The rise and potential of niche banking

A guest editorial by Nick Root, co-founder and chief executive officer of Intergiro

Fintech has paved the way for a new generation of banks, offering enhanced functionality, service, and customisation for both consumers and businesses. Following in the footsteps of digital banks are neobanks, green banking, invisible banking, and tribe banking. However, one of the most intriguing models gaining significant traction is niche banking. 

So, why is niche banking finding such favour? And how can fintechs step into the niche banking space? 

Understanding the role of niche banking in the contemporary business ecosystem 

Twenty-five years ago, the UK financial services sector was dominated by five core banks – HSBC Holdings, Lloyds Banking Group, Barclays, Standard Chartered, and NatWest Group. For decades, these banks operated with little differentiation, offering limited choice to business customers. While the largest companies had access to a range of services, small and medium-sized enterprises (SMEs) were often left behind. For businesses with unique models, this meant struggling to fit within rigid banking structures. Products and services simply didn’t meet their needs. 

The advent of fintech has dramatically changed this landscape. Banks are no longer bound by traditional systems and technologies. They can now create services and products tailored to their organisation and customer base. And this is where niche banking is turning things into an art form. 

What differentiates the niche bank? 

Niche banks focus on specific market segments and address the unique needs of their chosen communities with specialised banking solutions. For example, Reid Temple AME Church Federal Credit Union in Maryland aligns its services with church schedules, while Paragon Banking in the UK caters to the buy-to-let market. The aim is straightforward: provide targeted financial services that truly meet community needs. 

For customers, this means working with a bank that understands them, reducing the need for constant explanations and offering seamless access to relevant products. 

From a business perspective, the case for niche banking is clear. It offers a targeted market, a strong brand focus, reduced competition, and the potential for greater customer loyalty—if the right services are delivered. This is particularly important as, despite the rapid expansion of the neobanking market, profitability remains elusive for many. As of 2024, only a few neobanks, such as Monzo, Revolut, and Starling Bank, have achieved profitability, underscoring the need for focused, efficient operations. 

Niche banks, however, stand a better chance at profitability by focusing on high-value, underserved segments. By minimising the operational costs of serving everyone and concentrating on a specific group, niche banks can achieve a faster route to profitability. They also benefit from lower customer acquisition costs and the ability to charge higher fees for specialised services, making profitability more achievable even with a smaller, targeted audience. 

Challenges for niche banking 

The flipside of focusing on a single market is the limitation of a finite customer base, which can leave banks vulnerable to market changes. Economic downturns, changing customer needs, or regulatory shifts could present challenges for niche banks that are too narrowly focused. Therefore, it’s crucial for niche banks to remain agile, leveraging fintech solutions that allow them to pivot quickly and offer new products or services as needed. Overall, however, the benefits outweigh the risks. 

How to build a niche bank: a roadmap for neobanks and fintechs 

Unlike the first generation of neobanks that had to create their own technology stacks, today’s fintechs can leverage Banking-as-a-Service (BaaS) platforms to launch quickly and affordably. Providers like Intergiro, Swan, and Solaris offer powerful, pre-built banking infrastructure that allows new entrants to rapidly test niche markets without a heavy up-front investment, enabling them to focus on creating a unique, value-driven model. 

By leveraging these platforms, fintechs can concentrate on understanding and meeting the specific needs of their communities while the BaaS provider handles the technical, regulatory, and operational complexities. For an even faster approach, no-code white-label banking platforms make it possible to create a fully functional banking app without writing a single line of code.  

Community-centred: building loyalty and value 

Niche banks succeed by closely aligning with their communities’ values and needs, delivering tailored services that solve real challenges. This community-centred approach strengthens customer loyalty and sets niche banks apart in a commoditised digital landscape. 

With a clear, focused value proposition that resonates with their audience, niche banks attract and retain loyal customers who feel understood and valued. This targeted strategy allows niche banks to deliver specialised services that meet specific needs, fostering both profitability and long-term customer satisfaction.

Image: Intergiro

Guest Editorial This article was produced specially for Fintech Intel by an expert guest contributor.