Dawn of the digital banking – Neobanks

• Rise of neobanks
• A look into neobanks by region and players
• Road ahead for neobanks

The traditional banking sector, in recent years, has witnessed a new challenge with the rise of a new breed of digital-only, neobanks. They are fully digital financial service providers providing a range of services including banking apps and products such as payment and money transfer, individual and business loan, overdraft facilities, savings account and tips for saving and budgeting thereby offering an immersive customer experience. The first prominent neobank originated in the United Kingdom with the emergence of Atom Bank and Monzo. Their growth and popularity were because they provided banking to the unbanked at a lower cost. As per data by Zion Market Research, a research and analytics firm, the global neobank market, which is valued at $18.6 billion as of 2018, will be registering a CAGR of about 46.5% between 2019-2026, generating about $394.6 billion by 2026. There are many reasons for this growth, such as – the convenience, lower interest rates as compared with the traditional banks and also because of the faster and smaller size loans provided by it over a very user-friendly platform.

Of all the regions, Europe has been the perfect example market owing to favorable regulatory policies that are needed for the functioning of the neobank. The guidelines by the Payment Service Directive Law administered by the European Commission to regulate the payment service and payment service providers has eased the landscape allowing the fintech firms to securely access customer account data which was earlier a right only provided to the traditional banks. The European government has also eased the banking license procurement procedure opening doors for fintech startups to flourish. Some very prominent players in the sector include – N26, valued at about $3.5 billion with about 3.5 million users; Monzo, valued at about $2.6 billion with about 2 million users; and Revolut, valued at about $1.7 billion with about 7 million users. As per reports by ATK research, the customer base of the neobank in Europe has grown by a massive ~15 million since 2011, while the retail base customer has declined by about 2 million.

Other regions with such shining examples include Latin America as well with Nubank, which is now being valued at about $10 billion and hitting customer growth at a very exponential growth rate, with a reported 8.5 million users. Also, more regions which have been bringing out new policies for digital banking include Hong Kong and Taiwan, while Singapore, Thailand and Malaysia are also expected to roll them out soon. However, China remains the country with the biggest prospects of growth for the neobank players. Huge pool of underbanked customers coupled with the increase in the mobile banking customers will be the catalyst for growth. Leading the neobank revolution in China is Alibaba’s Jack Ma’s MYbank, which in four years has lent about $290 billion to nearly 16 million small companies with a default rate so far of only about 1%!

Despite neobanks’ success globally, its success has been rather slow in the United States, the home to some of the oldest neobanks such as Simple (founded in 2009) and Moven (founded in 2011). This is largely because of the very difficult regulatory regime in the United States to obtaining a banking license which has been the major stumbling block for the US digital banking system to catchup other regions such as Europe, South America and Asia-Pacific. Though this scenario is changing off late with new home-grown players venturing into the sector with much success, such as SoFi which is valued at about $4.3 billion with a user base of approximately 7.5 million and Chime which is valued at about $1.5 billion with a user base of about 5 million, while other international players are also expanding across its borders to capture the American market.

With many players delivering fairly good future prospects for the digital banking sector with their massive valuations and user base, many venture capitalists are also now flocking to the sector to invest their funds to join the digital banking revolution. As per data by CB Insights, the first nine months of 2019 has been a very lucrative one for the sector with venture capitalists across the global flocking in and pouring in $2.9 billion into neobanks,, higher than the whole year of 2018 when the total investment was $2.3 billion. Also, at this rate of funding, 2019 can see the funding inflow exceeding that of 2017 and 2018 combined.

Because neobanks are a fully virtual service provider, getting customers on board is not the easiest of tasks because customers have an ongoing issue of trust. Additionally, they are still unable to match the services of the traditional banks because of many different regulatory problems across different countries. But they do make life easier for their customers offering state-of-the-art platforms at a very competitive price.  And considering neobanks provide all of their services via an online platform, it has eased their ability to collect and analyze data, thereby helping them understand consumer behavior to better serve them, which has been the key to their success.

Armed with huge influx of cash, there is plenty of room for neobanks to increase the service portfolio and that could see them giving stiff competition to the traditional banks. Also, as tech get smarter these neobanks will evolve more, venturing into new avenues for delivering the financial services. How they evolve with their products and services and manage their challenges in terms of regulatory measures across economies, while also handling the security concerns will determine their success. Neobank have only recently arrived and they have a long way to go before we can actually arrive at a data driven conclusion on how well they have done (or not). Yet it is a given fact that neobanks are gaining momentum and posing stiff competition for the traditional banking sector.