In our first blog we suggested that as neobanks move up the maturity scale and evolve into fully fledged financial services institutions it will be servicing of customers and scaling digital operations where incumbents struggle to compete. Having reviewed how neobanks might evolve their customer journeys in order to offer the right cross-sell products in a frictionless way, ultimately driving higher consumer LTV, we now consider how neobanks can effectively scale their operating model. We posit that unbundling non-core services and leveraging third party solutions will set neobanks up for enduring future growth.

Competitive Edge Through Digital Operations

Innovation in product and distribution drive customer acquisition and market share; differentiated wedge products enabled fintechs to insert themselves into the provision of financial services. Consequently, fintech teams and their investors tend to ruminate on customer propositions rather than on internal operations. Under these circumstances the evolution of internal operations tends to be reactive, with the risk that such services are not developed in a strategic manner. One example is in Risk and Compliance, where headcount is often used as a proxy for controls effectiveness and to demonstrate intent to regulators. This may be particularly the case following a risk or compliance incident and the need to plug an immediate gap tends to be achieved by throwing people at a problem. Risk and Compliance may be the clearest example, partly because any incidents tend to be publicised, but the pattern is repeated across other internal services, such as Finance and Operations. The likely result of this over the long term, as fintechs add new products and expand geographically, is a set of bespoke processes, requiring manual intervention, that hamper the organisation’s ability to scale in an effective manner. There are lessons to be learnt from incumbents where capacity of internal operations is still largely determined by headcount and, as a result, direct expense is predominantly headcount driven. Instead, neobanks should look to mirror internally the digital-only proposition provided to customers and obtain a set of capabilities and tools that support a digital operating model.

Opportunities to Unbundle

How should neobanks obtain these capabilities? Here the ongoing development of the fintech ecosystem is self-reinforcing. Consumer facing neobanks may be the poster children for UK fintech but far larger is the cohort of startups that have sprung up to streamline and enhance the provision of supporting operational processes as diverse as AML, Finance and HR. Fintechs are built on and around API connectivity and it is this that is driving the opportunity to scale internal operations by unbundling non-core services and draw on the wider fintech ecosystem. Neobanks derive competitive advantage from only a subset of services, primarily those related to distribution. Other services are non-core in that, while supportive of the organisation’s day-to-day running, they are not direct drivers of value. Unbundling enables a neobank to retain specific areas of strength or expertise and leverage the wider ecosystem for services that are not differentiators. Through unbundling neobanks will be able to better utilise their resources and focus investment on differentiated consumer-facing products.

Benefits of Unbundling

Neobanks can realise a range of benefits from leveraging third party tools to deliver non-core internal services. We see four primary benefits that can be realised through unbundling.

  1. Improve scalability: Detach capacity from headcount and create a set of internal processes that can easily scale to meet new business demand.
  2. Lower cost of ownership: Benefit from another fintech’s economies of scale and deliver non-core services at a cheaper price point than is possible through bespoke in-house solutions.
  3. Preserve technology optionality: Build a modular architecture for internal services and retain the ability to adapt and take advantage of new market solutions.
  4. Retain the right focus: At scale internal services can become an alternative locus of management time and effort. Unbundling non-core services enables maximum focus on the customer and development of new products.

Despite remarkable expansion over the last few years we remain in the initial stages of the fintech growth curve. As neobanks transition to new stages of growth we believe that the ability to scale internal operations will be a key determinant of future market success. The best way to achieve this, in our view, is to unbundle non-core services and deliver these using third party solutions. Doing so will enable neobanks to streamline their organisations, focus on their competitive strengths, and retain the enterprise agility that has underpinned their success to date. In an environment of rising interest rates and potential recalibration of risk appetite, investors may be less willing to fund those neobanks that are not clear outperformers. Unbundling represents a route to providing necessary internal services in such a way as to maximise the time and resources spent on expanding the core business, focusing on improving the core customer metrics that will determine market winners in the years ahead.

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

Neobanks: Managing Increasing Complexity