Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Future of Neobanking: Exploring the Landscape of AI-Powered Digital Banks
Digital Banking | Jul 16, 2023
What is an AI-driven Neobank?
An AI-powered Neobank is a licensed digital-only bank that leverages artificial intelligence to deliver customer-centric, operationally efficient, and profitable services at scale. These banks differentiate themselves by embedding data and AI capabilities extensively across all aspects of their operations. This allows them to deepen customer relationships, improve financial performance, and deliver hyper-personalized services. They operate with lower cost structures and disruptive pricing practices compared to traditional banks.
See: How AI Has Revolutionized The Canadian Banking Industry
- A couple of examples of AI-powered Neobanks that are transforming customer experiences include:
- Revolut has rapidly launched and reworked new products and propositions, adapting to evolving customer needs. It has launched an average of a new product every quarter, driven by its strategy of experimenting with new products to address evolving market trends.
- Klarna uses a machine learning-based recommendation system to determine consumer purchase patterns and offer appropriate shopping recommendations and financing offers.
- In Canada, we can expect digital banks and fintech companies to make waves by further integrating AI across the spectrum of business operations:
- Neo Financial: This Canada-based digital bank recently raised $185 million CAD in a funding round, signaling confidence in the neobank sector. While it's not explicitly stated that they use AI, their digital-first approach and innovative services suggest they likely leverage AI technologies.
- Wealthsimple: Although primarily known as a robo-advisor and investment platform, Wealthsimple has expanded its services to include savings accounts and peer-to-peer money transfers, tax preparation software, and more. The company uses AI to manage investment portfolios, and it's possible that they use similar technologies in their other financial services.
Please note that while these companies are innovating in the financial sector, the specific use of AI in their banking services isn't explicitly confirmed in the search results. For detailed information, it would be best to visit the companies' websites or contact them directly.
Key Characteristics and Capabilities of Neobanks
AI-powered Neobanks can have several advantages over traditional banks. They operate with lower cost structures and offer more transparent pricing terms with fewer hidden fees. They leverage AI to deliver hyper-personalized services, maximize customer lifetime value, dramatically lower the cost to serve through automation, and adopt superior data-driven risk management practices.
See: French Neobank Startup, Green-Got, Collaborates with 1300 Crowdfunded Climate-Conscious Investors
They also have the ability to launch products at high velocity, focus on customer engagement, hyper-personalize experiences, adopt conversational design, integrate open-banking features seamlessly, leverage partner ecosystems to scale, and use customer-lifetime-value (LTV) to guide actions.
- AI is the cornerstone of successful neobanks, enabling them to deepen customer relationships, improve financial performance, and deliver hyper-personalized services. By embedding AI capabilities across operations, neobanks can maximize customer lifetime value, lower costs through automation, and adopt superior data-driven risk management practices.
- Winning neobanks distinguish themselves by rapidly launching and reworking new products and propositions, adapting to evolving customer needs. They prioritize customer engagement, offering services that go beyond pure-play financial services to deliver new forms of utility and entertainment.
- Successful neobanks leverage machine learning to personalize customer experiences, matching customers' present context and historical behavior. They are also adopting conversational design, replacing traditional forms and questionnaires with chatbots, voice assistants, and live video consultations for superior engagement.
- Neobanks gain a competitive edge by building an open platform from the outset, seamlessly tapping into the broader open-banking ecosystem. They also leverage partner ecosystems to scale, embedding their services within these ecosystems for easy, low-friction access to banking services. Open banking, facilitated by APIs, allows neobanks to integrate with other financial services and third-party providers, creating a seamless and holistic financial ecosystem for customers. This can include everything from linking with fintech apps for budgeting and investing, to integrating with payment services for easy money transfers. As customers demand more interconnected services, the ability to integrate effectively will be a key factor for success.
- Successful neobanks use customer lifetime value (LTV) as a key performance metric, alongside traditional balance sheet metrics. This enables them to take more granular and tailored actions quickly, boosting customer value and driving strategic and operational decisions.
Challenges and Opportunities Ahead
Like all fintechs, Neobanks, or digital-only banks, have been disrupting the traditional banking industry with their innovative, customer-centric approach. However, they face several obstacles and opportunities that will shape their future in the financial services industry.
Security and Regulation
As digital platforms, neobanks are attractive targets for cybercriminals. Ensuring robust security measures to protect customer data and transactions is crucial. They need to invest in advanced security technologies and protocols to prevent data breaches and fraud, which can be a significant challenge given the evolving nature of cyber threats. Neobanks often face complex and varying regulatory environments across different regions. Compliance with these regulations, including those related to data security and privacy, can be costly and time-consuming.
Profitability, Trust, and Adoption
Many neobanks are still striving to achieve profitability. They often offer free or low-cost services to attract customers, which can make revenue generation challenging. Despite their innovative offerings, they still need to earn the trust of potential customers, especially those who are accustomed to traditional banking. This trust extends to the security of their platform and the protection of customer data.
See: When A Neobank Goes Bankrupt What Happens to the Customers?
As more people become comfortable with digital banking, the adoption of neobanks is expected to increase. This is particularly true among younger generations who are digital natives and prefer online services. Many neobanks are looking to expand their services globally. This includes entering emerging markets where a large portion of the population is unbanked or underbanked.
Financial Inclusion and Sustainable Banking
As digital-only banks, neobanks already have a lower carbon footprint than traditional banks. They can further this by investing in environmentally friendly practices such as renewable energy for their data centers, promoting paperless banking, and offering products that support environmentally friendly practices, such as green loans or investments in sustainable businesses. Socially Responsible Products that support social welfare, such as microloans or greenloans for low-income individuals or businesses, or investment options that prioritize companies with strong social responsibility records. Operators must commit to ethical practices such as fair pricing, transparency in their terms and conditions, and avoiding investments in industries that are harmful to society or the environment.
Future of Neobanking
In conclusion, the future of neobanking is bright, promising a revolution in the financial services industry. As they overcome obstacles such as regulatory challenges, security concerns, and the quest for profitability, neobanks are poised to redefine banking with their customer-centric, digital-first approach. Innovations in AI, machine learning, open banking, and blockchain are set to drive this transformation, offering personalized, integrated, and efficient financial services.
Furthermore, by prioritizing financial inclusion and ethical, sustainable banking practices, neobanks have the potential to not only disrupt the banking industry but also contribute to a more inclusive and sustainable financial ecosystem. As we look ahead, it's clear that neobanks will play a pivotal role in shaping the future of banking.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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