A deep dive into the neobanks across the globe — Part I
If you do a fundamental analysis on global neobanks, you’ll understand that it is still in its nascent stage, except for some parts of the world like the UK, the US, and Asia. Despite being at a nascent stage, neobanks are already making a mark in the global banking industry. This can be inferred from the increase in customer deposits and transactions in recent times.
One of the primary reasons for the upsurge in neobanks across the globe is the Open banking initiative which came into force on 13 January 2018. From Open banking days, fintech has come to a long distance by disrupting incumbent financial systems & organisations that currently rely on BAAS (Banking-as-a-service) and BAAP (Banking-as-a-platform).
BaaS allows third parties to consume services to invent a new business via API banking. BAAP is a digital marketplace that exposes banking services and the services of other players.
Fast forward to 2021, we have a list of diverse & well-funded neobanks across the globe. Many of them have been launched recently, in the last couple of years, and we can expect many more in the next few years as well.
What are the different types of neobanks?
With the increasing internet consumption & usage of mobile phones, neobanks present an immense potential. They can bring the young and the people who don’t have access to banking services with the launch of different neobanks.
Now, let’s get to some basics.
Firstly there are two different types of neobanks in terms of their operating models -
(i) Full-stack neobanks, and
(ii) Front-end-focussed neobanks
Full-stack neobanks have a banking license. These neobanks can accept deposits and provide loans and also control the end-to-end banking operations. Monzo, Revolut are examples of full-stack neobanks.
On the other hand, Front-end-focussed neobanks don’t have a banking license. They partner with a licensed bank to receive deposits and provide loans. They only control the front end (i.e., the customer interface) and use APIs to provide banking services to their customers. Neobanks like Open, Fi are examples of Front-end focussed neobanks.
They have freemium or multi-tiered subscription pricing strategies. In a freemium model, most basic banking services like accounts, transfers, withdrawal, debit cards, etc., are free of cost. Neobanks could provide such services for free because they save on the cost required to set up physical branches, labour expenses, and other costs related to traditional banking.
Here they charge for additional features such as analysing the user’s finances or helping them invest their money or generate different cash flow reports for their business and so on.
Multi-tiered subscription plans are like freemium pricing, but instead of features, they arrange the subscriptions across account tiers. While the standard account is normally free, the other accounts ask for monthly or yearly charges and offer an elevated set of features.
Revolut follows this strategy and offers a free basic account, a premium account. In the case of front-end focussed neobanks like Open, they too have similar pricing where there is a free basic account (Solo Plan), and two premium account options — Startup (₹600/month) and Growth (₹ 900/month)
How good is the global market for neobanks?
The global neobanking market is expected to reach $356 million by 2025. These neobanks have mastered the banking activities from the backend to the front-end. They focus on a lean, asset-light & platform model to create a better customer experience.
Neobanks are building the entire technology stack from scratch in-house, leveraging data and analytics for fuelling innovation, and employing a lean model, offering greater control and flexibility to respond to customer needs.
As shown in the graph below, neobanking can disrupt SME banking and wealth management the most. (Source)
While most traditional banks still have different fees for different services, neobanks have figured out monetising key features is the way about it. The freemium strategy adopted by the neobanks is expected to grow over the next few years.
Over the next few years, the focus will be on boosting growth through the purchase of specific assets and accelerated rates of mergers & acquisitions. The product focus will lean toward entrepreneurs, SME lending, and consumer mortgages.
How are neobanks picking up globally?
Consumers mostly prefer neobanks for the speed, transparency and the user-experience. Neobanks have a quick and simple way of opening an account. They don’t keep any monthly charges, hidden fees or minimum balances. They provide feature-rich apps and tools at lower costs.
Apart from all these factors, neobanks have included even the micro-segments of the population to make banking available for the currently unbanked people. They also provide next-generation customer support with chatbots, video banking, and interactive content in real-time.
Consumers across the globe value trust, control and simplicity of the neobanks. Millennials rank digital self-service as the most crucial factor, according to Finnovate research.
If you look at the region-wise break-up, it shows the maximum concentration of neobanks in Europe, followed by the Americas.
Europe has been the best spot for neobanks mostly of this decade. According to AT Kearney’s research, European neobanks’ customer base has grown by over 15 million since 2011. Retail banks’ customer base, on the other hand, has gone down by 2 million. By 2023, Europe’s neobanks will win up to 85 million customers, reaching over 20% of the population above 14 years of age.
When you compare Europe to the US, the latter seems to lag in the growth of neobanking. It is important to point out that the US is the home of some of the oldest neobanks like Simple (founded in 2009), Moven (founded in 2011), and some relatively new neobanks such as Chime, Varo, and Aspirations.
However, neobanking has failed to attract US customers in the last ten years, and just 3% of millennials have opened a primary checking account in a digital-only bank.
European neobanking appears to be the only success story so far. There are a few interesting case studies in Latin America, such as Nubank, which was recently valued at $10 billion–it has achieved exponential growth in its numbers of customers.
While both these markets have a good number of neobanks, the growing market now is Asia, particularly India and China. Real growth is being unlocked in the APAC region, where many countries plan their virtual banking regimes. Hong Kong, Taiwan, and Singapore have already rolled out their virtual banking licensing, while Thailand, Malaysia, and probably India are expected to follow suit in the years.
Clearly, neobank fever is spreading around the globe. It can be inferred primarily from the growth that we have observed. Neobanks is expected to grow at 46.5% to generate revenue of around $ 394.6 billion. At the moment, close to 17% of the total fintech funding went to neobanks alone. The high adoption rates and successful business models will bring more & more such firms to the market.
That is all about neobanks from around the globe. In this article, we saw how the concept of neobanks has picked up globally. It will continue to accelerate due to the ongoing pandemic and increasing digitalisation.
To understand the growth of this segment in India, we suggest you go through our chapter on Indian neobanks.
