties about the BaaS provider.
To mitigate these risks, digital banks must choose their partners carefully. They should look for BaaS providers that offer a wide range of payment methods, interfaces to suit their business needs, and a strong track record of managing risks and providing scalable solutions.
Exploring new customer segments might be worthwhile amid today's banking challenges. Small and medium-sized enterprises (SMEs) and micro-enterprises in Europe, often struggling to gain access to financing, present a tangible business opportunity for the banking sector. Modern technological capabilities can help banks overcome historical challenges of serving this customer segment by reducing cost and improving personalization through digital engagement.
OakNorth, a UK-based bank, exemplifies this approach by lending £6.9 billion to fast-growing businesses across the UK since its inception. It illustrates the successful combination of digital and human-led engagements. Research by McKinsey suggests that a similar approach, where cost-to-serve is reduced by redirecting customers to digital channels and driving new revenue from frontline cross-selling capabilities, can enhance performance with SME clients.
To sum up, the current digital banking landscape in Europe is undergoing significant changes. While navigating these changes remains challenging, the available technologies and capabilities provide a wide range of opportunities. These include supporting customers and local economies to weather a potential recession, and ensuring future growth and development of the digital banking sector.
For a more detailed guide on launching and scaling a digital bank, our guide “How to sucessfully build a digital bank” provides comprehensive, practical insights. It serves as a step-by-step guide to support both new entrants and existing players in their digital banking journey.