Fintech has dramatically disrupted the conventional banking industry, with successful startups like Chime, Wise, and Stripe at the forefront. According to Statista, the fintech industry is on an upward trajectory, with neobanking transactions projected to hit$ 8.98 trillion in 2027. Meanwhile, the same study predicted that more than 376 million users will turn to neobanking by 2027.
However, Forbes experts underscored that many neobanking apps struggle with low retention, and only 5% are profitable.
Like most entrepreneurial ventures, a fintech startup's success relies on its business strategy and the mistakes they commit. I've collaborated with 5 neobanks at Uptech, and helped them release apps that users love.
For example, we’ve been teaming up with Aspiration for more than 3 years. Our team helped Aspiration introduce value-added features, ensure a 99% crash-free app, and more. Meanwhile, Cardless is another neobank that we help scale with various means, including revamping their onboarding screens.
We’ve helped these neobanks grow from seed startups to established fintech enterprises. We work closely with them to identify viable fintech solutions, conduct product discovery, and ensure they fit user demands. Furthermore, we’re aware of the legal obstacles and technical challenges in the neobanking industry.
I believe my experience comes in handy, particularly in avoiding the common pitfalls that many fintech startups make. Our customer-centric approach to app development and industry know-how resulted in our client’s remarkable growth. Hence, we believe that Uptech is in a strong position to serve as advisor for future fintech startups.
Starting a venture in fintech means avoiding technical, legal, and operational hurdles. Read on and find out how to increase your odds of success.
Mistake 1: Failing to build trust with users
Neobanks replace brick-and-mortar banking systems, but not the human touch and trust instilled by the latter. When deciding to switch to a neobanking app, users want to be assured that their money is safe. This is particularly true for consumers that need more education on how fintech works.
Trust in neobanks is growing, with a study highlighting that 40% of American financial decision-makers have a neobank account. While more consumers feel confident about depositing or transacting with neobanks, many remain skeptical. For example, a study in 2019 showed that only 45% of UK consumers would trust an online bank as they did conventional banks.
Another study shows polarizing results of consumer trust in fintech companies according to age groups. Users aged 18 - 24 are more likely to trust neobanks than consumers in the older age group. The study also found that respondents aged 65 and above place more trust in banks.
Consumers want to feel assured that stringent measures in neobanking systems secure their deposits. They do not trust an app that behaves robotically or one that struggles to provide the support they need. Instead, customers feel safe when the app provides a consistently helpful experience across all interactions.
Solution
Focus on introducing a consistent brand voice throughout the UX design. This includes the colors, content, style, and tone on websites, apps, and other marketing mediums. Use simple languages that consumers understand instead of writing jargon-laden text.
For example, Klarna uses simple words and a consistent tone of voice to explain its range of financial services. Meanwhile, Nubank's sleek interface, pleasant user experience, and gamification have seen its user base exceed 70 million in 2022.
Besides language, it's crucial to ensure that customers can get support quickly on the app. Easy access to support, descriptive instruction and easy-to-follow steps are good UX elements that help to build trust. For example, PayPal has an uncluttered interface and takes users through a transactional process in simple steps.
Trust is subjective and personal for each user. Therefore, I recommend you talk to users, just like we did, to find out how to address their pain points effectively. Such conversations help you uncover doubts that prevent them from shifting to neobanks.
We've done our research on building trust with apps, and here are some helpful tips.
- Write UX copies conversationally and with emotion;
- Use charts, graphs, and other visual aids to explain data;
- Explain why users must take specific steps, such as verifying their identity;
- Guide users with hints or explanations instead of scaring them with error screens;
- Simplify complicated tasks into easy-to-follow steps.
Takeaway
Trust, not fancy features, convinces customers to transact with neobanks. Trust-building starts with good UX practices that enable seamless onboarding, intuitive usage, and in-app support experience.
Mistake 2: Treating security as an afterthought
Neglecting security is a folly that doomed fintech startups to a premature demise. Threat actors are skirting conventional perimeter security and resorting to advanced social engineering measures to breach and steal data. Recently, Revolut suffered a security breach in a targeted attract that exposed the sensitive data of more than 50,000 users globally.
Global authorities are well aware of the increased cyber threats and have imposed policies and regulations that fintech startups must comply with. For example, European banks must onboard new customers according to the Know Your Customer (KYC) regulations. Meanwhile, the US Economic Growth, Regulatory Relief, and Consumer Protection Act grant authority to financial institutions to verify customers' identity.
Lack of cloud security awareness further aggravates data risk. Many startups assume that cloud security lies solely on the providers. This is a misguided assumption because cloud providers are only responsible for certain parts of the infrastructure. Securing the app, databases, middleware, and API are responsibilities that startups must bear.
Solution
Make security the key foundation of your fintech app. Neobanks must protect financial and customer data by applying secure technologies like
- encryption;
- multifactor authentication;
- identity verification.
When developing the app, your developers must assess the security risk of the tech stacks involved, including cloud servers, API, databases, and other 3rd party integrations. At the same time, introduce features that allow users to use the neobanking services securely.
For example, Chime is a fintech app that enforces stringent security measures such as encryption and fingerprint authentication. It also sends alerts and immediately blocks the user's credit card upon detecting suspicious activities. Likewise, our team secured Aspiration against data and money losses by hardening its app, database, and backend services against unauthorized access. With Cardless, we integrated the biometric stack with the powerful APIs to provide secure biometrics on Android. Then, we tested our biometric implementation to ensure everything worked smoothly and safely.
Besides security features, fintech startups must comply with the required regulations, such as AML, GLBA, and JOBS Act. in the US, and GDPR and PSD2 SCA in Europe. If the app processes credit card data, PCI DSS is mandatory. These regulations cover technical and policy implementation to safeguard customers' data, and compliance prevents your startup from being penalized.
Exabanque, a multi-banking solution for businesses, applies robust security measures in its financial products and describes them clearly on its webpage. It leaves no doubt amongst users that transactions on the platform are secured and comply with the PSD2 directive.
The bottom line is that customers must feel safe using your app. Here are some valuable tips for building a fintech platform customers will not hesitate to use.
- Break complicated tasks into smaller steps;
- Guide users along each interaction with hints, instructions, and 24/7 support;
- Assure users that the procedures are safe and publicize your data privacy policy.
Takeaway
Fintech Security is vital to prevent fraudulent practices and data breaches. It involves safeguarding your app and its underlying infrastructure with robust security measures. Take security seriously, and your fintech startup stands a strong chance for success.
Mistake 3: Delivering a poor user experience
Despite the growing momentum of neobanks, poor user experiences will cause customers to leave in droves. A study revealed that 88% of users would quit an app if it's littered with bugs. It's improper to expect customers to navigate through glitches or suffer app crashes now and then.
Besides a dysfunctional app, complicated onboarding and in-app app operations are definite factors for a high churn rate. Another study showed that 80% of users deleted an app because they had trouble figuring out how to use it. This is highly significant for neobanks because customers are sensitive when depositing their money and have little tolerance for glitches.
Solution
Thoroughly tests your neobanking app for bugs and other technical issues before making it public. Customers have zero tolerance for a compromised app, particularly when it involves their hard-earned savings. This means working with developers with proven experience in testing and releasing bug-free apps.
For example, our developers implement multiple stages of software testing to provide a secure and seamless neobanking experience. We do code reviews, tech and security audits, run unit and integration tests, address security concerns and protect sensitive data at every interaction point. Our team uses automated tools to identify vulnerabilities, apply fixes and run the app in the test environment.
While releasing a bug-free app is crucial, so is continuous engagement throughout the customer's app lifecycle. In this sense, fintech apps must display a unique personality and provide value-added features that reflect their brand values. For example, Aspiration attracts environmentally-conscious users, showing them how many trees they've planted when they swipe their debit cards.
Adding gamification elements, such as challenges, badges, and rewards systems, also help in retaining users in the long run. Revolut is an excellent example of gamification done right. The fintech company offers various rewards to loyal users who spend more with the Reward card. For example, customers enjoy up to 30% cashback when they dine at London restaurants.
Smarty Pig, an app that helps users save and meet financial goals, demonstrates the proper use of gamification elements. It allows users to track their savings with a progress bar and easily transfer funds to hit their financial goals. Besides, its cartoonish pig icon also creates a welcoming vibe for users.
Finally, take advantage of social elements like the popular investing app eToro. eToro has a CopyTrading feature that allows users to automate their investment by copying the portfolio of seasoned investors. The app allows investors to share their experiences, tips, and results in their feeds and engage with followers.
Takeaway
A bug-free, engaging app helps you retain and turn users into loyal customers. Continuously engage customers throughout the app lifecycle with gamification features. Implement a stringent testing process to detect and solve all teething issues before onboarding any users.
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Mistake 4: Adding superficial features while neglecting fundamental ones
More features do not guarantee a better retention rate. Instead, the opposite is more likely to be true if you introduce features that don't contribute to a better user experience. Faced with a cluttered interface, users end up confused as they try to make payments. Or, they find the app barely valuable for meeting their financial needs.
Such a bad product/market fit often stems from an insufficient understanding of customers' needs. For example, 37 Coins provided Bitcoin transfer services via SMS. Despite its versatility, the company shut down 2 years later because it faced couldn't transfer Bitcoin reliably outside the US.
Adding too many features to a new fintech app takes away your focus on the important ones. Ultimately, you commit too many resources to build features that users don't need while neglecting those that are pivotal for your success. Moreover, testing too many features is tougher and increases the risk of bugs slipping through.
Solution
Listen to customers' wants instead of relying on unproven assumptions when building fintech apps. At Uptech, we conduct discovery sessions using surveys and interviews to identify users' pain points. Then, we propose a minimum viable product (MVP) consisting of essential features. This allows us to perfect the initial release and measures customer engagement accurately before adding more features incrementally.
Our approach reflects those of successful fintech apps. For example, WeChat's pivot from a messaging app to a payment wallet involves tapping into the cultural sensitivity of Chinese users. It introduces a feature that allows users to send monetary guise as virtual red packets. The move proves successful and enables WeChat to build a solid user base for its e-wallet service.
Altruist is a favorite amongst professional investors and is exclusive for Registered Investment Advisors. It provides tools that help financial advisors save time and money.
Chime, a neobanking app, makes receiving money from paycheck much easier. With a paid subscription, users can deposit by sending a snapshot of the paycheck and receive the fund 2 days earlier. Meanwhile, Stash offers personalized plans such as investments for kids, retirements, and fractional shares to cater to investors with different risk appetites and goals.
Takeaway
Prioritize features that add real value instead of superficial ones. Instead of banking on assumptions, validate them by seeking feedback from users. Involve them early on when developing your neo-banking app to deliver a solution that solves real problems.
Mistake 5: Using an unprofitable business model
Neobanks are profit-driven businesses, and founders must stir their ventures along the path to profitability. Unfortunately, only 5% of neobanks managed to break even, according to a survey by Simon Kucher & Partners. This emphasized the importance of using the right business model when running a fintech startup.
Business models provide strategic oversights on differentiating factors and tactical means to generate revenue. Some fintech startups fail because they operate without a viable business model. Xinja, a neobank targeting the Australian market, discontinued operation in 2020 because of a flawed business model, which offered the highest interest rate for deposits. The company struggled to generate profit as it took up too many deposits and offered too few loans.
Another P2P lender, Circle Back Lending, also shared a similar fate in 2016. While Circle Back Lending has a decent number of borrowers, many failed to service their loans. Sometimes, a shift to a new business model will affect investors' confidence, as Volt Bank found out in 2022. The move badly affected the startup's cash flow and led to its eventual failure.
Solution
Determine which business model is suitable for your app and will eventually be profitable. To do that, conduct a product discovery before developing the app. This allows you to identify a suitable business model or combine several viable ones. These are several popular ones that successful fintech startups use.
- A partnership enables fintech startups to share an agreed percentage of revenue with other business entities they collaborate with. At the same time, they offer rewards and cashback to users for using the services. This is a common business model amongst fintech companies and conventional banks. For example, Netherland bank ABN AMBRO partnered with Danish fintech company Subaio to provide recurring payment services to the former's customers.
- Charging a transfer fee is also a profitable business model for certain fintech startups. With this approach, neobanks charge a small fee for external transfers, P2P transfers, and other transactions. Wise charges at least 0.41% for each transfer their customers make. The London-based neobank also imposed a fee for different types of card spending.
- App subscription enables stable and recurring revenue for fintech services. Startups can offer several subscription tiers with access to specific financing features in the app. For example, Dave, a mobile budgeting app, charges a flat $1 monthly, while Neobanks like N26 adopt the freemium model, where users subscribe to different plans to unlock premium features.
- A referral fee is a commission earned when a fintech app recommends and sells a 3rd party product through its platform. For example, Credit Karma offers users free credit check services and earns referral fees through subsequent recommendations of financial products.
Takeaway
Profitability and cash flow issues stemmed from choosing the wrong business model. Founders should consider their unique propositions and identify a matching business model as a framework for their fintech startups. Sometimes, it's feasible to combine several revenue streams at different growth stages.
Conclusion
Fintech startup founders face tremendous challenges to grow their neobank apps into roaring success. Besides a functional app, you must anticipate security concerns, deliver an engaging experience, meet users' needs and ultimately, be profitable.
I've shared some of the most common pitfalls that you must avoid and tips to do so. Instead of tackling the fintech's technicalities on your own, you stand a better chance by collaborating with an industry-proven technological partner.
Uptech is an experienced app development company offering best financial software development services for startups and established companies. We helped startups like Aspiration build engaging geobanking apps that meet users' needs. Our team possesses both technical capabilities and an understanding of strict regulations that fintech companies must comply with.
Talk to us about building a secure, trust-inspiring, and intuitive fintech product.