Stay ahead of neobanks by exploiting their weaknesses

With the right technology, community banks and credit unions can offer options at a fraction of the cost of a digital bank or stand-alone digital branch.

According to a recent study, the percentage of Americans whose primary checking account is with a digital bank has skyrocketed since 2020. The study found that each generation, from Boomers to Gen Z, saw growth in its digital banking relationships.

As formidable as these neobanks seem to be, community financial institutions can differentiate their offerings by identifying some of the inherent weaknesses of these neobanks as well as some of the inherent strengths of a traditional bank or credit union. The key question is: what should that offering look like and how should it be delivered?

Traditionally, the advice for community financial institutions has been to start a digital bank or offer a standalone digital branch. There is, however, an attractive third option for those looking to compete in the digital world: Offering a neobank-style account could be the key to keeping community banks and credit unions from losing market share to their digital-first rivals.

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Competitors like Varo, Chime and Aspiration have grown tremendously over the past few years, mostly due to the digital features they offer. Having a slick, modern-feeling mobile-first account is incredibly appealing – especially for younger generations looking for a place to start a banking relationship. Since most community financial institutions don’t have that type of offering, consumers are forced to look elsewhere.

The digital shift that happened during the pandemic won’t be going away. Features such as streamlined account opening, advanced payment and money movement features, credit building tools and no monthly service charges are just a few of the benefits of banking with a neobank – and frankly, these features are table stakes for a majority of today’s consumers.

Neobank benefits and more

So, what if traditional, community-focused banks and credit unions offered all that and more? While it’s nice to catch up to the competition, getting ahead is where banks and credit unions can truly win. Luckily for the community financial institutions, there are a few key features that many of the neobanks are missing.

Most of today’s popular neobanks don’t offer rewards programs, business solutions or card controls other than an on/off feature, and some don’t even offer virtual cards. There’s an opportunity for community financial institutions to not only offer the same things the neobanks offer, but to go above and beyond with features like these to ensure that consumers get everything they need out of their banking relationship.

Another important benefit for consumers is the ability to walk into a branch. While most people tend to lean digital today, some still want the option of walking into a branch and working with a real person. Trust is a key factor in any banking relationship and being able to get digital services from a trusted and familiar name is key for today’s consumers.

It’s clear that customers and members stand to benefit from this, but what’s in it for the financial institution? Of course, the competitive advantage is what makes this digital account so appealing for banks and credit unions. What’s more, this competitive advantage doesn’t require a major overhaul. These neobank-style accounts can be set up in a way that offers a complementary service for customers and members at a relatively efficient cost for the financial institution.

These digital features not only help retain current customers and members, but attract new ones, too. For example, adding business solutions can open up a new world of opportunities for the bank or credit union simply by providing an array digital banking and payment options for local businesses.

As banking continues to move more toward digital, community banks and credit unions must find opportunities to stand up to their neobank competition. With the right technology, community financial institutions can offer a neobank-style account in a few months and at a fraction of the cost of a digital bank or stand-alone digital branch that can fill a gap left by neobanks and propel them ahead of other competitors as well.

Kelly Payne is chief product officer of MOCA Financial.