The banking industry is undergoing a material shift in how businesses and consumers bank with an explosion of new alternative offerings. One of the most interesting phenomena that is developing as part of the fintech revolution is 'niche banking'. The niche banking model helps meet the needs of a growing segment of the population who feel underserved by traditional banks.
Community banks harken back to traditional models of community-centred banking, where funds are collected from and loaned within the same community. Today, online communities are as important as physical communities. With all of the modern changes and advancements, think of community banking as "community banking 2.0." It's evolved, but still encompasses the same ideas of the original concept.
In this blog, we will talk about what niche banking is, its pros and cons, provide real use cases, and answer the question why neobanks should focus on niche markets. Lastly, we explore how you can start your own niche bank — and provide you with some tips from Intergiro.
We will cover:
- Differences Between a Digital bank, Neobank and a Niche Bank
- Specifics of Niche Banks
- Why Should Neobanks Focus on Niche Markets?
- Centering Community as a Strategy - Community Banking 2.0
- The Pros and Cons of a Niche Bank
- Real Uses Cases of Niche Banks
- How To Start a Niche Bank?
- Tips From Intergiro - Spread Your Idea
First off, let’s take a closer look at how digital banks, neobanks and niche banks actually differ.
Differences Between a Digital Bank, Neobank and a Niche Bank
The fintech sector is taking the banking industry by storm. Technology companies are creating new financial institutions and even startups without a banking licence are offering similar services to traditional banks, by leveraging banking as a service solutions. Digital banks, neobanks and niche banks: what do they all mean? The lines between these different types of financial institutions are often blurred and the terms are used interchangeably. We've created this guide to help you differentiate the three and learn the key differences.
Digital banks are usually part of a larger traditional bank or credit union and offer financial services that include both online banking and mobile banking services.
Neobanks represent the new wave of banking companies, are digital-only and offer bank-like services which exist outside the traditional banking establishment. They are tech-led and being built with a completely new tech stack enables them to move and evolve more quickly than their legacy competitors.
A niche bank can exist as a digital, neobank, or a hybrid — but a critical aspect of its definition is that the bank has a specific customer base, to whom it offers bespoke financial products and services that meet a highly specific financial and emotional need.
Specifics of Niche Banks
The term 'niche bank' is an often-used description of a smaller financial institution that focuses on doing one thing really well. While others neglect niches but provide broad, more general services, niche banks can position themselves as the most attractive offering within their target market.
Some key takeaways:
- Niche banks are financial institutions that have a specific purpose, focused on a particular subset of the population.
- A niche bank focuses on targeting a specific segment of the market and tailors its service offerings and value propositions to meet this segment’s specific needs.
- A niche bank’s entire operations, marketing, and product mix are all developed to cater to the target market’s preferences.
- A niche bank is able to provide non-financial ancillary services, specifically of interest to their customer segments.
It might sound simple, but in reality, niche banking is harder than you think. Financial institutions find themselves in a difficult position: they need to be able to offer services that fit the needs of specific customer niches, but still be able to make a profit.
But first, let's talk about what niche banking is NOT.
What is NOT a niche?
- It’s not sufficient to have an online or mobile version of your product for a segment of your customer base.
- A generic digital bank is not a niche. Though it might seem to be very specific, its services are often not specifically tied to a customer’s needs.
Does a niche bank have to be digital?
No, there are lots of examples of successful hybrid models like Studio Bank in Nashville (niche banking for the creative community). This company has both brick-and-mortar and online stores, which they seamlessly combine to offer a great customer service.
Now you know what a niche bank is and what it’s not - great. But why should neobanks focus on niches?
Why Should Neobanks Focus on Niche Markets?
In the early 2010s, neobanks were a new type of digital bank that offered a better customer experience. Companies like Monzo Bank, Revolut, and N26 have flipped the industry on its head by offering faster, more convenient, and completely digital banking services.
However, neobanks are still not profitable for the vast majority of players. Growth rates are soaring, but according to a study by Boston Consulting Group, only 13 neobanks (out of 250) worldwide will be profitable in 2021.
Neobanks have long endeavoured to build up financial services for the general public, while pursuing growth at all costs. The focus has been on innovative features and digital convenience, which is why niche markets have been overlooked. However, judging by the low profitability of most neobanks, it’s not clear if following this strategy will be a key to success. Could shifting towards vertical markets, in other words, a niche focus, be the winning strategy?
Centering Community as a Strategy - Community Banking 2.0
With many different neobanks competing with similar infrastructure and products, how can niche banks stand out from other challenger banks? Community is one way to set them apart. "It's about the community, because the infrastructure and even the products are becoming commoditised," says Sean Park, founder at venture firm Anthemis.
Customers like to use banks that cater to their needs. When financial institutions offer specific banking products and services for a select group of people, it simplifies the banking process and makes the customer feel like their needs are important and recognised.
A flood of banking competitors have come into the market, with the relatively easy-to-implement banking technology. There are many new players that want to find an edge, but a disadvantage is that "if it catches on, everybody copies it," Park said.
The Pros and Cons of a Niche Bank
The advantages of a niche bank are that there are fewer players, making it easier for them to stand out from their competitors. By targeting underserved communities, they can more readily lead a unique portion of the market. Let’s take a look at some of the pros and cons of niche banking.
The advantages of targeting a niche segment are many:
- Less competition – in a small pond, your business is a big fish
- Clear focus - target particular customers, in other words easier to find and reach a specific market segment
- Developing specialised skills and knowledge, leading to niche market expertise
- Customers are often willing to pay a higher price - paying for your expertise
- Customers are likely more loyal
- In many cases, profit margins are higher
The main disadvantages of niche banking include:
- The risk of depending too heavily on a single product or market
- Companies risk becoming vulnerable to market changes when niched - putting "eggs in one basket", so to speak
- Challenges with economies of scale (the cost advantages that accompany when increasing product volumes)
Real Uses Cases of Niche Banks
The concept of niche banks has been around since the beginning of banking. Banks have always specialised in certain types of clients, products, or regions. A return to niche audience focus, along with the possibilities opened by digital transformation, is creating new and interesting opportunities for financial institutions. Below we examine some of the real-world great examples of niche banks that serve the underserved.
1. Fundof - Banking for Digital Content Producers (Powered by Intergiro.3d)
A kind of digital ‘tip jar’, Fundof provides a service for digital content creators to monetise their creativity. Fundof’s platform gives content creators a debit card, which they can immediately use after being tipped by fans. This is particularly valuable considering that “the content creation industry has exploded during the Covid pandemic, becoming a $40 billion industry, as people have turned to supplementing their income by monetising their online content,” as stated by Fredrik Rodievis, Fundof’s co-founder. Fundof provides a way for followers of a content creator to thank them for their creations, and allows content creators to pursue their passion.
Key features of Fundof:
- Makes it easier for influencers and online content creators to earn money, at any scale and without the need to create exclusive content
- Easily integrates tipping into a creator’s existing channels
- With strong identity verification tools in place, it ensures secure transactions
2. Daylight - Banking for the LGBTQ+ Community
Billie Simmons and Rob Curtis wanted to target a specific population when they started Daylight. They didn't just "stick rainbows'' on the product and hope people would notice. Instead, they developed a product for the LGBTQ+ community that truly met their needs.
The Daylight website claims that 53% of LGBTQ+ people find it difficult to keep regular savings. The bank is committed to empowering people with tools that help them manage their finances, but also maintain their sense of self-worth and adhere to the diversity of the community. "LGBT people face different financial challenges than other people, and are left behind by traditional banks," according to Curtis.
Key features of Daylight
- Members can use their desired name within their accounts and on their cards, it is easier to feel included
- Providing members with access to financial coaches who support and affirm, instead of judge
- Content created and designed for the LGBTQ+ community.
- Be part of a community with the app; share stories, get advice and celebrate successes
3. Greenwood - Banking for Black and Latin Consumers
“The racial wealth gap can't be bridged easily. But the coalition focused on financial equity is a major step towards economic empowerment,” said Greenwood founder, Mikael Render. Greenwood has pledged to make Latino and Black individuals, families, and businesses more economically empowered.
Greenwood takes advantage of a fully digital platform to reach a larger audience in bank deserts across the United States. The specific services that Greenwood offers include savings, spending and access to ATMs. They also offer Apple Pay and Google Pay in order to make banking accessible for many people.
Key features of Greenwood
- Taking social responsibility for black and Latino communities and providing financial inclusion
- Offering features like food drives, donation links to non-profits, and grants to small businesses
- Encouraging members to give back to the community, which helps people stay afloat
4. Majority - Banking for Migrants
A significant percentage of the world's population are migrants, who may or may not have access to financial services. Such services may be inaccessible due to strict registration restrictions, high bank fees, and general distrust of the traditional banks. "Migrants are the most ambitious people in the world," said Magnus Larsson, CEO of Majority. "They strive for success in a new country – and they need the necessary tools.” Majority is here to solve this problem.
Majority offers mobile banking to migrants for $5 a month. This includes features that make international living more comfortable, like bilingualism, a calling service that includes free or low-cost calls to many countries, and celebrations of cultural heritage. Its website and app both follow this simple idea with vibrant colours, bold typography, and inclusive language.
Key features of Majority
- International money transfers with no added fees
- Free calling to 20+ countries
- Personalised advisers in every possible language
- Rewards for local support, including discounts at local restaurants, grocery stores, and more
5. Nerve - Created for Musicians
Nerve is the world’s first neobank for musicians, providing them with financial tools to keep their business sustainable. “Banks used to provide services according to the needs of the geographical area they were in,* said CEO John Waupsh. “Today, banking isn’t built around rivers and railways, but really about what the customer needs.”
Nerve offers customised financial tools to help musicians manage their finances and prepare for the future, and caters to English- and Spanish-speaking musicians. Services include business debit and savings accounts (FDIC-insured) to help the musician separate their business and personal financial life.
Key features of Nerve
- Artist’s streaming and social follower data
- "Private networking" for musicians, helping them to find each other, make payments, and collaborate
- Free instant payments to anyone with a Nerve account
- Access to 55,000 free ATMs worldwide (a perfect solution for the travelling musician)
How To Start a Niche Bank?
While the first generation of neobanks had to create their technology stack from scratch, today’s neobanks no longer have to. Banking-as-a-Service (BaaS) providers have simplified the process for new entrants to the market. They can leverage state-of-the-art banking infrastructures and launch their neobank more quickly (within months) and at a lower cost. If you want to launch your own financial services, we've got you covered with Intergiro.3d.
Intergiro.3d is designed for businesses to build their own financial solutions or embed financial operations into their products and services. Thanks to the flexibility of Intergiro’s suite of APIs, you can create anything from card programmes, to white-label banking, to fully-fledged neobank-style financial institutions. A key differentiator is Intergiro’s top-up feature, which enables customers to instantly top up their account using third party cards.
Tips From Intergiro - Spread Your Idea
To begin with, if you want the idea of your product or service to spread like a virus, you’ve got to make sure it’s worthy of being spread in the first place. The more compelling it is, the more likely it will be to go viral. The more your idea is designed to resonate with your target audience, the more likely it will be to spread.
When you spread your idea and build a proposition of value to the community, the relationship you develop is mutually beneficial. Your offers may not be for everyone, but people will be more likely to engage with you when you show that you care. Generic offerings don't work with one-size-fits-none models; instead, focus on the things that work best for your clients. Your level of understanding as a company is important to provide a real solution to your customers. The returns on the other side can be significant.