What can Filipino financial institutions learn from the successes of digital challenger banks?

By Lance Katigbak and Julian Cua

DO YOU KNOW what it means to “Venmo” someone? If you live outside the US, chances are you haven’t heard of the peer-to-peer fintech app whose name is now synonymous with money transfers.

Indeed, digital challenger banks such as Venmo have significantly reshaped the global financial landscape in recent years, including here in the Philippines.

Challenger banks are now in full swing across the country, with six local digital banks leveraging the digital-only, customer-centric, cloud-native and always-on availability characterized by these emerging challengers.

Many readers will be familiar with prominent examples and their expansion. GCash, though not a bank, has already become a household name. GoTyme, a local challenger bank with over 3.7 million customers, recently acquired leading fintech SAVii to build out its lending business. UnionDigital Bank, the digital banking arm of UnionBank, crossed P5 billion in revenue in 2023. Pioneering digital bank Tonik Bank recently extended its fintech offering into Cebu, as well as introduced new products and features such as SME lending and generative AI chatbots.

Two of the six local players are already profitable according to Bangko Sentral ng Pilipinas. These and other digital banks around the world offer important insight into the opportunities and challenges for traditional financial institutions eyeing their own role in this buoyant digital market.

LESSONS FROM NEOBANKS
Lesson 1: Target the underserved.

Neobanks often succeed by targeting segments largely neglected by incumbent financial institutions.

In mature banking markets, this often means addressing underserved populations such as small- and medium-sized enterprises (SMEs) or individuals with poor credit or low incomes. They also succeed in attracting digital-savvy populations with expectations of personalization and efficient service in a digital-first world.

Lesson 2: Leverage partnerships.

For example, US-based Chime leveraged a partnership approach with ride-hailing giants Uber and Lyft to address the unmet payment needs of gig workers. It drove growth through partnership by linking and managing third-party banks on Chime and offered rewards with major retailers to incentivize new users to spend via Chime.

Clair, a US neobank in which one of our authors previously worked, targeted hourly workers by offering free advances on their earned wages as soon as they clocked out of work. It was able to do this through developing unique partnerships with HR technology companies.

In emerging markets, digital challenger banks often target younger, tech-savvy urban populations that predominantly rely on cash, and may have low income or financial literacy. They also succeed in targeting modest-sized SMEs and low-income populations who have a desire for banking with affordable services.

Lesson 3: Differentiate with superior customer experience.

Successful challenger banks each take different strategies for acquisition — they know that it’s not about having to pay a lot of money for users, but about targeting them effectively.

Brazil’s NuBank targeted unbanked populations by offering no-fee credit cards in areas of high demand, as well as offering a no-fee digital account with free transfers. This was backed with exceptional customer service through 24/7 customer support.

Lesson 4: Focus on a few key products then build a suite.

Digital challenger banks take different paths to build a complete suite of products, although they typically start with transactional or credit businesses. The UK’s Revolut and Monzo, Germany’s N26, and South Korea’s KakaoBank all launched with payments solutions, with KakaoBank also including current account, savings account and lending facilities. China’s WeBank and MYBank both focused on current account, savings account and lending products.

Startups typically launch with transactional business models, then add new products through partnership or business building, while corporate-backed firms often launch with accounts and lending businesses.

Lesson 5: Be agile.

Challenger banks know that they don’t need to have every product ready for every customer all at once — it’s about iteratively building products to acquire different types of customers over time.

CREATING THE RIGHT FOUNDATION FOR SUCCESS
For traditional financial institutions looking to compete with neobanks, the journey will involve both a technical and cultural transformation.

It’s vital to create the right technical backend to support an effective frontend experience. Successful digital challenger banks can deliver these unique, appealing customer experiences and product offerings because of a flexible, fit-for-purpose backend.

Comprehensive front-to-back (F2B) transformation will be essential, integrating transformation seamlessly across all elements of a bank. This includes redesigning areas such as customer experience, colleague experience, internal processes, risk and compliance controls, and the tech and data stack.

An F2B approach works because it addresses customers, colleagues, costs and controls as part of a holistic transformation. For example, UK-based HSBC unlocked $1 billion in productivity savings, a 35-point increase in net promoter score, 2x to 3x faster time to delivery and up to 4,000 full-time-equivalent hours of cost savings through F2B transformation.

F2B transformation does not require all changes to be delivered at once but promotes a holistic strategy rather than a siloed and disjointed transformation journey. At Boston Consulting Group (BCG), we work with financial institutions to inform strategic F2B transformation through a five-step process to not only identify pain points, but also to define the “North Star” of project ambition while putting the building blocks and implementation plan in place for transformation.

It’s never too late for incumbent institutions to begin. Legacy banks already benefit from scale and reach of their existing operations, and they can leverage this for their advantage.

WHAT’S NEXT FOR INCUMBENT FINANCIAL INSTITUTIONS?

Filipino financial institutions can learn important lessons from digital challenger banks, like developing new channels, committing to improved digital customer experiences, creating a fit-for-purpose and flexible technology platform, developing an agile working environment and building new brand connections with an expanding customer base.

Digital challenger banks have captured value by not only meeting evolving customer expectations, but also addressing the unmet need in a significant share of the customer base. Traditional financial institutions can learn from this approach to inform their own strategies.

Filipino financial institutions should act now to embrace digital transformation, building on lessons from successful global examples to achieve success.

Lance Katigbak is a principal at BCG Manila and was the former chief revenue officer of Clair, a US-based neobank.

Julian Cua is a managing director and partner at BCG Manila and works with technology companies across Southeast Asia.