Will 2022 Be Good for Neobanks?

Even if you haven’t realized it yet, neobanks are already an important part of the financial services industry. Grand View Research data shows that the global neobanking market was valued at 34.77 billion dollars in 2020. According to the report, the new industry will continue to grow fast — at a CAGR of 47.7% from 2021 to 2028.

Even before the pandemic, the neobanks’ consumer base was quickly expanding, but COVID-19 has undoubtedly accelerated this trend. 

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Neobanks have revealed the vital need for innovation in the conservative banking services space to enhance the present financial system and make it more affordable and more easy-to-use. It seems that neobanks are now reformatting the banking landscapes, significantly changing the way financial institutions will serve customers in the future. 

The problem with traditional banking

Why are so many people turning away from traditional banking, which proved to be reliable and safe, and choosing challenger banking services instead? 

One of the biggest disadvantages of the traditional banking system is the necessity to spend much time on document gathering and visiting the bank’s branches. 

Depending on the country, the decision process of the financial institution may take long too. Another challenge is that incumbents continue to turn many customers away based on various reasons, low income, lack of credit history, industry uncertainties, and so on.

One more critical reason behind the neobanks’ success is that the traditional banks’ services can be quite costly, while many customers name low fees as the number one reason for picking a particular service provider. 

Finally, when it comes to traditional banking, even well-established brands are not so good at providing value-added services to their clients, and so few of them target a specific customer group (e.g., students).

Whatever the reasons are, clients, both individuals and businesses, feel a lack of choice and aren’t able to find the right financial service provider. Since banks ignore reality and are rarely ready to back away from entrenched standards of work, new players are emerging to respond to the growing market demand. This is where neobanks come into play.

Neobanks to the rescue

As with many new trends in the world of technology, neobanks can still be too new to easily accept. What are neobanks anyway? Are they the same as digital or challenger banks, or is it an entirely new concept?

Are neobanks special?

Neobanks and challenger banks are digital organizations that challenge the traditional banking foundations and rules. Both can be classified as software-driven businesses that are tackling the problems of the financial space with new approaches using new perspectives.

When it comes to neobank vs. challenger banks, these are often used as synonyms. Nevertheless, they have some differences.

Neobanks do not have bank branches. They rely on a “mobile first” approach. Intuitive and user-friendly apps are the core of their business. 

Challenger banks typically address a broad market and pursue the goal to “steal” large market shares from established providers. At the same time, neobanks tend to turn to selected target groups in order to meet their specific needs, complementing the existing market offerings. A neobank, unlike a challenger bank, doesn’t necessarily have a banking license, therefore it is not regulated as a banking institution. 

Another difference lies in the sphere of doing business. While neobanks are built with a startup mindset focused on building a strong user base and providing good experience, challenger banks strive to earn money, therefore, are more focused on expanding their balance sheet. 

The benefits of neobanking

Neobanking is disrupting the conservative financial services field by offering more convenience, accessibility, and mobility to users from all over the world. 

New generations of consumers are particularly focused on app-based services, and banking services are not an exception. Neobanks want to win consumers’ loyalty with the help of great product offerings, an individualized approach, and a high-quality experience. For now, it seems that they handle this task very well. 

The recent Plaid’s Fintech report says that nearly 30% of Americans use some kind of digital-only banking, and the EY survey shows that as much as 27% of consumers worldwide have lasting experience with neobanks.

There are at least several ways in which neobanks are trying to fill in the gaps with what was missing. Here is what neobanks are particularly good at:

• Simplicity and speed. It only takes a few minutes to open an account with a neobank online. Often all you need is your ID.
• Easy accessibility. Neobanks usually do not require proof of income. So everyone can open an account at this kind of bank.
• Pricing. Because the neobanks overheads are significantly lower, it decreases the overall fees. Some services can be free, both for personal and business accounts.
• Mobility. Neobanks platforms and apps are designed to allow you to manage everything related to your account online.
• Global reach. Another excellent characteristic of neobanks is their openness to the international market.
• Unique features. Each neobank has some specific feature that differentiates it from other players. For example, Tide offers free business accounts, and Revolut provides cheap international money transfers.
• Focus on the gig economy. Some neobanks aim to craft a banking model that helps small-business owners and gig workers access banking services.
• Addressing personal values. Some neobanks position themselves by providing perks to particular customers and communities. For example, GoWomen aims to become the first neobank for women of color.

A good time for neobanks

The neobanks industry was one of the winning sectors during the pandemic. Top European neobanks’ new application downloads have increased significantly since COVID-19, and as of March 2021, the six leading European app-only banks had nearly 40 million apps downloads combined.

But it is not just Europe where the popularity of neobanks has increased. The same trend can be clearly observed in other regions and on a global scale. According to App Annie data, there were more than 264 million neobank application downloads worldwide from Q4 2020 to Q3 2021, with particularly Brazil and LATAM overall being favorable regions for neobanks growth.

Last year, the phenomenon of neobanks continued to catch large hauls of investors’ money.

Some of the most prominent deals of 2021 were German N26, which nabbed $900 million in a round led by Coatue and Third Point ($9 billion valuation), American Chime — completed $750 million fundraising ($25 billion valuation), and Brazil’s fintech star Nubank — raised $750 million in the summer and recently even went on IPO. Investors are also very much enthused about the future of neobanks in the emerging markets

2021 actually was a good year for many fintech firms. Only in the third quarter of the last year, Fintechs globally attracted $33.7 billion in venture capital across more than 1 200 deals, the five largest of which unsurprisingly went to neobanks. 

The neobank space has also become more crowded, with some entrepreneurs raising millions specifically for expanding their neo banking business across new markets. 

VCs support undoubtedly will help accelerate the development of the sector and build a better neobanking infrastructure to enable more and more people to access superior (neo)banking services.

Challenges of challengers

There is no doubt that neobanking is on the rise right now. Still, the sector faces some challenges that are unlikely to disappear anytime soon. First is a strong variation of regulations in different countries and regions. Because of that neobanks feel some serious difficulties entering and operating successfully in particular markets. 

The second obstacle is the fact that some countries like the United Kingdom have too many players in the banking field, therefore it is hard for the neobanks to get their slice of the pie.

Third, big banks are also leveraging the technology advances and forming unique offerings in some markets, making it harder for neobanks to stand out while betting on functionality and user-centricity. This largely explains why Nubank managed to build such a successful business in Brazil, where traditional banks were too lazy to offer customers what they needed, and why a giant like N26 had to leave the US market.

The fourth challenge of neobank is their struggle to translate the popularity among customers into good revenue streams. If now venture capitalists are very willing to fund the neobank startups, they may change their minds if they won’t find a way to achieve profitability in their business soon enough.

Another big concern is called “the white-label banking platforms.” They help build new fintech software cheap and fast, but also create additional pressure for the existing neobanking players. And finally, the lack of trust continues to remain a major issue for neo bankers.

So, what’s next?

The COVID-19 pandemic has fueled the movement towards everything digital. The trend helped neobanks find their path to customers, and it seems that they are here to stay. Some experts predict that the challenger banks market will surpass 722 billion dollars by 2028, while others see the neobanks customer base exceeding 145 million in just two years from now.

The forecasts like these are many and don’t seem to be overreaching. Despite a number of challenges, neobanks are one of the bright spots in the fintech field and will probably remain that in the near future. As people continue to seek simplicity, diversity, and cheap offerings when it comes to finance, the space of neobanking is sure to thrive.

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