Why Are Some Neobanks Reinventing Their Business Models?

Neobanks started a paradigm shift in financial services with a customer-centric core, which legacy banks could not offer. They also managed to gain customer trust with cost-effective, simplified, relevant, and improved targeted services. 

Growth of Neobanks 

A rise in the number of digital-savvy customers has led to the emergence of neobanks over the past six to seven years.

Here’s a look at some leading neobanks across the world: 

Regulatory rollouts such as PSD2, UK’s Open Banking Standards, and UPI have enabled neobanks to develop as the new players within the banking ecosystem.

Chime is the largest US neobank with the most sought-after mobile features among the top neobanks. The number of account holders is projected to grow from 7.4 million in 2019 to 19.8 million in 2024. 

Revolut’s rapid expansion since its launch in 2015 is one of the biggest successes in the neobanking space. Over a span of five years, Revolut has established itself in more than 30 countries, gained 13 million customers, and processed over $40 billion in transaction value. 

Sterling, a six-year-old neobank, achieved break-even in October 2020. Sterling continues to build a sizable SME loan base through which it generates over 60% of its revenue.

With 20 million customers, Nubank is the largest independent neobank in the world. One of the reasons for Nubank’s scaling up in Brazil is its POS penetration that is on par with many western countries. Nubank benefits from a lower cost of funds from deposits by having customers leverage their bank accounts. 

Neon digital bank focused on SMBs and created a small business payroll management offering to fund accounts for Brazil’s payroll industry. 

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The Missing Links in Neobanks’ Growth Trajectory 

It may seem like it’s a well-laid-out path for neobanks, but it’s not the whole truth. Many neobanks are finding it difficult to tread further. Collectively, neobanks have secured millions of dollars in funding to scale rapidly.

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Here are some key influences on the downfall:

• Traditional banks modernizing their offerings using FinTech are leading to higher customer acquisition costs for neobanks.
• Unlike legacy banks, neobanks don’t offer the alternative of a branch in case of outages. Thus, the perception of neobanks as riskier than incumbents for cybersecurity and continuity of service/outages is seen as a setback. 
• A push from investors and management boards to demonstrate the monetization of products is leading to profit.
• There’s difficulty in raising capital from the market amid the economic impact of COVID-19. 
• The lack of funds for lending has increased SME credit demand.
• There’s high reliance on payments and interchange.
• Larger neobanks are focusing on strengthening stand-alone unit economics.
• Fewer customers are shifting to neobanks as their primary account. For instance, in the UK, less than 10% of consumers use neobanks as their primary accounts.
• Traditional banks are filling their gaps, which initially led to customer migration. Customers, on the other hand, are completing the cycle of trying fresh, new, digital-only products. Thus, customer lifetime is reducing, consequently increasing the cost of acquisition for neobanks.
• A vast majority of neobanks are making changes to their fee structures, thereby increasing existing charges and introducing new ones. 

Neobanks Are Pivoting to Focus on Unit Economics and Profitability

All is not grim. The neobanking space will continue to grow as neobanks offer more specialized products and services, greater transparency, cost-effective products, and easier access to financial services. The global neobanking market size is expected to reach $722.6 billion by 2028, according to a new report by Grand View Research.

However, the overall sustainability depends on customer monetization, operating with the most suitable business models, and proportionate funding. The pandemic showed that neobanks perform better than incumbents in unusual circumstances.

Yet, the pressure on neobanks to create a path of profitability and sustainable unit economics is driving them to build new revenue streams such as paid subscriptions and more. While it’s alright to introduce new revenue models, it’s also important for neobanks to be more transparent and affordable to continue earning their customers’ trust. Neobanks also need to dedicate more resources to cybersecurity and prevent outages, such as those faced by Chime, Monzo, and Revolut. Neobanks need to demonstrate that they are just as reliable as the incumbents and build on their trust quotient. As with any business, those that survive the economic downturn will have a great future ahead.

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