Neobanks have emerged as a disruptive force in the 21st century financial set-ups. These banks are usually online-based digital platforms, enabling hassle-free customer onboarding through websites and mobile apps.
Since neobanks don’t have physical branches, the customer fees get lowered too. These organisations also provide hyper-personalised services, while letting the customers open their accounts through one click on their smartphones.
Procedures like KYC, payments/transactions, personal budgeting and employee salary disbursal can be performed in just a few minutes as the neobank app interfaces are known for being well-organised, and user-friendly. With a heavily customer-focused design and brilliant response rates, these neobanks function at a pace unimaginable for conventional banks, as the latter have been stereotyped for long customer queues and time-consuming operational procedures.
A neo-bank makes its decisions based on data mining methods. By using AI, machine learning and predictive analysis tools, these banks monitor and decode customer activities, before drawing up customised financial products and services.
Talking about neobanks’ popularity, let’s take India, the world’s fifth-largest economy as a case study.
Digital payments in the country have been witnessing a sharp growth curve in recent years. In 2020, India recorded 48 billion digital transactions, and will likely account for 71.7% of the total payments volume by 2025, if the words of S Anand, the founder and CEO of PaySprint and SprintVerify, are to be believed. The South Asian country’s millennials and Gen-Z are embracing neobanking now. The same trend has been noticed in Brazil and Ireland too.
Is financial trading next stop for neobanks?
Neobanks are providing a faster, more secure and more efficient way of banking than ever before. As the 21st tech-savvy population gets more familiar with the trend, it is resulting in a higher adoption rate too.
“As neobanks have sought to grow at a rapid rate, they have gone primarily after customer acquisition and retention, and market penetration. However, as they have done so, many have expanded almost too quickly, spreading themselves too thin,” commented Andrew Grevett, co-founder and CEO of Market Dynamics.
What does that mean?
Although neobanks have become a rage, some of these online-only entities have also missed key new trends that could impact their initial product or innovation, while others are trying to open as many accounts as possible to better their customer onboarding ratios, without working out how to make the overall operations profitable.
A report by Simon-Kucher & Partners has found that the overwhelming majority of these neobanks have failed to make a profit. As per the study, by May 2022 alone, there were roughly 400 neobanks around the world serving close to one billion clients. The industry was worth around $300 billion. However, profit generation has been a key worry for these digital-only banks.
To offset this, Grevett suggested neobanks focus on selling value-added services to the customers. One of them can be financial trading, which has peaked in popularity over the last few years, particularly during the COVID-19 lockdown.
“It’s a natural fit, considering neobanks already have access to huge amounts of customer data that they have built up over a sustained period. This provides them with rich insight into their customers’ spending patterns and behaviours, as well as their current finances, and, thus, be able to offer them a customised trading solution that fulfils their requirements,” he stated further.
We already have the example of London-based Revolut launching its commission-free stock trading platform in 2019, a move which helped it to report its first full-year profit in 2021.
“More than half of its revenues stemmed from foreign exchange and wealth services, and, subsequently, it has made the addition of new services a priority moving forward,” Grevett noted further.
Is the idea feasible?
As per a tech.eu report, neobanks, as a disruptor in the global financial market, have enjoyed only mixed successes as of 2023, with most of them now facing the conundrum of profiting from their increasingly enlarged businesses.
“The likes of Revolut, Monzo, Starling, N26 and Bunq have garnered tens of millions of mainly younger customers across the continent, enticed by their whizzy technology, flashy cards and almost cult-like status. But the quintet, generally speaking, are rare successes in a nearly 300-strong neobank market overwhelmingly populated by loss-making startups, and many which have failed altogether,” the report stated, while narrating the neobanks’ ordeals in Europe.
In the United Kingdom, Starling, valued at more than £2.5 billion, made £32 million in 2022, its first annual profit. Monzo, valued at £3.8 billion, made a £119 million loss in 2022, and is now eyeing “profitability” by the end of the 2023-24 financial year.
Meanwhile, traditional banking giant HSBC made a whopping profit of £14 billion in 2022. Amsterdam-based Bunq, valued at £1.6 billion, reached quarterly profitability for the last quarter of 2022. In Germany, N26, valued at £7.6 billion, registered losses in 2021 of £153 million while its rival Vivid Money is on track to be “operationally” profitable by the 2023 end.
Yes, the neobanks have continued to disrupt the market and generate impressive customer onboarding ratios, but the feat is not converting into sure-shot profitability.
Despite garnering massive funding over the last eight years, these neobanks have been over-reliant on card transaction fees as a primary revenue stream, a strategy which experts and industry stakeholders have dubbed as an unsustainable one. So, these institutions are now broadening their revenue streams.
Revolut, which emerged in 2015, wants to be the financial ‘super app’ and now provides value-added services like currency exchange, stock trading, crypto, peer-to-peer payments, travel, insurance and even instant messaging. Experts now believe that investing in areas like lending, SMB market and paid-for subscription offerings can do a world of good for these neobanks.
Grevett further emphasised that since neobanks already have vast amounts of customer data at their disposal, they can easily start their trading services. These data, collected over a long period, will help these neobanks to get a predictive analysis of their customers’ financial situations and spending habits, which in turn will help these entities to draw up personalised trading offerings.
“The problem is, however, that, while digital banks have made good progress in terms of opening up new trading services, the majority still don’t offer any such product directly to their customers. Of those that do provide trading as a service, half only offer access to one financial instrument,” he stated.
“The chief reason is the complexity of establishing such a service. As well as the initial development of the necessary financial infrastructure, workflows and logic, neobanks need to secure regulatory licencing to ensure that they remain compliant,” Grevett remarked further.
What’s the way ahead then?
Grevett believes that neobanks need to team up with innovative Fintech start-ups that are already providing trading services. He talked about how Revolut generated more than half of its 2021 revenues from foreign exchange and wealth services.
“The key enabler is technology. After all, the most successful neobanks go beyond merely providing a slick customer experience – they understand their pain points and solve them,” he commented.
In short, neobanks need to leverage their digital services and tools further to continue their pursuit of offering more and more personalised financial products and services, be it trading services or anything else.
The 21st Century customers prefer customised banking solutions which meet their financial needs. Data analysis will be a potent tool for the neobanks to hit the sweet spot called ‘customer satisfaction.’
The more satisfied customers are, the more they will be loyal to their bank and in the best-case scenario, will recommend the entity’s services and products to others. It will result in more customers and less churn, resulting in greater overall revenue growth and profit margins.
“At the end of the day, it’s a no-brainer for neobanks to offer trading services, given its rise in popularity over the past few years and the surge in investors during the COVID-19 pandemic as people were required to stay at home through the lockdown. As demand continues to grow, so they need to make sure that they are providing these services moving forward,” Grevett concluded.