Merging the convenience of digital banking with the personalized and tactile experience of traditional banking, “phygital” banking is transforming the modern banking market, empowering users to manage financial transactions both online and in-person using platforms such as mobile banking apps, websites, Automated Teller Machines (ATMs), and brick-and-mortar branches.
Registered users can unlock up to five pieces of premium content each month.
Log in or register to unlock this Insight.
Neobanks and Instant Issuance
Major regions of the world have seen a significant rise in neobanks (also known as challenger banks). These new agile financial institutions embrace a flexible approach to banking by providing innovative and compelling digital-first offerings. Critical to instant issuance, these market disruptors have a major advantage in their favor, namely their ability to tailor and install digital platforms from scratch to their specification and use this as a lynchpin to target new tech-savvy and underbanked populations. As a result, they are able to rapidly outmaneuver traditional banks with mature legacy platforms. New customers are attracted to the value proposition of this new model through offerings like:
- Instantly issuing and activating virtual payment cards in Original Equipment Manufacturer (OEM) mobile wallets, such as Apple Pay, Samsung Pay, and Google Pay.
- Spending limits and purchasing mechanisms for transactions made for a chosen type of product or service.
- Disabling a stolen or lost payment card instantly through the digital platform.
- User-accessible interfaces and platforms to display spending patterns by category and time frame.
- The near real-time ability to open new accounts without needing to attend a branch appointment.
The increasing digitization of payments, increasing data security, concerns around fraud, the shifting nature of business spending patterns stemming from the pandemic, and increasing public understanding of their advantages are pushing neobanks to the fore, alongside instantly issued digital-first payment cards rapidly gaining traction in both consumer and business sectors.
What Challenges Are Startups Currently Facing?
Neo and challenger banks must be aware of a number of key considerations around physical instant issuance. A significant number of these financial institutions fail to become profitable, with many being new startups with comparably no capital to invest compared to a traditional bank. Profitability becomes a significant obstacle as the emerging neobanks attempt to grow their limited user bases, while still channeling revenue streams. This highlights the importance of innovation—both from a physical and a digital perspective.
Differentiation is the arena in which financial organizations currently spar, whether it be in terms of sustainable materials, such as Polylactic Acid (PLA) or reclaimed ocean plastics, or next-generation technologies, such as biometric payment cards and Dynamic Card Verification Value (DCVV). These are some of the compelling offerings that new entrants seek to leverage to differentiate themselves from their competition. Flat card printing and instant issuance also open opportunities for orientation changes between landscape and portrait to the physical card, alternative and stylish designs, and even the opportunity for the end user to design their own custom card.
Startups and challenger banks do not have a significant amount of funds to play with when first entering the market, which makes it critical to get a payment card, the physical and branded anchor, into the hands of the customer, from which they can advertise branding and begin generating revenue. The strength of these new forms of banking lies in their digital instant issuance and online banking services, yet messaging on their webpages and marketing materials also assures customers that the physical card form factor is still one of their key offerings.
As COVID-19 posed a significant challenge for the payments market to overcome, many changes to the broader ecosystem are set to become permanent installments. In particular, from 2023 onward, we will see rapid growth in instantly issued digital card demand and market development through the forecast period ending in 2027. Alongside this, other agencies with a role to play in the industry, such as payment networks like Mastercard and Visa, issuing banks, and project managers, are preparing to launch their own compelling offerings, rapidly expanding their support toward neo and challenger banks that are seeking to supply virtual cards to their user bases.
A "Phygital" Approach and Looking to the Future
The rise of “phygital” banking aims to converge the separate physical and digital realms by blending both digital and legacy banking features into a hybrid model, which will assist traditional banks with keeping up with neo and challenger banks. By setting up a banking ecosystem that provides streamlined and simplified processes that are both physical and digital without compromising on the most compelling features, financial institutions can maintain their irreplaceability to their user bases, while maintaining their competitiveness against disruptors like neobanks.
The complexity of this process goes further than a simple launch of a mobile banking app to accompany in-person banking, as many incumbent high-street banks have done, and is instead a new banking philosophy that shifts attention toward the customer experience of how they interact with their bank. This phygital approach reinforces the importance of brand recognition and increasing interaction levels across all banking mediums, subsequently creating additional revenue channels. In the near future, phygital banking will give rise to trends like seamless banking experiences across multiple channels, including mobile apps, websites, and physical branches, as well as offering self-service solutions to customers across all channels to enhance customer engagement and reduce costs.