We will begin with the story of Xinja. Xinja was founded in Sydney, Australia in the year 2017. In 2019, Xinja received a full banking license in Australia. They raised funding of AUD 204.7 million (US$159.5 million). Their deposit scheme was a huge hit. Within just 19 days they received AUD 100 million of deposits. By December 2020, Xinja’s customer deposit stood at more than AUD 500 million (US$377.8 million). In the same month, Xinja declared its shutdown. Why?
The deposit product Xinja launched offered a 2.25% interest on deposits while the traditional Australian banks offered less than 1% interest rates. It was an enormously successful growth strategy and quickly Xinja received far more customer deposits than they had planned. Here is a thing about deposits though, they are not revenue but liabilities. Acquiring a high-interest deposit liability means the bank needs to acquire a high-interest loan book of favorable duration unless they have access to a huge cash reserve of an already established bank. The quick success of Xinja became the reason for its demise as they failed to launch any credit product while COVID made raising funds difficult for them.
As in the case with many startups, many neobanks also devise growth strategies without a suitable follow-on strategy for revenue and profitability. This article looks into different Go-To-Market (GTM) strategies that neobanks can use to acquire customers in various target segments along with suitable follow-on profitability strategies.
This is obviously not a comprehensive guide as there are various factors such as the stage of economic cycle, maturity of the regulatory structure, funding availability and market structure, etc. which play important roles in the growth and revenue strategy.
Read about revenue banking sources here.
To better structure the discussion, let us define some broad customer segments and the relevant pain points neobanks can target to solve. This is a broad segmentation and exact definition of segments likely to vary market to market.
Broadly we can define this category as a low disposable income category. The major pain point of this category is the lack of liquidity. This segment needs access to short-term credit to manage liquidity shortfalls.
This is the segment with higher disposable income. Now, this segment can be further classified based on what they do with the disposable income.
Consumers with higher disposable income who are primarily interested in growing their wealth through saving and investment. In general, they avoid credit and seek opportunities for higher yield. This segment has higher investable assets.
Consumers with higher disposable income who primarily are interested in elevating their standard of living. Consumers in this segment use credit to access more liquidity to fund their lifestyle and generally keep limited amounts of investable assets. This segment is aspirational and wants to socially stand out for their financial success. They are the most internationally mobile segment.
GTM Strategies for Neobanks
Now, let us discuss some GTM strategies neobanks use to acquire customers.
China’s WeBank used short-term microcredit as their customer acquisition tool. They targeted thin-file customers who lack access to credit from established banks. They made the credit application process automated using advanced technology such as AI/ML.
Read more about WeBank here.
Other credit instruments used by neobanks are fee-free overdrafts (Eg. Chime), and credit cards (virtual or physical) with lower interest rates and/or longer grace periods and/or lower fees (Eg. Monobank from Ukraine), etc.
This strategy involves making various use cases of payments easier for the users - debit cards linked to checking accounts, prepaid cards, and other payment tools. For example, Germany-based N26 offers free virtual debit cards with their free checking account. The virtual card can be used with Apple Pay or Google Pay. Apart from that N26 offers Moneybeam for real-time p2p transfers and integration with Wise for international payments.
There are two deposit based GTM strategies. The first one is targeting the liquidity pain point with lower minimum balance requirements. The second strategy is offering higher interest rates on deposits. These strategies target very different segments - the first one targets low-income segments facing liquidity issues, the second one targets high-income segment who focus on savings and are looking for higher yield from their savings.
Money Management Tools
Before launching mobile banking, US-based Dave launched a money app that helps people avoid overdraft fees. Many neobanks offer tools that provide higher visibility to financial life, track expenses by categories, help them save (such as Spaces from N26 ), help them budget better, alert them for liquidity issues, etc.
Choosing a GTM Strategy
Suitability of a GTM strategy
- It addresses the pain points and aspirations of the target segment.
- The choice of GTM should be financially sustainable. Choosing a particular GTM strategy may mean discounting that service. For example, choosing a credit-based GTM strategy may require offering loans at lower rates or offering a longer grace period. Choosing a deposit-based GTM strategy may mean offering higher interest rates on deposits or offering lower minimum balances. Choosing a payment-based GTM strategy may mean offering free payments which may require the bank to absorb some costs itself. The point is that choosing a particular GTM strategy may involve cost which may escalate quickly. The growth should not kill the company.
- The economic assets the chosen GTM strategy creates should give way to predictable revenue source(s).
GTM strategy for different segments
As mentioned before, the primary pain point for this segment is liquidity. Easy access to short-term credit seems to be the most effective way to acquire customers in this segment. Apart from credit, payments and liquidity-focused money management tools (Eg. Dave which solves the overdraft problem) can be useful. This segment may require low or no fee, help in building credit, and even help in finding new sources of income for the customers such as Dave’s Side Hustle feature. Another growth channel in this segment is partnering with the government to roll out various policy schemes that target this income segment.
The lifetime value (LTV) of this segment is expected to be very low. This necessitates maintaining a very low CAC (customer acquisition cost). WeBank manages to keep CAC at very low levels by pre-underwriting and making the credit approval completely AI/ML-driven. South Korea based Kakao took a similar approach. Apart from that Kakao made banking a part of their portfolio of services ranging from chat, news, games, etc.
Read about WeBank here.
Apart from the low CAC, for any neobank to reach scale with this segment, a huge customer base is required. A user base created by some low involvement product can be utilized - such as WeChat/QQ in the case of WeBank, KakaoTalk in the case of Kakao Bank. An existing referral channel also can be used as in the case of neobanks who are subsidiaries of established banks.
High Income - Wealth Focused Segment
The consumers in this segment have the highest amount of investable assets and are looking to increase their wealth. The focus of the neobanks targeting this sector would be providing access to investment opportunities previously not accessible to the customers - for example, international equities, cryptocurrencies, and deposit in foreign currencies, etc. Japan-based au Jibun Bank is an example of neobanks using this strategy. Slightly higher interest on deposits may also be used to acquire customers in this segment but needs to be balanced with suitable credit products or support from an established bank.
High Income - Lifestyle Focused
This is a younger aspirational segment with higher earnings. They use credit to elevate the standard of living. They seek exclusive access, association with premium brands, and like to appear socially privileged. They are also liquidity-focused to elevate their lifestyle. The CAC for this segment can be higher as considerable brand-building effort is needed for this segment. At the same time, this segment offers the highest potential LTV. Neobanks targeting this segment need to put considerable effort into brand building. Exclusive access is the key.
Credit cards with points and miles, exclusive access to deals, access to premium brands, etc. are some strategies that can be used to acquire these customers. The offering should match their internationally mobile lifestyle.
Path to Profitability
The credit first approach for the low-income segment can help neobanks earn revenue early on although the credit quality can be an issue. Average Revenue Per User (ARPU) is expected to be low for this segment. Neobanks operating in this segment need to take a portfolio approach and cross-sell low-involvement products to increase the share of their wallet. Revenue growth is dependent on continuous customer acquisition. The focus should be on keeping CAC and operating costs as low as possible using technology.
For the wealth-focused high-income segment, the path to profitability lies in acquiring a larger share of their financial lives. From brokerage services for various financial instruments to portfolio management and advisory.
The lifestyle-focused high-income segment is the most potent segment for monetization. The monetization strategy for this segment should be focused on lifestyle products and services. Apart from credit cards, long-term credit products (Eg. Real estate and automobile loans) can be used to monetize this segment. Apart from that, loyalty programs give exclusive access to holiday pancakes, access to airport lounges, priority check-in, access to international brands, etc. Banking-as-a-Platform can be used to bring in third-party service providers onboard and create sources of commission revenue.
As this segment is focused on increasing their social prestige, they are generally keen to do charitable donations to causes with higher social visibility. Crowdfunding for highly visible social causes can be another way to monetize (commission-based) this segment.
This article in no way suggests that a neobank should provide only the services mentioned above for particular categories but rather define the focus areas for growth and monetization. Every bank needs to provide a portfolio of services from deposits to loans to payments, etc. to become the preferred choice of any customer segment. This article just points out what they need to do better than others to acquire and monetize customers from specific segments.
The goal of this article is not to provide foolproof playbooks for neobank startups but rather emphasize the requirement of playbooks that not only addresses how to acquire customers but also financially sustainable strategies to becoming full-fledged banks.