UK fintech is awash with capital, with the rise of pre-emptive rounds and compressed fundraising timelines a testament to investor eagerness to engage with the sector. Figures from Innovate Finance indicate that in H1 2021 investors backed their theses with record levels of funding; the $5.7bn invested across 317 deals surpassed the highest full year amount, $4.6bn, set in 2019. Consequently, a number of fintechs have reported eye-catching fundraising figures, the most notable of which is perhaps Revolut’s $800m Series E at a $33bn valuation. That the financial super-app now has more than 16 million customers is, however, arguably a much more interesting statistic. Revolut may be the posterchild for UK fintech but customer numbers continue to scale across the sector.

This raises the question, as consumers what leads us to try a new financial services product or provider? In a commoditised industry with largely fungible products, the differentiating factor is the ease with which customers have been able to access the products and services offered by fintechs. This has a range of implications as fintechs continue to scale and adopt an ever more varied and complex product set.

Simplicity proves to be a winning formula

A marked trend of recent years has been the unbundling of financial services and the willingness of consumers to use different fintech solutions to meet specific financial needs. Ostensibly this would only increase the level of complexity for consumers compared to using a single provider. However, while there are certain areas, such as crypto trading, where the service was simply not provided by incumbents, it was the cumbersome user experience and one size fits all approach to cross-selling that provided such fertile ground for UK fintech. Faced with a scenario in which cross-selling was not adding value and with limited benefit to be gained from a single provider, consumers have voted with their feet (and wallets) by adopting fintech solutions that meet their needs where they are, rather than where the bank imagined them to be. Fintechs have been able to insert themselves with a single, or limited set, of wedge products that cater to a narrow subset of consumers’ financial needs. The success of these wedge products lies in providing a solution in a frictionless way. In contrast to many incumbent offerings, fintechs had simple customer journeys that were well executed.

In part 1 we wrote about how as fintechs grow brand and scale they will look to move from that original wedge product to being the consumer’s primary financial services provider. In order to do this neobanks must offer a full suite of financial products and we have seen moves from the UK’s neobanks to expand their product sets. Simply offering a complete spectrum of products will not be enough, however. There are two key factors that will determine success, namely whether neobanks can win consumers’ trust to handle more complex and important aspects of our financial lives and whether they can continue to provide the frictionless experience that they achieved with their original wedge products.

The question of trust is largely a function of scale and longevity. As consumers we may be willing to use cards issued by new entrants for our day to day spending or use their apps to take advantage of new services like crypto trading, but far fewer of us have, to date, redirected our salaries from our accounts at incumbents to neobanks. It remains to be seen how consumers will feel about using neobanks for sizeable financial commitments, such as mortgages, the market for which continues to be dominated by the Big 4 incumbents. We expect consumer trust will continue to develop as neobanks build scale and bolt on incremental products to their offerings. For many consumers it is likely too big a leap of faith to use a fintech for significant and complex financial needs without there being any pre-existing relationship. It is much less of a leap if they already cater to numerous other aspects of your financial requirements. The issue of trust will also be aided by the preferences of neobanks’ predominantly digitally native consumer base for whom the concept of a few on screen touches to secure a loan does not seem alien.

Managing increasing complexity

In this environment fintechs must ensure that they do not jeopardise the trust that they are building. For example, getting the right internal processes for risk management, controls and financial crime will limit the potential for damaging headlines and regulators having to step in. Although the consumer base will include a subset of evangelical early adopters, who may be undeterred, for the early and late majority of consumers, who will be required if fintechs are to realise their ambitions of scale, negative press is unlikely to help foster the trust required for them to adopt the fintech as their primary financial services provider. Appropriate internal processes will also be key in demonstrating to regulators that fintechs should be allowed to offer more complex financial products.

As the product set becomes more complex neobanks will need balance these increased regulatory demands with maintaining a consumer frictionless experience. When neobanks started out with a simple product set, small product-aligned teams could rapidly iterate and deliver a simple, consistent experience. Different products will require different levels of consumer protection given their relative size and impact on a consumer’s life. How should neobanks build in the appropriate protections and deliver a consistent experience across their product set? Making the right data available across the organisation at the right time will enable neobanks to prompt consumers with suitable products and services, but how should this be balanced with compliance controls and the potential risk of mis-selling? Furthermore, as neobanks reach the scale where they begin to embark on M&A activity, such as Starling Bank’s £50m acquisition of Fleet Mortgages, how will they continue to keep customer journeys simple at the same time as incorporating different cultures, processes and ways of working?

Just as the traditional bundling of financial services and efforts at cross selling did not have a one-size fits all solution, there is no single answer for how neobanks should maintain and evolve their customer journeys. Regardless of where neobanks started, developing the other side of the balance sheet presents new challenges and introduces additional complexity and regulatory demands. The approach to navigating these these challenges will vary by neobank and reflect their unique product sets and the markets in which they operate. How customer journeys should be managed to respond to an expanding product set is, however, a conversation that should be being had by teams within the UK’s neobanks. The unbundling of financial services has been driven by a hypothesis that bundled services were not adding value for the consumer. For those neobanks that can continue to provide a frictionless, consistent experience then we are likely to see a rebundling.

If you have any questions or comments then please do get in touch (Ollie FeltonPooja Patel; Ana Garcia).

Previous blogs in the series:

Neobanks: Continuing to Build Scale