Can neobanks make their bundles worth it?
Neobank users typically opt for the standard, free accounts. But in order to become profitable, these banks need to convert users into paying customers of their premium packages by bundling together various products and services.
It started with your cable TV subscription. Maybe it was your local newspaper subscription. Or National Geographic arriving in your mailbox every week. Or some other product you have been subscribing to for years. Subscription-based services and products have been with us for decades. You pay a weekly or monthly fee and in return, receive a product or access to a service. It is a straightforward, viable way to set up a business.
This business model has long been the foundation for analog- and print-based services. Now, even as the world has accelerated away from the services and products of yesteryear, top companies, cooking up all types of impressive new digital products, have maintained their unwavering faith in subscriptions. Netflix doesn’t develop a physical product that people purchase one time. Spotify isn’t a single-purchase app. Instead, people get locked into recurring, monthly payments for different plans. Often times there is a free, basic version of the service that lures in users before the company seeks to convert you into a paying user. Netflix, Spotify, and Amazon have been incredibly successful at signing up millions of users.
In the banking world, neobanks, maybe as a result of their founders and financial backers being steeped in the world of tech start-ups, are seeking to follow the well-trodden subscription-based path. Virtually all digital banks have created different tiers of service, starting with a free, standard bank account and then moving up to paid offerings costing anywhere between €5-€20 a month. As you move up the price ladder, you unlock more perks and services. A shiny metal card is common in premium offerings. So are more monthly ATM withdrawals. Some neobanks like Revolut and Monzo offer interest on deposits up to a certain amount.
In order to make the premium package more enticing, neobanks partner with a variety of companies to sweeten the offer. Travel and phone insurance plans are a staple. Both Revolut and N26 team up with Allianz to provide this service. Access to airport lounges is another commonly found service. Given the profile of a typical neobank user – 18-35 years old and a frequent traveler – this type of perk makes sense. They can pay a little more each month to ensure comfortable travel (if we ever do that again).
Neobanks are partnering up with various companies, such as Mastercard or AXA, to bundle together a group of services and products, charge fee, and then hope to reap the sweet, recurring revenue rewards. This is what Scott Galloway, the NYU professor, L2 founder, and serial podcaster, refers to as “rundling.” From the biggest companies in the world to the startups just getting off the ground, everyone is using the recurring-revenue subscription model. What lies ahead is essentially a battle of bundles, according to Galloway. “It’s going to be an arms race, with cheap capital as the munitions, to see what brands and retailers can establish credible/compelling bundles,” he said.
So far, metal cards, a paltry amount of cash back, and phone insurance aren’t winning the hearts and minds of banking customers. Neobanks are still losing money on every customer. These banks, once set to upend the world of retail banking, are all struggling mightily to reach profitability. The pandemic, which has forced people to stay home and manage their finances digitally, seemed to provide an environment in which these banks could shine due to their superior digital customer experiences. That hasn’t been the case, with some banks endeavoring to merely exist next year.
I wrote earlier in the year, pre-pandemic, about neobanks and their “growth at all costs” vs. “profitability” conundrum. These challengers have prioritized adding customers at the expense of being profitable. The expectation has been that they could convert these customers into dependable streams of recurring revenue. But that conversion hasn’t happened yet. And until those millions of reported users are actually purchasing products from these banks, they will continue to lose money per customer.
So, how do they enhance their bundles and create more paying customers? The subscription-based model can work, but people are clearly seeking more from these offerings. The partnerships and exclusive perks seem like a real area of opportunity. The problem is potential customers don’t even know what is contained in these special deals. N26 only alludes to “premium partner offers and discounts with world-class brands” and “unique experiences carefully curated just for you.” One way they could entice people to paid offerings is to disclose what exactly these “extra perks” are. People might be willing to pay if they knew what they would be getting in return!
Beyond disclosing what is included in these packages, neobanks need to focus on compiling attractive bundles. While a slicker mobile app might appeal to some, most every traditional financial institution now has a serviceable way of digitally managing your finances. Yet these banks continue to tout the ability to lock your card from your phone and add your card to Google Pay as if these are some groundbreaking features that set them apart. All of these features are standard now, no matter the institution. A more intuitive, transparent customer experience with a couple of goodies thrown in isn’t quite cutting it.
Customers need to feel like they are getting good value for their money. As a neobank customer myself, I appreciate some of their features but have yet to pull the trigger on signing up for a paying tier. The value just isn’t there. Can a neobank develop a bundle that delivers all the services a customer may need? And what might this look like? Surely effortless financial management, cash back with the ability to invest and grow your money, insurance to cover anything life might throw your way, and some unique and special experiences to top it all off. But until that is what these bundles contain, neobanks will struggle to turn their millions of customers into recurring revenue.