Improving Customer Acceptance for Challenger Banks and Neobanks


Challenger banks and neobanks are digital-first banks that deliver their services primarily through mobile apps. These include traditional offerings like checking accounts, debit cards, credit cards and loans. However, despite the word “bank” in their name, these companies are more akin to fintechs, offering a range of additional financial services, including cryptocurrency, peer-to-peer (P2P) payments and more.

Neobanks vs. Challenger Banks

While these firms share several similarities — the terms “challenger bank” and “neobank” are often used interchangeably — they do differ in one important aspect: Neobanks do not have a banking license, and instead must partner with traditional banks and other companies to provide their services. Because there are no branch offices or a physical presence, neobanks deliver a 100% digital experience to their customers.

Challenger Banks

Challenger banks, a term used more often in the UK, do hold a banking license and are in some way affiliated with a traditional financial institution. They might maintain something of a brick-and-mortar presence — albeit a much smaller one than a larger traditional bank — in addition to their digital operations. 

The term “challenger bank” arose in 2010, when Metro Bank received its banking license in the UK. It was the first bank to be issued a license by the UK government in 100 years — thereby challenging incumbent banks Barclays, HSBC, Lloyds and NatWest.

In recent years, neobanks and challenger banks have increased in their size and the number of their customers. Such firms have become popular, especially among younger banking customers seeking fast, easy financial services without the need to be tied to a physical location. According to Statista, 24% of consumers indicated convenience as a reason for using a digital-only bank. 

Do customers know the difference between a challenger bank and a neobank? Most likely not. They might see an exciting TV ad for a new type of bank, or a fun set of display ads for a new P2P payment service, but most consumers are blissfully unaware whether the company offering these services holds a banking license.

This variation in awareness can lead to challenges for challenger banks and neobanks in acquiring the right customers and, more importantly, onboarding them properly to present them with the right mix of financial products.

Challenges in Customer Acceptance for Challenger Banks and Neobanks

Apps that promise a fast, mobile-only, intuitive banking experience might seem to appeal to only a thin segment of financial services customers, but this is not the case. 

The UK is leading the adoption of neobanking and the rise of digital challenger banks. More than 15% of the UK population has an account with an app-based bank, and almost one-half of users have it as their main payment option. By comparison, only 11% of the US population has an account with a neobank or challenger bank.

Challenger banks and neobanks certainly want to grow their customer — and deposit — base. While their aggressive marketing efforts might deliver the eyeballs, clicks and conversions, ensuring that the right customers sign up and are accepted can be a challenge. Some of these can be expected, given the digital-first environment, while others are specific to the ways that challenger banks and neobanks do business. Let’s have a look.

Target for Cybercriminals

Cybercriminals target devices, apps and networks that have the highest likelihood of vulnerability — and challenger banks and neobanks fit this requirement perfectly. Neobanks are not regulated by banking, securities, insurance or other financial services authorities. Therefore, their device and app security measures might not be as strong as those of traditional banks that have to meet the stringent requirements of the industry — and cybercriminals know this. 

They purposely target these apps and services, thinking that neobanks, which also generally operate in start-up mode, may not have invested in the proper identity-verification and fraud-detection measures. Challenger banks, however, are a part of, or more strongly connected to, traditional banks, and so they will have such safeguards in place. Yet criminals, much like the general public, may not know the difference between a challenger bank and a neobank, and will target either with the same aggressiveness. Cybercriminals typically target such apps with the intent of opening accounts or credit lines in order to extract funds without any intention of repaying. 

Lack of Regulation

As already mentioned, neobanks are not regulated, which means that deposits are not protected by insurance like deposits made to a traditional brick-and-mortar bank are. While this might not scare away some customers, the lack of deposit protection might frustrate older customers, or those with more sizable assets. Challenger banks operate under a banking license, which can be an issue, but neobanks are challenged to find and accept seasoned, experienced customers who most likely seek the safety of traditional banking products. Regulation can be a good thing for neobanks, as it can attract new segments of customers and grow the overall market for neobank services. 

Younger, Unprofitable Users

Younger users are attracted to neobanks and challenger banks for their branding, cutting-edge technology and attractive introductory offers (e.g., promise of high returns on savings accounts). However, these younger customers most likely have thin credit profiles and may not be the most profitable at the beginning of the customer lifecycle. Neobanks’ strategy often mirrors those of other fintech or software-as-a-service companies: acquire as many customers as possible and then gradually keep upselling them on services and charge fees. Identifying and onboarding customers who will be the right fit can be a challenge.

How To Improve Customer Acceptance for Challenger Banks and Neobanks

Long before the pandemic forced customers to go online or download mobile apps and conduct their day-in, day-out banking activities digitally, they had already been seeking convenient, intuitive apps that made banking fast and even fun.

Younger consumers may not necessarily hold allegiance to banks their families used, and are more receptive to newer, digital-first experiences. Indeed, 38% of customers say that the user experience is the most important factor when choosing a bank, according to the consulting firm Deloitte. 

Although digital onboarding aims to make signing up for new lending accounts simpler and more convenient, the majority of processes can still impose friction that leads to abandonment in the customer journey. On the flip side, a too-easy customer onboarding process might let in cybercriminals who steal information or take out loans with no intent to repay. While neobanks might not be regulated, challenger banks are; complying with best practices and industry standards will create the safest onboarding environment even when such standards aren’t necessarily enforced. Indeed, neobanks and challenger banks can only grow when they accept the right customers.

Onboarding as Marketing

Customers expect a unique, advanced technology experience when they bank, so they also expect a similarly unique, advanced technology experience when they open an account. Many companies are concerned that a long onboarding experience might be a turnoff, but you can use this balancing act to your advantage: Make it long enough to delight them with technology (selfies, image matches, etc.) and reassure them that these steps are necessary for their security, but make the experience short enough to remove frustration. Indeed, onboarding can serve as a critical component of a neobank’s or challenger bank’s marketing strategy. 

Disparate Systems That Don’t Talk to One Another

Neobanks, as fintech companies, may be new to the onboarding game, so they don’t know what they don’t know. They may have bought into one point solution for onboarding, not realizing that it doesn’t provide another, key step in the process, which will require yet another solution. At some point, a patchwork of disparate systems are in place, causing confusion for customers and even employees, who may not know why a customer was rejected. Such systems have been shown to reject up to 40% of good customers. This poor customer experience hurts conversion rates and turns away potentially profitable customers. Further, these different systems most likely are delivered with different branding elements and, to the previous point, do not fit in with the overall marketing experience either.

Predictive Accuracy via an Outsourced Provider With Industry Experience

Traditional banks may capture data on rejected customers and use it as training data to build an algorithm to better understand customer acceptance during the onboarding process. However, neobanks and challenger banks do not have years of such data collection. An outsourced, managed digital onboarding service, with years of using machine learning predictive analytics, can help new companies verify identities and select customers in real time, recapturing up to 50% of rejects using legacy systems or point solutions. With more good customers approved, fraud losses are lowered; outsourcing saves time and expenses related to building a system in-house or training a staff on how to use it. 

Lower Costs To Improve Financial Results

Traditional customer onboarding systems reject customers who should be approved so that they can start engaging with the company’s financial products, which cuts into profitability. With the acceptance of significantly more qualified new customers who have passed customer verification, identification and compliance screening tests, challenger banks and neobanks can increase their top-line revenue and profitability and reduce write-offs. This also makes them more attractive to new partners, so that they can establish alliances and offer additional services.

Insurance Indemnification To Shift Fraud Losses

Challenger banks, and the partner banks for neobanks, need to reserve capital in order to be able to write off losses when they occur. Instnt, the first fully managed customer onboarding service for business, is the only provider that offers contractual guarantees of fraud-loss indemnification up to $100 million annually.

Regulatory Compliance and Privacy Goals

Managed digital onboarding services provide complete regulatory compliance — including addressing Know Your Customer (KYC), Anti-Money Laundering (AML) and privacy issues — which is essential to effective corporate governance and risk management, even if challenger banks and neobanks don’t think they need that yet. However, as they grow, they certainly will. 

Using a managed digital customer onboarding system like Instnt can significantly improve customer acceptance while handling identity verification and regulatory compliance, lowering fraud losses, and delivering stronger revenues and profitability. 

Instnt Customer Acceptance

Instnt is the only customer-acceptance service that provides performance guarantees for each good customer a bank accepts. Because Instnt assumes liability for fraud, banks can experience growth like never before without any of the negative effects of widening their sales funnels. For more information on Instnt’s innovative solution to an age-old problem, start your free demo today.


About the Author

Instnt's fraud loss indemnification technology provides coverage of up to $100M for fraud losses stemming from synthetic, third-party, and first-party fraud. With Instnt's comprehensive fraud loss protection, businesses can confidently extend their services to a wider customer base, enabling them to embrace more opportunities and enhance revenue streams while maintaining a secure, fraud-free environment.