The rise of neobanks
Banking is fast emerging as one of the industries being most disrupted by digital innovation. Big legacy banks have long charged customers exorbitant charges, often offered very poor customer service and have been slow to innovate or to improve their product offering. It’s no surprise then that a number of startups have emerged to try to disrupt the status quo and to take a bite out of the multi-billion dollar retail banking industry.
Enter ‘The Neobanks’
Neobanks are entirely digital, cloud-based banks that reach out to their customers from web platforms and mobile applications. The first neobanks was launched in 2010, and have seen an explosive growth as evidenced by Figure 1 so that by the end of 2020 there were estimated to be over 250 live neobanks globally, with many more in the process of being launched. This growth has accelerated significantly in recent years with new neobank estimated to have launched every five days somewhere in the world.
Figure 1 – Neobank Worldwide Launches from 2010
Source: Payments, Cards & Mobile – 4th January 2021
Currently 43 neobanks are operating in multiple counties with Revolut and TransferWise being the most global examples operating already in 36 markets, with more in the pipeline. Figure 2 provides a broad overview of the main neobanks globally. It is evident that the UK has one of the highest concentrations of neobanks with 24 operating in the market by the end of 2020. The USA and Continental are other markets with high concentrations of neobanks. Asia, South America and Africa remain ripe for disruption and are likely to see an emergence of a number of neobanks over the coming years.
Figure 2 – Global Neobanks
Source: FT Partners Fintech Industry Research, January 2020
What they do differently
Neobanks typically have fast opening account times, streamlined and efficient systems, offer flexibility in their banking and access to a wide range of services. Neobanks provide a platform that not only has a current account, but also offers additional features such as payroll, expense management and automated accounting services.
As Neobanks do not have the legacy systems weighing them down like traditional banks they are able to be more agile in their innovation and able to use technology to quickly introduce new products and solutions. In doing so they can develop innovative user experiences and are able to launch features and embrace new opportunities much faster.
Unlike traditional banks many neobanks are also highly segmented with their customer focus, initially focussing on providing customers with one particular product or service. In doing so they are able to outperform traditional banks on customer service, products and margin to bring the offering to market. Examples include Revolut and TransferWise’s focus on international transfers or Habito’s focus on mortgages. This serves to give them a competitive edge. They are also able to reach vulnerable or underserved customer segments, for example Monese’s success in delivering services focussed on migrant workers needs.
So how are they doing?
It’s still too early to tell. Research from Accenture’s Digital Banking Tracker found that by the 2019 neobanks had nearly tripled their worldwide customer base, from 7.7 million customers in 2018 to 19.6 million customers globally with their growth rate of 150% outpacing traditional banks 1% growth rate. By the end of 2020 they this figure had skyrocked to 39 million users globally. Yet, despite this apparent growth many of the neobanks are struggling with reach profitability and ignoring significant losses. Monzo, one of the UK’s first neobanks reported an annual post-tax loss of £113.8 million in its 2020 accounts, up from the £47.1 million in 2019 and expressed “significant doubt” about its ability to continue “as a going concern”, due in par to the impact of Covid-19, whilst other neobanks such as Revolut has had to cut 60 staff recently in order to save money.
How much of a threat are they to traditional banks?
Clearly whilst neobanks are expanding they have a long way to go before they can truly challenge traditional banks and questions certainly prevail over whether they can survive long-enough to pose a long-term threat before they suffer such loses that they have to close. The recent demise of Xinja, one of the first neobanks in Australia, is evidence of this happening and it isn’t likely to be the last one.
Many neobanks simply do not have sufficient capital or a large enough customer-base in order to be able to scale quickly enough. With the notable of exception of Starling very few
neobanks are profitable or anywhere near being profitable, which casts considerable doubt over their long-term survival. Their ability to rapidly innovate to provide products and solutions to customers is likely to give them a strong competitive edge. Furthermore, by providing such innovative services they are likely to generate strong customer satisfaction, which is likely to convert into significant word of mouth referrals. Whether this will be enough to give them a long-term chance of survival remains questionable.
We believe that there are still significant opportunities for new neobanks to enter the market, especially in markets such as South East Asia, Australia and New Zealand. It’s also possible for traditional incumbent banks to innovate through various processes in order to compete more effectively. In doing so they can be more agile and adaptive to their customer’s needs and truly develop products and services that are likely to have a significant growth potential or to at least enable them to compete with these newer challenges.
We are committed to working with both new entrants and with the traditional banks during this disruptive period. Whilst there are many challenges they need to face we believe that banking will be one of the most disrupted industries as the traditional banks have, frankly, offered poor services and high fees for far too long.
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