The winning formula for fintech growth is to deliver engaging experiences, personalization, speed, and transparency, packaged in a service that is compelling enough to share. Nail those customer value propositions and the sky’s the limit. Fintech success stories like Credit Karma, Affirm and Lemonade, who began by unbundling high-friction bank products and delivering them through great user experiences, are now looking for new opportunities to integrate digital banking services to accelerate customer engagement and growth. Technology advancements and regulatory updates have empowered third-party technology companies like Marqeta to offer modern card issuing, processing, and program management services that make it much easier for fintechs and traditional financial institutions to bring digital banking services to market fast.
Here are some of the growth opportunities digital banks and financial services innovators are pursuing in 2019:
Opportunity #1: challenge tradition
Supported by technology partners that deliver innovative card issuing, processing, and Program Management services, challenger banks have garnered loyal customers from traditional banks by providing low fee services, higher interest rates, great user experiences and reliable, always-on technology. The UK is a hotbed of innovation, with many challenger banks building powerful new brands that deliver digital banking services through sleek mobile apps. Brands like Atom Bank, Tandem Bank, Monzo, Starling Bank, Revolut and N26 have attracted over $1 billion in funding and 2.4 million customers since 2014, according to CB Insights.
In the US, challenger banks have had a slower start. US consumers seem to be less trusting than their British counterparts in having a tech company as a primary bank. BankMobile, an early entrant in 2015, is the largest digital bank in the US with 2 million accounts. “Challenger bank” may be a bit of a misnomer in the US, but European challengers see potential in the US. N26 and Revolut came to the US in 2018, and there are reports that U.K. challenger bank and unicorn, Monzo, is coming to the US. N26, who has a banking license in Europe, chose to launch its banking services as a debit card program in the US, speeding their market launch.
Partnerships will continue to be the mantra for challenger banks moving forward as they look to add new services to support customer retention and growth. Some will even look to partner with other banks to help bolster network speed and information security. (For more on challenger banks, here’s a good article on how challenger banks are taking on retail banking from CB Insights.)
Opportunity #2: diversify into new services
Many fintech firms started on a narrow beachhead. They unbundled bank products with poor customer experience, focused on one or two services, then used their technology savvy, UX expertise, and competitive pricing to build brand equity among mostly younger millennials. It worked. Today, there are 39 fintech unicorns valued in the aggregate at $147 billion, according to CB Insights. Digital lenders like Affirm and Kabbage, personal finance providers like Credit Karma and SoFi, and wealth managers like Robinhood and Acorns have attracted millions of customers using this strategy.
Integrating digital banking services, that are powered by innovative payment platforms and modern APIs are the power behind fintechs as they diversify into new services to encourage higher customer engagement and card usage. Digital lenders such as Kabbage, who uses cards to fund small business loans, are adding everyday banking features like direct deposit, POS swipe and ATM access to their branded card programs to enhance cardholder convenience and increase card usage. Mobile, peer-to-peer apps like Venmo are adding physical cards with digital banking features that mirror debit cards to leverage their immediacy and expand their value with customers. Wealth manager Goldman Sachs surprised the market by diversifying into lending with their online lending and savings account duo called Marcus, with plans to build it out into a full digital bank.
Always in-tune with their engaged customers, these companies have led the way for others to diversify ahead of their maturing customer base. Their strategy seems sound. According to CB Insights, about 60% of US bank customers say they are willing to try a financial product from a tech firm they already use, and that number rises to 73% for customers aged 18–34. Venmo is taking advantage of this, expanding from peer-to-peer payments with a debit card for immediate access to their Venmo funds for everyday purchases. Here’s a good overview of how Venmo is diversifying from Media Logic.
Opportunity #3: partner with a modern payments platform
Fintech companies have the expertise in their services and applications but can lack the payments expertise, experience, and technology infrastructure needed to deliver the stand-out experiences they’re looking to design for their customers. Building the payments infrastructure in-house and developing relationships with banks, card networks, acquirers and processors is often outside of their scope and business model. Enter another part of the fintech boom, the business-to-business technology innovators that help to power the brands the consumers are learning to love. These companies, like Marqeta, leverage modern technology stacks, payments, and program management expertise, and extensive relationship networks to support the customization, speed, reliability and compliance requirements that fintechs and digital banking providers need to keep pace.
Many fintechs like Square, Stripe, and PayPal have innovated the acquirer side of payments at the point-of-sale, but few have modernized the issuer-processor side of payments, which is essential for digital-first banks and financial services startups. Companies like Marqeta bring financial service providers reliable card processing, card management through established card network relationships, and fraud management services. When a fintech company needs a banking relationship, Marqeta can also provide Program Management Services that include digital banking features and regulatory and compliance services. The unprecedented control of the design, development, and delivery of their digital banking services.
In our final post in this series, we’ll share some of the best practices that digital banking and financial services companies have leveraged to build brand and grow market share.