The Extract from Extractable is a condensed roundup of digital experience news for financial services institutions and our take from San Francisco.
Strategy seems to be the theme across the three articles we are highlighting. From M&A and failed neobanks to digital transformation, read on to find out how strategy is on everbody’s mind.
Where Did the Post-Pandemic Banking M&A Rush Go?
Joe Fenech, Managing Principal of SMBT Consulting, writes in the Travillian blog about a possible turn in the banking M&A market to favor acquirers. Like many people, including myself, Fenech expected that coming out of the pandemic M&A in banking would go into hyperdrive. It didn’t happen.
The COVID-induced recession was different, in the sense that banks were the beneficiary of regulatory forbearance, unprecedented monetary and fiscal stimulus in response to the crisis, and the fact that COVID-aside, there just weren’t any significant underlying problems in the economy. Moreover, higher reserve levels that proved detrimental to earnings last year were, for the most part, funded by PPP proceeds that have more than helped to fill the gap this year.
However, he notes that things seem to be turning around. Fenech has some ideas about why this is, and if you’re interested you should check it out.
We expect consolidation to accelerate during the coming years. Customer expectations regarding digital service offerings are accelerating, and many banks are struggling to make the investments necessary to stay relevant. As a result, many organizations will view partnering with a larger organization leading in the digital space as a quicker path to generating growth and delivering appropriate shareholder returns.
Did You Hear About N26?
The fintech world was abuzz with the news that the German neobank N26, which has been widely successful in Europe, has decided to pull out of the US by January 2022. They launched in the US in July 2019 and had grown to about 500,000 customers.
Shevlin sees these three failures providing lessons for all challenger banks. We think these lessons should also apply to all banks and credit unions as well. He says the lessons are:
- “Product differentiation is a must.” N26 didn’t offer anything different from Chime, Varo or other US-based neobanks. Similarly, most banks and credit unions don’t offer anything different except “customer service,” which they all say they do well.
- “Affinity is the new community.” Shevlin offers that, “The challenger banks—or as I would prefer to call them, community fintechs—that are growing today are firms like Aspiration and Daylight who target specific segments of the market, and understand their unique product needs.” In the meantime, we see community banks and credit unions abandoning their focus on specific communities wanting to be “everything for everyone.”
- “Traditional marketing is far from dead.” N26 was relying on word-of-mouth marketing. Shevlin notes that “Chime (is) spending roughly $100 million a year in TV and print advertising.” While community banks and credit unions continue to rely on traditional marketing, they need to be more critical about their campaigns. I know of a community bank in the Northeast that relies heavily on Pennysaver campaigns instead of a balanced mix of media.
Shevlin shares a lot more of these nuanced observations. We encourage you to check it out.
Digital Adoption Across Banks and Consumers
We came across a great article by Anson Vuong and Andrew Robertson on Gallup.com which is an excerpt from a Gallup report. The article and report examines digital adoption by banks and consumers in the US.
Vuong and Robertson look at three distinct “broad digital segments” related to their consumers: digital laggards, digital-forward and middle customers. They found a correlation between where banks are in their digital transformation and the mix of consumers they attract. Industry leaders have virtually no laggards, with the majority of their clients being digital forward (80%) and the remaining being middle consumers. At the other end of the spectrum, the bottom quartile banks have 69% middle consumers, 18% laggards and 13% digital-forward.
Vuong and Robertson note,
Gallup’s work with banking clients has uncovered six areas in which banks struggle to accelerate digital adoption through human channels: culture, change leadership, infrastructure, analytics, decision-making and journeys/proficiency.
We agree. In fact, those are the same issues we see working with our clients.