How neobanks are disrupting the banking space

By Sarath Babu
July 17, 2020
5 min read

If you are someone who follows the fintech space at close heels, you would have definitely noticed the buzz word ‘neobanks’. While they were pretty popular in the US and European markets, it’s only recently that they hit the buzz wave in the Indian market.

For years, banks struggled to cater to the needs of businesses from end-to-end. And financial regulators across the globe have been working closely with banks to offer a seamless banking experience. And all these initiatives together lead to the emergence of ‘neobanks’.

Mapping neobanks across the globe

When it comes to digital banking, the UK dominates the rest of the gang. The first few neobanks were fueled by the Dotcom boom in the late ‘90s. Another factor that gave them an edge in this space was the introduction of common banking guidelines for the whole of the European Union. This helped the neobanks in the UK to rapidly grow their customer base while being compliant with the regulations. The first set of neobanks that emerged from Europe include Revolut, N26, Starling Bank, Monzo, Atom Bank, and Tandem.

According to Accenture’s digital banking tracker, over the past few years, neobanks have nearly tripled their customer base from 7.7 million customers in 2018 to more than 20 million in 2020. So much so that, at 150%, the growth rate of neobanks outpaces that of challenger banks (25%) and incumbents (1%).

Digitization through collaboration

Around the world, there is a rising shift towards the digitization of banks. So much so that banks are now partnering with fintech companies to explore new possibilities. Let’s look at the three such ways:

(1) Direct investment:

It is amazing to see that a couple of big banks have made direct investments in various neobanks. And these investments are primarily aimed at facilitating the digital transformation of partnered banks.

(2) Strategic partnerships:

In such collaborations, new technologies and services built by neobanks are integrated into the banks’ applications.

(3) Mergers and acquisitions:

Over recent times, the growth strategy of banks has evolved from accelerator programs to acquisitions. As per the Medici’s report on neobanks, almost one in three banks and asset managers have plans to buy a fintech company in the next 12 months.

Why do banks need such partnerships?

With these partnerships, customers and businesses will have access to more personalized financial products and services–right from transactions to payments, savings, credit, and insurance.

Here are a couple of challenges that financial institutions across the world are trying to address by partnering with fintech:

(1) Access to new segments:

Now, it isn’t feasible for banks to open up physical branches in every other remote area. With most people opting for low-value accounts, the returns would be very very minimal. For example, the partnership between the French multinational insurance firm AXA and another insurance provider MicroEnsure has helped the former in creating new insurance products for new segments at a much lower cost.

(2) New solutions for customers:

Creating innovative solutions via partnerships is one brilliant way to bring in more regular and uniform revenue from existing customers. For example, Stanbic Bank had collaborated with an African fintech company DreamOval to offer a mobile payment platform for its customers called Slydepay.

(3) Collect, use, and manage data:

Using data in banking has become a necessity to keep up with the competition. Banks are leveraging the expertise of fintech to collect and use customers’ data to create alternative risk modeling techniques. For example, Mexican fintech company BBVA Bancomer partnered with a Latin-American lending company Destacame to provide financing solutions for lending in Latin America.

(4) Boost your customer engagement:

Through these partnerships, banks leverage digital tools to gain a better understanding of how customers engage across touchpoints.

Partnerships for mutual growth

For a while now, neobanks have been partnering with other fintech /neobanks to extend their set of services to customers at a much lower cost.

They have placed their bet on such partnerships with a vision to build a service marketplace that is centered around banking operations. Given that the UK’s Open Banking standards and the European Union’s PSD2 protocol are now in effect, it’s likely that more challenger banks would come forward actively seeking partnerships with fintech.

Starling Bank, a challenger bank based in the UK, has already teamed up with 25 fintech startups to launch an API marketplace in 2019.

Reshaping the banking space

The emergence of neobanks has reshaped the entire banking landscape by offering more digital financial services. Here are a prominent few:

(1) Demographic focussed platforms:

There are neobanks that focus on building niche products that cater to specific demographic segments. For example, Open offers credit cards and a business banking platform that is built ground up for startup, SME, and freelancer business segments.

(2) API platforms & ecosystem:

With the emergence of API Banking providers, businesses can now build & launch best-in-class financial products & offer enhanced user experience with great ease. Much of the innovation in this space is concentrated around payments and lending. For example, Open offers developer-friendly APIs around payment, deposit, cards, thus empowering fintech companies to build and launch innovative financial products.

(3) Banking-as-a-service (BaaS):

BaaS exposes banking APIs and processes to third-party developers. To date, BaaS is broadly classified into three different categories – API stores that will help build better banking services for consumers & fintech, white-labelled platforms, and BaaS as a co-branding proposition to traditional banks.

Key trends to look out for the next 5 years

With an estimated user base of 39 million globally and ever-growing attractive propositions, the valuation of neobanks has skyrocketed. Over the next five years, the global banking space will witness the inception of new neobanks and a plethora of new services from them.

Let’s look at some of the key trends that are going shape up the neobanking industry for the next five years:

(1) Cost Management:

Mounting pressure on cost management will drive banks to collaborate with neobanks. With a quarter of banks already struggling to keep costs under control, proper cost management will help banks turn profitable. Given this, one in ten banks is likely to consider merging or forming strategic alliances with neobanks.

(2) More capabilities and more users:

It is estimated that over 98 million people will use neobanks in 2024, as more tech-savvy consumers become the bank’s customers.

(3) Multi-channel:

A simple branch network will become a thing of the past with the emergence of a multichannel network to meet consumer and business needs. By 2023, most of the prominent banks would have closed thirty-per cent of their branches.

(4) Lifestyle platform:

With 7 out of 10 Indians ready to share their personal data, banking platforms will soon turn into lifestyle platforms. So much so that, by 2023, platforms will combine financial services with other aspects of daily life & business life, such as online shopping, B2B marketplace, etc.

It goes without saying that neobanks will continue to grow and increasingly gain customers. Now, with the onset of the COVID-19 pandemic, there has been a rise in the adoption of digital banking services. And neobanking has a lot of innovative solutions to offer on this front. Open today powers over 500,000 businesses to manage all their business finances digitally.