Scaling Neobanks, exploring new Customer Segments

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In 2024, 86% of adults in the UK will use some form of digital banking, representing approximately 46 million people. Whilst these users are dominated by digital natives, such as millennials and Gen Zers, older populations are now embracing digital banking, with 60% of those over 65 now managing their finances online. And significantly for neobanks, 40% of digital banking customers now have digital-only bank accounts.

But over the next 5 years, the landscape of digital banking in the UK is going to rapidly transform. There will be more digital customers than ever, with 1 in 10 Brits intending to open a digital-only bank account. And, from a demographic perspective, we will see the makeup of customers change with 15% of Generation X and 8% of Boomers opening digital accounts.
As the number of digital banking customers grows, so does the opportunity for neobanks to capture these new customers to meet their growing need for profitability. However, the challenge lies in how digital teams can cater to the diverse needs of these customers to unlock these opportunities. In this blog, through focusing on a number of key demographics, including Gen Z, over 65s and the mass-affluent, we will explore this in more detail.

Gen Z person engaging with banking app

Neobanks are tasked with capturing Gen Z as customers

Generation Z

As Generation Z has matured, so has their role in the financial services market; 5.5 million Gen Zers have already joined the workforce and another 4.5 million, currently in full-time education or out of work, are set to join them within the next 10 years. The task for neobanks of capturing this emerging customer segment is definitely not an easy one.

For digital banking experiences, we see Gen Z presenting a number of unique challenges and opportunities:

  1. Digitally Native Expectations

    As digitally native, Gen Zers are more likely to have digital banking accounts than any other generation, for example, they represent more than 50% of Monzo’s customers. However, this demand comes with high expectations; Gen Z customers value speed and efficiency in all aspects of digital banking. It is, therefore, the role of digital teams to create seamless, reliable and personalised apps that meet these expectations.


  2. Financial Education

    Gen Zers are increasingly interested in engaging with more complex financial products; according to YouGov, they are twice as likely to borrow, acquire cryptocurrencies and take risks on stocks than the general population. However, as seen with Buy Now, Pay Later (BNPL) used by 40% of Gen Zers, this attitude can lead to increasing levels of debt. It is the responsibility of banks to ensure that these newer, often profitable and unregulated, financial products empower and educate younger generations, rather than create an indebted generation. For digital teams, this could be delivering innovative customer journeys oriented around financial education such as gamified experiences or video content highlighting the risks associated with trading stocks.


  3. Socially and Environmentally Responsible Banking

    Gen Z are highly socially conscious customers, when it comes to banking they expect banks to engage in ethical practices, including environmental sustainability and social responsibility initiatives. In fact, 64% of Gen Z would switch banks if their current provider fell short on ethics and environmental sustainability. Here, socially and environmentally sustainable products and practices, such as ESG Investing, will become a competitive advantage for digital banks.

In 5 years, 68% of Gen-Z are predicted to have a digital-only bank account. (Finder.com)

Digital team strategising social ethics in neobanking

Digital teams will aim to encompass social ethics to neobanking marketing strategies

Older Population

Historically, older generations have avoided digital banking; citing difficulty budgeting, security concerns and tech savvyness. Despite this, even in older populations, trends are shifting digital; 60% of over 65s now manage their money online and this figure is only set to increase. With this age group contributing the most accumulated wealth in the UK, it is crucial that neobanks do not forget these potential customers.

However, to capture these customers, neobanks face an uphill battle - less than 10% of over 65s are predicted to open an account with a neobank in the coming 5 years. So how can digital teams at neobanks go about reversing this trend? We see older populations representing both an opportunity and challenges for digital banks:

  1. User-friendly and Accessible Interfaces

    Amongst 65+ adults, digital skills are the largest factor preventing them from banking digitally. When it comes to user journeys, such as onboarding or identity verification in particular, user interfaces should be intuitively designed and tailored for older adults. Some UI tactics might include using legible text fonts, visual aids, step-by-step guides, and simple navigation options.

  2. Security and Trust

    With 37% of over 65s not feeling protected against banking fraud or identity theft, older populations are the most distrustful of banks in the UK. On one hand, it is fundamental digital banks bring their AML and anti-fraud capabilities in line with traditional banks to drive security and trust. For example, the UK’s Payment Systems Regulator reported that Monzo and Starling had some of the highest fraud rates of any consumer bank in 2023. On the other hand, neobanks must utilise targeted approaches for building trust with older populations, whether that is educational resources to foster confidence and trust or offering alternative customer support for customers that prefer to speak to a real person.


  3. Customer Support

    As mentioned above, customer support is one of the areas where neobanks must cater to older populations. 27% of over 65s still want to manage their bank account in-branch meanwhile when using digital channels, only 35% feel comfortable receiving advice through a chatbot. To attract these customers, neobanks must help older customers navigate this transition from physical to digital wherever possible. Digital teams could explore offering real-time video assistance options and ensure customer support agents recognise the specific needs of older people.

Older generation engaging with neobanking app

60% of over 65s now manage their money online

Mass-Affluent

The UK "mass-affluent" segment includes individuals with annual income or investable assets of £50,000 or more and represents approximately 1 in 7 adults in the UK – or 10 million people. Significantly, beyond their income and sayings, these customers tend to have significant mortgages, high digital platform usage and utilise a diverse set of financial products such as credit cards. As a result, this segment is highly profitable and attracts significant attention from all banks, including those neobanks, such as Monzo, aiming to democratise and redefine financial services.

We estimate that roughly one in seven – or 10 million people – are ‘mass affluent’ in the UK. (lloydsbankinggroup.com)

Unsurprisingly, competition for mass-affluent customers is very high – both traditional banks, such as HSBC and Lloyds, and neobanks, such as Chase and Revolut, have built bespoke propositions for these customers. So how can neobanks win this battle for the mass-affluent?

  1. Personalised Experience

    Mass affluent customers expect a highly personalised experience; ranging from bespoke financial advice and planning services, unique rewards and benefits and tailored investment strategies. However, despite introducing investments, mortgages and brokerage, neobanks have so far avoided these products and services such as wealth management and financial advice. If this is brought into neobanks expansion roadmap, digital teams should interrogate and draw inspiration from, on one hand, traditional banks who have offered this for years and, on the other hand, robo advisers who have built convincing digital-only experiences for the mass-affluent.


  2. Premium Rewards and Benefits

    When it comes to mass-affluent customers, banks understand that the mass-affluent want to “get the most of their money”. As such, loyalty programs that offer exclusive benefits, such as travel perks, concierge services, and higher interest rates on savings accounts, can differentiate neobanks in the eyes of mass affluent customers. Similarly, high-end credit card offerings with features like cashback, travel rewards, and access to airport lounges are also appealing.


  3. High-Level Security and Privacy

    Given their significant assets, mass affluent customers demand strong security measures that protect confidentiality and financial data and build trust. For digital teams, this might mean doubling down on security measures such as including biometric authentication, fraud detection, and robust data privacy protections.

Mass affluent group in poolside garden

Mass-affluent customers are highly profitable and attract significant attention from banks

What can we learn from this?

Through the lens of some of the most significant demographics and segments in the UK, we have seen how different banking customers have different expectations of digital banking experiences. From meeting the needs of digitally native and socially conscious Gen Z customers to providing an accessible and user-friendly experience for older populations and then delivering highly personalised and rewarding experiences to mass-affluent customers, catering to these different segments is a massive challenge for digital teams.

And, what’s more, we have only scratched the surface of the UK market. For organisations that have, or are growing, operations across continents and the world, neobanks must be tuned into the local changes in demographics and segments. For example, looking further afield, South Korea’s ageing population is being left behind by digital banking meanwhile India’s enormous, comparably young and digital savvy population is a very different challenge for neobanks.

For executives and senior leaders aiming to piece together a holistic digital experience strategy for multiple segments, we see a number of trends that may support this:

  1. “Full-Service” Neobanking Model

    By providing a more comprehensive suite of digital banking services, or even a ‘Super App’, neobanks combine the propositions of traditional banks with their own superior digital experiences, increasing the likelihood of being able to cater to customers across demographics.

  2. Subscription Model

    The subscription model is not only a way to monetise neobanks’ services, it also allows different customers to self-segment themselves into distinct propositions. For example, Revolut built bundles of products, ranging from ‘Basic’ to ‘Ultra’, that are tailored to customers' income.


  3. Hyperpersonalisation

    By combining a unique ‘single picture of the customer’ with innovative data analytics and machine learning, banks can create truly personalised products, services and experiences. For example, transaction history, spending patterns, and financial goals, could be used to create a bespoke savings product.


  4. Generative AI and LLMs

    This new era of AI opens up new opportunities for neobanks to deliver their CX. Currently, the most convincing use case is the use LLMs to create more effective customer support chatbots e.g. Bunq has a GenAI personal finance assistant called Finn. Alternatively, this technology could be used to generate entirely bespoke, personalised UIs based on a customers characteristics, preferences and behaviours.

Importantly, translating and operationalising these approaches, some more radical than others, to each unique organisation is where value and competitive advantage is created. And, to reap these rewards, neobanks must also utilise an industry-leading, user-centred approach to product development. At Elsewhen, through a wealth of experience helping financial services deliver digital products, strategy and transformation, we are uniquely positioned to help organisations achieve this. Get in touch to find out more.

References

  1. “You can’t bank  on it anymore” The impact of the rise of online  banking on older people (https://www.ageuk.org.uk/globalassets/age-uk/documents/reports-and-publications/reports-and-briefings/money-matters/the-impact-of-the-rise-of-online-banking-on-older-people-may-2023.pdf)

  2. Digital banking statistics 2024: How many Brits use online banking? (https://www.finder.com/uk/banking/digital-banking-statistics)

  3. Britain: Key attitudes and behaviours of Gen Z with respect to finance and insurance (https://business.yougov.com/content/46577-britain-key-attitudes-and-behaviours-of-gen-z-with-respect-to-finance-and-insurance)

  4. Monzo Investments launch will help create new young investors (https://www.retailbankerinternational.com/comment/monzo-investments-will-help-create-new-young-investors/)

  5. Gen Z is Reaching Adulthood and Merchant Service Providers Need a Plan (https://javelinstrategy.com/research/gen-z-reaching-adulthood-and-merchant-service-providers-need-plan)

  6. Banks in the UK and EU want to serve Gen Z, but still need to correct some slight misalignments (https://www.emarketer.com/content/banks-serve-gen-z-correct-misalignments)

  7. As bank branches continue to close, a new Age UK report reveals that 4 in 10 over 65s with a bank account do not manage their money online (https://www.ageuk.org.uk/latest-press/articles/2023/as-bank-branches-continue-to-close-a-new-age-uk-report-reveals-that-4-in-10-over-65s-with-a-bank-account-do-not-manage-their-money-online/)

  8. APP fraud performance data (https://www.psr.org.uk/information-for-consumers/app-fraud-performance-data/)

  9. Launching a new digital proposition: Lloyds Bank 360 (https://www.lloydsbankinggroup.com/insights/launching-lloyds-bank-360.html)

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