F I N A N C I A L S E R V I C E S2018

02n u m b e r

T H E N E O B A N K S

I N D E X

Our second edition of Inside Financial Services is dedicated to one of the most revolutionary developments in retail banking: the rise of a new generation of digital challengers, the Neobanks. We have been tracking the evolution of digital banking models for the last ten years and are now observing the most dynamic market environment ever. Over the last three years alone, more than 50 Neobanks have entered the scene in Europe with many more launching in other geographies including many emerging markets in Asia or Latin America. With customers getting quickly “spoiled” by these new challengers and the superior customer experience offered by them, it is time that traditional banks equip themselves to compete in a market that is profoundly changing. In this newsletter our research team first summarizes key facts of the Neobank panorama and then analyzes the underlying business model before identifying counter-attack strategies and priorities for incumbent banks. Finally, Valentin Stalf, founder and CEO of N26, told us about how his Neobank was born and is growing rapidly across Europe, keeping its focus on customers. We thank him for his testimony, which surely can be of great interest to our readers.

Enjoy the readingChristoph Stegmeier

3 7 Facing the arrival of the new wave of digital banks: THE NEOBANKS

8 9 LE SWAVE

10 11 INTERVIEW Valentin Stalf (CEO of N26)

12 14 7 LESSONS ON INNOVATION FOR TRADITIONAL BANKS

EDITORIAL

For more informationcontactgermany@extonconsulting.com

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We define Neobanks and distinguish them from earlier generations of direct or digital banks by their undivided focus on the smartphone as the delivery channel, their almost singular aspiration to provide a superior customer experience, their openness in collaborating with other banks or Fintechs, and their general quest for disruption of a specific segment, product or process leveraging new,

flexible IT architectures. The differentiation between Neobanks and other Fintechs may be subtler but can best be described by the Neobank´s ambition to own the heart of the customer relationship and the need to require some form of banking license for doing so, whether acquired by the Neobank itself or “borrowed” from a banking-as-a-platform (BaaP) provider.

Facing the arrival of the new wave of digital banks: THE NEOBANKS

The rise of a new generation of banks – we refer to them as Neobanks – is making headlines across the

majority of the globe’s most important banking markets. Despite being a recent phenomenon, Exton

Consulting already counts and tracks more than 50 such Neobanks, with many more preparing to challenge

established players in the years to come.

LANCEDANIELSSeniorManager

CHRISTOPH STEGMEIERPartner

A SHORT HISTORY OF DIRECT BANKING MODELS

FIRST GENERATION DIRECT BANKS SECOND GENERATION DIRECT BANKS NEOBANKS

• Starting point in the 90´s – peak before

the dotcom bubble

• Call Center as pivotal point of the busi-

ness model

• In most cases affiliated with one of the

incumbent banks

• No long-term economic success

• Launched as direct alternative to tradi-

tional banks

• Strong growth in the 2000s – reaching

scale through acquisitions (e.g. ING

DiBa) or organically (e.g. DKB)

• Focus on Online (desktop) and process

automation (cost reduction!)

• Different types of direct banks emer-

ging: brokerage specialist, savings mo-

nolines, or primary banking alternatives

to branch banks

Five common identifiers for Neobanks:

• Disrupting a specific segment, product

or process

• Extreme focus on customer experience

and „journeys“

• Smartphone as primary distribution and

communication channel

• Based on new, flexible IT-architecture –

no „Legacy“

• API-Native and Open Banking oriented

1990 2000 2010 Today

Source: Exton definition

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The Neobank model is commercially successful with Millennials1, as evidenced by the prominent booms of Revolut, N26 or Nubank. Geographically we are observing increased activity across many markets but at the same time a noteworthy concentration on Europe´s most dynamic markets for Neobanks: the UK and France. In both markets alone we are counting a staggering 35 new players that are competing for retail and/or small business customers (see graph below). And although not all of the Neobanks will survive, it is clear that the market transformation they have initiated is irreversible and that traditional and online banks alike must follow suit and quickly adapt their models based on key learnings from Neobanks.

1. THE COMPETITIVE ADVANTAGE OF NEOBANKS

While most Neobanks may still technically be considered start-ups – unprofitable and without a tested long-term strategy - it would be a mistake to not at least take the best

of them seriously. Many are very well funded, have rapidly acquired clients, already offer an impressive set of products and services, and easily exceed much larger traditional players in innovation capacity and customer acceptance.Above all, we believe that the potential of Neobanks lies in their ability to activate six key levers that break with the "old world":

extreme customer focus in both product design and processes

a willingness and ability to expand and scale across ge-ographies quickly

fresh branding and look-and-feel, promoted by existing clients

agility and speed of adding and improving services and products (time-to-market)

digital native, leveraging the possibilities of digital mar-keting, advanced analytics and available data

capability to quickly integrate other partners through modern, service-based IT Architecture

NEOBANK KEY DIFFERENTIATORS

COUNTRY OF ORIGIN OF DIRECT BANKS AND NEOBANKS IN EUROPE1

As of June 2018

By operating in a branch-less model, leveraging cloud-based techno logy and tak ing fu l l advantage o f the European harmonization of financial services regulation, Neobanks have been able to rapidly achieve a true pan-European presence. This is an unprecedented phenomenon: just three years after its launch, N26, for example, is already present in 17 European countries and planning to open in the US and UK. Compare this to traditional players where the majority of large retail banks are present in five or less countries. Using internationalization to capture volumes and economies of scale is the most critical element of the development models of the most ambitious Neobanks.

1 Definition Millenials: 18-35 years old, very connected generation (generation Y and part of the generation Z)

1- Data from the Exton Direct Banking Database comprising over 150 direct banks

Neobanks

Direct Bank

LEGEND

EX

TR

EM

E C

UST

OM

ER

FOC

US

AG

ILIT

Y

DIG

ITA

L SK

ILLS

AP

I-NA

TIV

E

IT

GEO

GR

AP

HIC

SCA

LE

FRESH

BR

AN

D

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Agility and speed of execution, as well as the capability and willingness to integrate third parties, are part of the Neobank DNA and are closely linked to the technology these players rely on. New products or services may be launched on almost a monthly basis and include both own developments and the integration of solutions from Fintech providers. These connections to third-party providers are enabled by an API-native architecture and a mindset to radically test & learn that is unrivaled by traditional banks. At Monzo, for example, the product roadmap is even directly visible to customers who can give their opinion on which product to launch next and monitor the progress of developments in real time. The extreme customer focus and capability to disrupt traditional banking processes is demonstrated by the

fully digital and radically shortened account opening process that is a must-have for all Neobanks, often performed in less than 10 minutes. These processes integrate modern, biometric authentication services (often provided by Fintechs) to identify customers remotely using the customer’s own mobile device.

There is one more advantage that Neobanks have been able to exploit. Their package of customer-oriented design, digital focus and fresh branding has generated a group of young clients actively promoting their new bank, both by word-of-mouth and social media, helping to create a buzz around these models that effectively generates free marketing and helps to attract new clients at relatively low costs.

2. THE QUESTION OF THE ECONOMIC MODEL OF

NEOBANKS

The economic model of Neobanks may appear to the casual observer as nebulous or fragile given that most of their anchor products are either completely free of charge or not covering the costs they generate. It is almost history repeating itself: some 10 to 15 years ago, similar questions were asked about the validity of business models of large direct banks, but a decade later many of these banks not only still exist but, in some markets, even belong to the most profitable retail banks with the likes of ING-DiBa or DKB in Germany providing possibly the best examples.The most progressive Neobanks in our view have an even brighter future ahead of them:

increased revenue opportunities: the existence of a rapi-dly expanding network of specialized Fintechs and other thrid-party providers willing to offer their services to the most successful Neobank platforms and paying a sizable distribu-tion fee paves a completely new road to profitable customer relationships.

better scale and lower cost base: with cloud-based IT archi-tectures designed to ramp up at very low marginal cost, di-gital end-to-end processes, automated or bot-based custo-mer service, and a chance to outsource virtually everything (even the banking license) operating costs per client will be a fraction of that of traditional banks. This, in turn, requires only limited revenues per customer to operationally break even.

lowered acquisition costs: Neobanks have experienced signi-ficant tailwind in their acquisition efforts via frequent press mentions and a high member-gets-member rate. At least in the initial phase of the bank´s individual growth path this ef-fect is important to reduce acquisition costs per client and, therefore, limit the cash burn of the company. It will be inte-resting to see how these acquisition costs per customer grow over time as Neobanks will increasingly need to attract custo-mers outside of their natural Millennial customer base.

As a consequence of the tendencies described, the most successful Neobanks in our expectation will quickly reach operational break-even, but need to closely manage growth versus profitability.

MARKET PRESENCE OF SELECTED DIRECT BANKS AND NEOBANKSEuropean focus

All European markets available when e-residency in Estonia

Core countries

Exton research 2018.

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3. THE THREAT FOR ONLINE BANKS AND

TRADITIONAL BANKS

The threat of Neobanks for existing players is very real. Similar to Aggregators – one of the large beneficiaries of the PSD2 regulation – Neobanks are battling for the most important asset of banks: the direct customer relationship. Quite possibly, the likes of Atom Bank, N26, Monzo or Starling, all well-financed and with a banking license, have the means to reach their ambition to reinvent the model of the universal low-cost bank.

However, the threat is not exclusively from start-ups. Local incumbents, foreign banks and even non-banking groups are realizing the potential of this “new way” of banking. This is evidenced by Goldman Sachs´ launch of “Marcus”, La Caixa’s millenial off-shoot “ImaginBank”,

Bancolombia´s Neobank “Nequi” or by the successive 2017 arrivals of Carrefour´s C-zam account and Orange Bank in France.

Different to the largely private client-focused models of Direct Banks in the early years of the century, many Neobanks are also eyeing the Small Business market. Based on Exton´s Neobank database, more than 40% of the new-entrants already focused exclusively or at least partially on business clients, often tailoring their offer to specific segments or industries. Players like Qonto in France, Penta in Germany or Tide in the UK have begun to revolutionize the day-to-day banking for professionals by promising radically simplified processes, value-add features for their respective target group such as accounting tools, manageable cards, or access and roles

definition, and the integration of dedicated third-party services for professionals - all at very competitive rates.

4. COUNTER-ATTACK STRATEGIES

We are convinced that the market transformation triggered by this latest generation of digital banks is irreversible and that both traditional banks and online banks alike must closely observe the disruption and act accordingly. In essence, established players have three strategies to choose from:

defend market share by quickly and radically transforming existing operations, ultimately providing a similar customer experience and agility as Neobanks

participate in and learn from Neobanks through investment and/or acquisition

KEY DIFFERENTIATOR: MOMENTUM EFFECT

The “buzz” effect of Neobanks is witnessed in the press with Neobanks increasing in media presence while Direct Banks quiet down

MEDIA PRESENCE OF SELECTED PLAYERSNumber of mentions in the worldwide press over the past year

1800

1600

1400

1200

1000

800

600

400

200

0

DIRECT BANKS

NEOBANKS

6%809

758771

312

147%

LEGEND

Avg. 18 to 12 months

12 to 6 months

Avg. last 6 months

last 6 months

Source: Factiva, Worldwide Area, languages = English, French, German, Dutch, Italian and Spanish. Period from 23.09.2016 to 23.03.2018.

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attack by launching an own Neobank, in their home country to attract new customer segments or to con-quer new markets

There is growing evidence that the majority of Tier 1 Banks are opting for one of the two more radical alternatives to either acquire Neobanks or build their own greenfield operation. The large Spanish retail banks provide a fairly complete overview of that development:

in 2014, BBVA acquired the American mobile bank Simple, a pioneer of neo-banks, for 117 million dollars; since then it ac-quired stakes in Holvi (100%), Atom Bank (29.5%) and Solaris Bank, a Bank-as-a-Service provider

Caixa Bank has created its own 100% low-cost mobile bank under the Imagin Bank brand, aimed at their Millenial clients

Santander is in the process of transforming its online bank OpenBank, created in 1995, into a new generation Neobank.

We observe similar tendencies in the French Banking market including BPCEs acquisition of the German Fidor Bank, Crédit Agricole’s launch of the Eko offer, Arkéa’s acquisition of Pumpkin (P2P wallet of 300,000 users) and subsequent conversion to a Neobank, or Crédit Mutuel-CIC’s development of Avantoo, a packaged account + card + mobile plan.

In several other markets the reaction of incumbents has so far been more hesitant. In Germany, Deutsche Bank has announced they will withdraw their plans to create a new digital bank and instead shift existing operation towards an open banking platform where FinTech partner offers can more easily be integrated. Most other large banks and banking groups in the country have either not announced wider reaching plans to launch Neobank-like offerings or are struggling with its implementation. The focus so far, therefore, has been on integrating Fintech solutions into the existing offering (Deutsche Bank with Deposit Solutions, DKB with Cringle Payment Solutions or ING DiBa partnering with Scalable Capital and acquiring Lendico, to name a few). This may not be enough in the medium-term as the Neobank avalanche is rapidly gaining traction.

Regardless of the chosen strategy, it is essential that traditional banks and last generation online banks leverage their largest assets: an existing client base, a significant history of product and customer data, and a brand that in many cases still carries an aura of stability and trust. Nonetheless, for these assets to shine banks must undergo a deeper transformation while playing catch-up with their Neobank competitors. Considering their competitive areas of advantage, we identify six

specific areas of transformation that banks should target to counter the rise of Neobanks, beyond the widely discussed megatrends of Big Data usage, Artificial Intelligence or Robotic Process Automation:

continuous improvement of the customer journey and customer experience across all channels

strengthening of the organization's agility and innova-tion capability, including the cultural transformation of staff

upgrade and “opening” of its IT architecture with a fo-cus on easy integration of 3rd party vendors

development of a coherent Fintegration strategy (buy vs. connect, focused on clear value added and diffe-rentiation)

more professional use of digital marketing techniques, reducing cost per acquisition and staying in the game for the increasing number of digital natives

re-evaluation of (international) growth opportunities by applying new, more easily scalable digital structures

Exton Consulting has carried out an in-depth study of the models and the market of Neobanks in Europe (an extract of which is presented in this article) and accompanies many Neobanks in their launch and development. For more information: contactinfo@extonconsulting.com

NOTE

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LE SWAVE

Already with an established history of supporting start-ups, the state-run economic development agency Paris & Co has opened a new acceleration platform dedicated to FinTechs in the La Défense business district in Paris. Exton Consulting is the exclusive consulting partner of the platform.

The site is highly symbolic with over 2,500 m2 of co-innovation space on the 19th and 20th floors of the Arche de la Défense.

The ambition of Le Swave is to: gather key accounts, institutional partners and financial servi-ces specialists* around a platform of excellence

promote interaction, transfer expertise and connect start-ups with the leaders of the sector to establish business part-nerships and accelerate their development

reinforce the attractiveness of the French innovation ecosy-stem and attract young foreign talent in a Brexit context

promote sustainable and socially responsible financing

The initiative provides support across various areas, in particular covering many of the specificities of the financial sector (regulatory approach, regulatory approval, market knowledge, etc.), that represent major obstacles to the economic development of start-ups in the sector.

With its expertise in financial services, Exton Consulting will provide tailor-made support and coaching for some of the start-ups hosted in Le Swave.

More than 70 start-ups have applied for 4 key themes: Neo-finance Cybersecurity Artificial intelligence and machine learning the finance of tomorrow

EXTON CONSULTING HAS LAUNCHED THE FINTECH ACCELERATOR LE SWAVE IN PARTNERSHIP WITH PARIS & CO.

*partners and sponsors:

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EXTON RESEARCH DEPARTMENT, STUDIES AND

INNOVATION DATABASES

Studies/White Papers (Connected cars, The Fintech Phenomenon, Neobanks in Europe,...)

Databases: Fintech, Insurtech Watch and NeoBanks

DEDICATED CONSULTANTS CONNECTED TO

ENTREPRENEURIAL ECOSYSTEM

Dedicated teams organized by topics: Neobanks, Insurtech, Fintech, RegTech, Robo/IA, Data and Machine Learning

Participation at top Fintech events and conferences Meetings and projects with start-ups in the sector

PARTNERSHIP WITH LE SWAVE

Accelerator Financial Services Paris & Co Launched on October 20, 2017 2500 m2 in the Grande Arche de la Défense Selection and support of about thirty start-ups in different fields: neofinance, cybersecurity, robot, IA, machine learning finance of tomorrow (climate finance, dirable finance, regtech)

Prepaid Cards MPOS Account/card physical network distribution Neobank Smart POS Robo-Savings Account onboarding à la carte Omnichannel pre-acquisition platform Distribution of insurance in stores Instant card issuing

Blue Ocean Methodology Design Thinking Methodology Innovation Screening Methodology Fintech Partnership Strategy Due diligence for Fintech targets Project management with Fintechs Learning Expedition Open Innovation Competition …

PARTNERSHIP WITH FINANCE INNOVATION HUB

Dedicated teams organized by topics: Neobanks, Insurtech, Fintech, RegTech, Robo/IA, Data and Machine Learning

Participation at top Fintech events and conferences Meetings and projects with start-ups in the sector

EXTON CONSULTING IS EMBEDDED IN THE ENTREPRENEURIAL FINTECH ECOSYSTEM TO WITHDRAW FIRST

HAND EXPERIENCE USED TO SUPPORT OUR CLIENTS

SUPPORTING INNOVATIVE IDEAS FROM CONCEPT TO

IMPLEMENTATION

AN ORGANIZATION DRIVEN BY INNOVATION AND

INTEGRATION WITH THE ECOSYSTEM

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INTERVIEWVALENTIN STALF

CEO of N26

BORN IN VIENNA, VALENTIN STUDIED ACCOUNTING & FINANCE (M.A. HSG) AT

THE UNIVERSITY OF ST. GALLEN, SOPHIA UNIVERSITY IN TOKYO AND THE VIENNA

UNIVERSITY OF ECONOMICS AND BUSINESS ADMINISTRATION. DURING HIS STUDIES

HE WORKED IN A NUMBER OF FIELDS INCLUDING STRATEGY CONSULTING AND

INVESTMENT BANKING/ MERGERS & ACQUISITION.

HE WAS WITH ROCKET INTERNET AS ENTREPRENEUR IN RESIDENCE, INVOLVED

IN BUILDING DIFFERENT COMPANIES BEFORE HE FOUNDED N26 TOGETHER WITH

MAXIMILIAN TAYENTHAL IN 2013 AND LAUNCHED THE INITIAL PRODUCT IN EARLY

2015. SINCE THE LAUNCH OF N26, THE BANK HAS REACHED OVER 1 MILLION

CUSTOMERS ACROSS 17 EUROPEAN MARKETS, RAISED MORE THAN 250 MILLION USD,

AND HAS OVER 430 EMPLOYEES.

HOW DO YOU SEE THE RELATIONSHIP BETWEEN N26 AND TRADITIONAL BANKS BY 2020?

Our main competitors are not the traditional banks, but rather the strong online banks which have the right mindset, resources and capital to develop their product towards a mobile banking experience. But from today's perspective they are still far away from understanding digital businesses or producing a great digital experience. That’s a challenge for all of them. In the long run the bank of the future has to deliver more than current banks do. The bank of the future needs to be a problem solver for customers combining a great digital experience with guidance for financial decisions and beyond. The source of most decisions people take at one point has a financial component, if one can be helpful in a complex financial world, that has a huge value for customers.

We are an independent bank and use the most modern IT systems, that helps us to have a much lower cost level than traditional banks that are locked into old technology. Besides being an independent bank, we offer not only our own products to customers. We check for each product if there are innovative and great products on the market and have built a platform for the best financial products. Our customers can use this products with one or two clicks within our app. We offer best of breed products on our platform. We see N26 as the one stop shop for all of our customers financial needs. One of our products that is a good illustration is our savings offering. We have integrated about 15 different banks from across Europe, traditional ones and newer ones. Our customers now can choose between the best and most attractive offerings without leaving the app.

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The interview was conducted in 2017 and some of the numbers were updated since.

RECENTLY N26 STARTED A PARTNERSHIP WITH CLARK TO PROVIDE INSURANCE POLICIES

FOR ITS CUSTOMERS, HOW IS IT GOING?

Very well. The insurance wallet is very well accepted among our customer base. It was a first step for us to go beyond offering bread & butter banking products to our customers. WHICH ARE N26 GOALS FOR 2018 AND FOR THE LONG TERM?

Our strategy is definitely focused on further growth. We want to roll out our product offering internationally and become a full replacement for any other traditional bank in all the markets we operate in. Our goal is to grow our customer base to five million by 2020. In order to accelerate this growth, which is primarily driven organically by recommendations from our existing customers, we will enforce marketing activities to strengthen our brand.

IN YOUR OPINION WHICH WILL BE THE TOP FINTECH TRENDS IN EUROPE FOR 2018?

The impact of Machine Learning on prices and the way banking is perceived will be huge, starting at automated customer service but going as far as a personal assistant that is digital. Banking of the future will be much more personal at a much lower price level.

REGULATION ISSUES AND TECHNOLOGY COMPLEXITY INCREASE THE CHALLENGE TO

FOLLOW THE “LEAN START UP” APPROACH FOR FINTECH COMPANIES. IF IT IS IMPOSSIBLE

TO WORK WITH MVPS, HOW DID YOU MANAGE N26 DEVELOPMENT FROM THE BEGINNING?

When we launched our product in Germany in early 2015, we used a partner bank which provided the infrastructure and ensured compliance with the regulatory requirements. It was also a chance to see whether our product had the potential to be successful which it proved to be shortly after its launch and we gained 50.000 and then 100.000 customers. At that point we started the process to obtain our own banking license which provided us with the necessary independence to accelerate innovation and also to limit costs. Building an MVP in fintech means being creative and testing the right aspects of the product first, before going deep into regulatory topics.

N26 REACHED 1 MILLION CUSTOMERS IN EUROPE, SO FAR. WHICH WERE THE 3 MAIN

CHALLENGES YOU FACED TO GET THIS BIG RESULT? HOW DID YOU MANAGE THOSE

CHALLENGES?

The first challenge was to launch a banking product in general in a highly regulated environment and to see if the product was demanded by our customers. The second challenge then was to obtain a banking license with fairly limited resources to become an independent bank and the third one then followed by building our own banking infrastructure in order to migrate all customers to our own platform. Now it’s about building a bank that millions of customers love to use.

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7 LESSONS ON INNOVATION FOR TRADITIONAL BANKS

ANDREA GNETTI Partner

FEDERICO VITALESenior

Consultant

Successful innovations often lead to the demise of another: the diesel engine rendered obsolete the steam

locomotive, Google pushed aside AOL, digital cameras replaced Kodak, Apple replaced Nokia and so on.

In all of these cases, it wasn’t about the size of the new entrant or their capital; success hinged, rather, on

harnessing the new capabilities of technology to better serve both the old and emerging needs of customers:

to move faster; to easily research online; to avoid long waits to develop photos; to have one device that can

do it all and fits in your pocket ...

IF I HAD ASKED PEOPLE WHAT THEY WANTED, THEY WOULD HAVE SAID FASTER HORSES.

(Henry Ford, founder of the Ford Motor Company)

This same principal is why traditional banks must quickly

react to avoid their demise at the hands of quickly rising

FinTech initiatives and Neobanks. While fully re-building

the bank remains a relatively complex and expensive

activity, banks must start or, in many cases, continue

to modernize the necessary services and processes

to combat the effect of these new entrants. The most

exposed business components need to be protected

with the highest priority in the short-term, while driving

in parallel a structural transformation of the bank

that will allow the bank to compete in the new digital

environment. At Exton, we explored the market, its

trends and impact, and identified seven priority areas

for innovation:

1. Work like a FinTech

2. Keep an eye on new technology

3. Extend footprint

4. Think like your customers

5. Open the doors for partnerships

6. Use the force of data

7. Enhance your distinctive elements

1. WORK LIKE A FINTECH

” Ideas are like rabbits. You get a couple and learn how to handle them, and pretty soon you have a dozen.”

(John Steinbeck, author)

One of the central characteristics of all FinTechs and Neoban-ks is the limited availability of funds in the start-up phase. New ventures must be able to cheaply and quickly demonstrate their potential to find new investors while battling against shortened

expected break-even timelines. Such restrictions require an organizational setup and way of work that focuses on two ele-ments fundamental to all FinTechs: implementation speed and frequent, gradual releases that accelerate time-to-market.

From an organizational perspective, flat structures facilitate spe-edy decision-making and the exchange of information across te-ams. Often “agile” teams or squads define a delegation process

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that places responsibility for individual business and product decisions, not at the executive level, but rather where the key capabilities actually exist. This means putting key product de-cisions at the content expert level. It also leads to shortened review processes and faster time-to-market, with a focus not necessarily on “getting it right the first time” but instead a willin-gness to test, learn and adjust through frequent releases.

Many traditional banks are already moving towards this type of organization by setting up FinTech companies or launching their own institutions to participate in the emerging Neobank market. Examples include the hype of Banca Sella or the recent launch of Unicredit's BuddyBank, which can benefit from organizational logic similar to that of the Neobanks.

But this will not be enough. Even traditional bank organizations must adapt new ways of working to capture digital market possi-bilities. We see the three fundamental aspects of change:

reduction of hierarchy levels: this will allow banks to shorten decision-making processes by shifting decisions closer to the end customer

increased delegation related to client management but always in accordance with control processes required to comply with the law and without exposing the bank to repu-tational risks.

extended knowledge sharing within the organization by im-plementing new digital tools to facilitate the exchange of ide-as and content, including the use of social platforms, cloud and remote management of meetings, but also by matching best suited resources with the key initiatives of the bank.

2. KEEP AN EYE ON TECHNOLOGY

“Information technology and business are becoming inextri-cably interwoven. I don't think anybody can talk meaningfully about one without talking about the other.”

(Bill Gates, founder Microsoft)

Talking about innovation in the financial system today means

talking about new technologies. Innovation based on emerging technology is on the agenda of all banks. Blockchain, Artificial Intelligence, Machine Learning, Open API, Robotization - just to name a few - are topics that are already top-of-mind for the de-velopment programs of many institutions.

The difficulty, however, is not in adopting these new technolo-gies, but rather in setting the right priorities based both on bu-siness needs and budget availability. We believe this is achieved through creating an innovation ecosystem that is capable of identifying the crucial development needs and finding technolo-gical solutions that are best able to satisfy them. There are at le-ast three pivotal aspects that such an ecosystem must possess:

the first concerns exposure to the best solutions available with the dual objective of understanding the main techno-logical developments while also building a scouting network of possible solutions for implementation. An accelerator or incubator can be an important enabling factor of such a stra-tegy by, for example, forming partnerships with university re-search centers.

launching an innovation center tasked with developing new solutions internally, is a second way for banks to address the-se needs. Internal development topics frequently include to-pics such as user experience, Artificial Intelligence, Machine Learning and Cybersecurity. Creating a network of colleagues able to meet innovation requirements by promoting their own projects is the third piece of the puzzle for a functioning ecosystem.

the management of this network of innovators must be wide-spread throughout the enterprise, and its nurturing should be a managerial priority.

3. EXTEND FOOTPRINT

“The alchemists in their search for gold discovered many other things of greater value.”

(Arthur Schopenhauer, philosopher)

Differences between European countries are increasingly

subtle. The principal driver of this phenomenon has been, on a structural level, the harmonization of financial regulations between the member states (for example IDD or MIFID 2), and, on the infrastructural level, the digital revolution. The reduced need for a physical distribution network and the high quality and reliability of digital infrastructures allow Neobanks to expand its international landscape faster and far more cost-effectively than had previously been possible (see also the related graph in our study “Facing the arrival of the new wave of digital banks: the Neobanks” in this Newsletter).More traditional players can and should follow suit by using par-tnerships or entering new markets with digital offers that do not require a significant physical presence.

4. THINK LIKE YOUR CUSTOMERS

“There is only one boss. The customer. And he can fire every-body in the company, from the chairman on down, simply by spending his money somewhere else.”

(Sam Walton, founder of Walmart)

Customer centricity is not a new concept, but in this phase of economic recovery it plays an even stronger role: characteri-zed by a new way of relating to customers that finds its genesis in technological development. Customers are accustomed to easily find information independently and experience an in-creasing level of convenience. The market is owned, and will continue to be owned, by those who have the strongest rela-tionships with their customers. The initial focus of Neobanks is typically to gain customers "at any cost", worrying about pro-fitability only in stage two of its endeavors. Constantly rethin-king its services and offers becomes a fundamental element to remain competitive. In this process, techniques such as Design Thinking help become increasingly relevant, aligning the offer continuously with customer needs. The collection of as much data and information as possible is the basis of this process, which makes it necessary to develop skills, methods and tools that enable not only future developments but also a true cul-ture of customer service in the bank.

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5. OPEN THE DOORS FOR PARTNERSHIPS

“Walking with a friend in the dark is better than walking alone in the light.“

(Helen Keller, author)

The PSD2 Regulation specifies how third parties can access a bank's information and transactional services to provide addi-tional services to its own customers. Being at the center of a broader ecosystem that integrates innovative third-party servi-ces in that context provides a real opportunity for banks. The many discussions and emerging examples in the field of open banking show the relevance of the topic. A relevant case study can be found in Banca Sella, the first bank in Italy offering an open API structure for access to current accounts and promo-ting important partnerships with new players such as Money Farm.Depending on the size of the financial institution, this approach can have different effects. The biggest players will likely use many intragroup partnerships while the smaller ones will rely more on external structures and partnerships. In both cases it is important to have a strategic view on the business which clearly separates the production element from the product´s distribution, giving freedom to the sales network to decide what solution to pitch to its customers and giving product suppliers the liberty to select their preferred distribution partner.

6. USE THE FORCE OF DATA

“War is ninety percent information.” (Napoleon Bonaparte)

Never has it been more true that the world is made of infor-mation. Before, it was known in theory, but there were no tools to put it into practice, today it is reality. Until recently, running a platform that was able to collect and analyze all the data ge-nerated by an activity such as banking business was either not possible or simply didn´t make economic sense.Today, however, the game is different: the Internet giants have

developed the ability to integrate and use unprecedented amounts of data, including uneven and fragmented, unstructured data into efficient models that allow exploiting such data in real time. For example, the Google search trend such as "sleep better with a cold" or "how to soothe the cough" allows predicting or recognizing seasonal flu outbreaks (and its geographic distribution) much earlier. Similarly, Google search records can help predict with reasonable accuracy the outcome of a political election.Still on the topic of data usage, Amazon has developed its own algorithm that allows a price change due to the number of pur-chases of a particular product. But not only that product, the price trend of the same product also affects the prices of others!A bank has an impressive amount of data including expenditure data, risk-related factors, socio-demographic variables, user patterns and many more. Neobanks are ”big data-native”, collecting and using as much data as they can. More so, the use of data is a crucial element of the business model of many of them. Just as much as these new challengers, banks must insist on making the most of their potent data assets: use cases are extremely broad, from anti-fraud to proactive marketing, from making sales networks more efficient optimizing customer-dedicated apps. Those banks that prioritize use cases best and rapidly build the necessary underlying infrastructure will benefit most and fastest from these new opportunities.

7. ENHANCE YOUR DISTINCTIVE ELEMENTS

“In the business world, the rearview mirror is always clearer than the windshield”

(Warren Buffet, CEO of Berkshire Hathaway)

Traditional banks bring to the table a number of features that are difficult to replicate in the short term. The long-standing pre-sence in the market that characterizes them has allowed them to acquire a large pool of customers with whom they interact continuously and with whom they enjoy a stable relationship. As a result, huge amounts of data have been amounted that few others have access to. This should enable them to use business intelligence more efficiently. The consolidated presence on the territory, albeit in the process of rationalization, is another distinguishing feature that can only be imitated by new entrants at a high price. Personal relationships, financial stability and branding (in some cases at least) appear to be other factors banks need to exploit heavily. In a recent study by Exton on young people and banks, this customer group still highlighted the importance of a trusted brand as a guarantee for services and security. Nurturing these assets will allow incumbents to face new challengers, be they Neobanks, GAFA or others, from a position of relative strength.

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