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To compete with fintechs, banks need to modernize and personalize service

Paul Hutchins, Log in to subscribe to the Blog

As younger consumers increasingly choose electronic, mobile-first banking, neobanks – fintechs that offer banking services exclusively online – have been steadily grabbing market share from traditional brick-and-mortar institutions. Traditional banks up to now have still offered advantages over neobanks, such as the ability to provide Federal Deposit Insurance Corporation (FDIC) guarantees. But those advantages are disappearing.

Recently, Varo Money (Varo) became the first U.S consumer financial technology (fintech) firm to receive a national bank charter.

Varo, founded in 2015, is a mobile-only neobank based in San Francisco. The company provides financial services through its mobile app and currently has more than 1 million customers. Today, Varo offers some traditional banking products, like checking and savings accounts, installment loans, and credit cards.

On July 31, the Office of the Comptroller of the Currency (OCC) approved the national bank charter application of Varo Bank, N.A., which will become a wholly owned subsidiary of Varo Money, Inc. The bank had already received approval from the FDIC for deposit insurance, subject to garnering approval from the OCC.

While the U.S. has had branchless banks for years, the FDIC approval process for mobile only and fintech companies has been virtually nonexistent. These firms have had to resort to partnering with existing banks and third-party solution providers to offer an array of consumer-based products and services.

The approval process has also been time-consuming and very expensive. As a former regulator with the FDIC and having personally been through the application process a couple of times with the OCC, I can attest that getting regulatory approval is no easy task. Both regulators heavily scrutinize the sourcing of capital (they really don’t like private equity as a capital source) and have a heavy focus on the ability of the bank to meet all the necessary state and federal regulatory requirements. These regulators are very selective because they want to ensure that consumer deposits are protected and that taxpayers don’t become liable for reckless lending.

The approval of Varo as a national bank has escalated the threat that fintechs pose to the long-standing dominance that traditional banks have held in the market.

Now that Varo has entered the market as a peer, it has the ability to differentiate itself through an expansion of product offerings. In an October 2019 article by Bank Innovation, Colin Walsh, the bank’s CEO, explained Varo intends to grow relationships with customers through multiple product offerings and integrations with other platforms. According to the company, 60% of its customers have more than one product relationship with the brand.

“ 'There are things that we will be able to do across a broader set of products – including credit, deposits, cash flow, savings and lending – much more seamlessly as a national bank. [It includes] things we will be able to do with our data, and the whole basic banking experience.’ With a banking charter, Varo will be able to deliver a more comprehensive group of offerings, including joint accounts, wire transfers, money market accounts and certificates of deposit, he added.”

In the same article, when asked about the bank’s use of personalized data, Walsh responded, “ 'We have fairly rich information on customers that allows us to use notifications like alerts and email, even the sort of the welcoming experience when you come into the app,’ he said. ‘It’s about how to welcome you in a way that is much more about you and what we know about you. Over time, you’ll start to see Varo using its data in interesting and sophisticated new ways.' ”

Varo’s strategy is to leverage its digital technology and infrastructure to significantly cut costs and to use the mountain of customer data it has acquired to improve their relevance with customers and expand their revenue growth. In short, to take market share from their now-existing traditional bank competitors.

While the banking industry has recognized this potential threat for years, it has been very slow to react and adapt.

According to a 2018 Accenture article, Julian Skan, Accenture Strategy’s managing director for banking and capital markets, " 'Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what's been seen before. With challenger banks and platform players reducing traditional banks’ competitiveness and the threat of a power shift looming, incumbent players can no longer rest on their laurels.' "

In order to now compete effectively against this evolving threat, banks must have a renewed focus on accelerating digital transformation by using intelligent automation to reduce costs and optimize the way work gets done.

Banks must focus on identifying opportunities for straight-through processing to eliminate unnecessary friction in their processes. They must focus on eliminating the cost and complexity of multiple legacy systems and adopt a more agile way of delivering services. The fintechs, like Varo, aren’t constrained by legacy processes and heavy infrastructure costs and are able to deliver products and services much more efficiently than many banks.

Banks must also protect their existing customer base from the fintech attacks as well as continue to expand their market reach by increasing customer engagement.

By creating a tailored, relationship-deepening environment, banks cannot only protect and expand their market, but deliver more relevant product messaging and next-best-action recommendations to ensure cost-effective customer engagement.

At Pega, our next-best-action strategy is specifically designed to help banks engage each customer with empathy, helping them manage their evolving needs and challenges. We help financial organizations deploy new strategies instantly across all channels and keep pace with changing customer sentiment and market conditions. We leverage streaming data and machine learning to determine and predict customer needs “in the moment” and deliver tailored, perfectly timed interactions. This capability has now become an essential part of any bank’s customer engagement strategy if they are to effectively compete.

Fintechs will continue to gain market share, forcing banks to transform.

Varo will not be the last fintech to obtain a national bank charter. As other fintechs mature and grow nationally, the message from the federal banking system is very clear. Both the OCC and the FDIC will continue to demonstrate keen interest in supporting technology and innovation in the delivery of consumer financial services and open the door for other non-banks to enter the marketplace.

For the traditional banking industry to successfully defend its market, they must take advantage of enhanced digital transformation and increased customer engagement.

Learn more:


Challenge: Customer Engagement Challenge: Business Agility Industry: Financial Services Product Area: Customer Service Topic: Customer Engagement Topic: Operational Excellence

About the Author

In his role as Pega’s Senior Director and Industry Principal for Financial Services, Paul Hutchins advises some of the world’s most recognizable financial brands on opportunities for growth, engagement, and digital transformation.