As Covid-19 reshaped the financial landscape around the world, the flexibility of services offered by the expertise and structure of Neobanks proved the institutions to be considerable challengers to incumbent traditional banks.
But is the good news to last? Do Neobanks boast the capability to rival the reputation of the industries biggest players? These are questions explored and answered by Arina Kulackovska, Head of Corporate Payment Solutions at the international crypto exchange CEX.IO.
Offsprings of fintech, neobanks are the teenagers of modern finance. More agile by design than their incumbent counterparts, they are quicker to embrace trending technologies, in particular crypto.
Still, tightening regulations and the aftermath of the pandemic pose challenges for the new banks – while the old ones are doing their best to keep up with the competition. So the question is, can neobanks thrive in today’s economy without compromising their most significant asset: their flexibility?
Neobanks, or challenger banks – such as Revolut, Monzo, Starling, and others – first appeared on the market several years ago. According to a report by Exton Consulting, today their number goes up to the impressive 256, as from 2019 and until now, a neobank was launched every five days somewhere in the world.
Rather than having physical branches as traditional banks do, challenger banks are purely digital; they reach their clients through mobile apps and web portals. Most of them have the same basic features: a modern, user-friendly interface, reduced rates, easy KYC process, instant chat support, and loyalty programmes.
Yet, this is not the main secret behind the popularity of neobanks. Using public APIs and e-Money licenses allowed them to develop new products around customer needs and respond to the demand incumbents are not meeting. Take the growing adoption of digital currencies: today, new banks are more willing to engage with crypto-related transfers, which the legacy ones treat as high-risk. Add to that their flexibility and speed, – and we’ll get the perfect instrument for everyday transactions.
Considering all the above, it would seem that neobanks are in many ways superior to legacy banks. So what is hindering their ascent?
The Challenges Neobanks Are Facing
The first catch is regulations. Several challenger banks have already applied for a full banking license; others acquired traditional banks to develop their products (or were a subsidiary to one in the first place). The question is, will they be able to both comply with regulations and preserve their speed and flexibility? Or will neobanks be devoured by the same old-fashion machine they have been competing with?
Second, the competition is getting serious. Today, many of the incumbent banks are catching up with neobanks as far as UX is concerned. Historically, the former have more resources – and therefore more opportunities for development, as well as more room for handling a mistake or a crisis. They also have more trust: both from customers and regulators. On one side – according to numerous reports – even though the customer is more likely to pick a new bank for everyday operations, they would rather choose a traditional bank to keep their savings or give them a loan. On the other, incumbents have built long-term relationships with local regulators, undergoing repeated checks of their license.
And third, most neobanks focus on non-interest income. As long as they have less than 10 billion dollars in assets, they are eligible to collect up to 1.5% of transactions as interchange fees: that’s seven times more than bigger banks are allowed to take. However, with the Covid-19 pandemic breaking out, the number of daily microtransactions has decreased, cutting their revenue and challenging neobanks to seek new business models.
There are a few opportunities neobanks can pursue to profit in today’s economic climate. One is finding new ways of getting income, e.g. selling premium subscriptions. Another is introducing new products beyond banking: such as building native marketplaces or offering lifestyle services along with the financial ones.
With a full banking license, challenger banks will be able to give loans to individual and corporate clients. Besides that, there is great potential in providing banking services for small to medium-sized businesses, while some of the new banks might choose to explore investing, opening brokerage accounts for their customers.
And lastly, as crypto and blockchain are raising massive funding round, crypto-friendly neobanks share the glory. I expect that those of them, who – like Revolut – choose to offer access to crypto trading and give the green light to crypto-related transactions, will be seeing a stable inflow of new clients from the crypto sector.
How the situation will develop remains to be seen, as there are many social and economic factors in play. However, if the neobanks manage to both evolve and keep their best qualities – speed and convenience of crypto payments – they will enrich the finance with new products and solutions.